The Multilateral Investment Fund (MIF), a member of the Inter-American Development Bank Group, in March launched a $5.3 million fund to test a new social sector financing tool: Social Impact Bonds. This fund is a window to a promising new approach to social development in Latin America.
A Social Impact Bond is a new funding and fundraising tool bringing a powerful focus on results to the flow of money into development. First, through a pay-for-success contract, a government commits to pay an NGO for a program if and when it improves a social outcome of interest. For example, a ministry of education can pay an NGO for demonstrated improvements in test scores. Against this conditional revenue stream, the NGO is then able to raise working capital from private investors. If the program works, success payments from the government provide a reasonable return on investment to the project investors. Governments pay only for what works. NGOs are rewarded for producing outcomes they care about, bringing integrity to their own missions. Finally, impact investors find the golden alignment of social and financial returns, which is a unique property of SIBs.
The appeal? SIBs hope to improve the effectiveness of social programs through an alignment of incentives and a powerful multi-sector partnership. Governments disburse only to impactful programs, and NGOs and investors get repaid only if they can deliver impact. The incentives of implementers are aligned with the goals of the funders and, most importantly, the welfare of the program beneficiaries. Each sector contributes what they are best at toward solving complex social issues. Governments prioritize social issues, investors manage risks and drive rigor in implementation, and NGOs use local knowledge and community relationships to improve social outcomes.
Starting in the UK in 2009, more than 40 SIBs are currently in design or implementation globally. At Instiglio, we began exploring the potential of SIBs in international development two years ago, starting with Colombia. Since then, we have seen growing interest in Latin America. We explored the potential of SIBs in reducing teen pregnancy and school dropouts in Colombia, and we are currently exploring SIBs for workforce development and tax collection for municipalities. In Mexico, we worked with the social security agency on diabetes reduction. We are currently exploring reduction in recidivism in Chile.
During our work on the ground, we have observed a number of challenges that governments, investors and NGOs face in engaging with SIBs. SIBs require paradigm shifts in all three sectors, and that is not easy. That requires resources, strong convening and coordination, which the MIF is well positioned to provide; its SIBs Fund is a market infrastructure that could solve some of the most important challenges through strategic capacity-building and early-stage investment into the market.
Concretely, the fund proposes to support interested governments that request assistance from local MIF offices, to address new contract technicalities and procurement innovation. The SIBs Fund is also stepping in to make lead investments in early deals that would demonstrate a new investment practice, establish diligence guidelines and produce valuable lessons for those impact investors watching from the sidelines. SIBs can indeed be jarring to impact investors who are not used to investing in NGOs. Despite the value proposition, many traditional impact investors are unsurprisingly waiting for a track record of deals before engaging. The fund will also hopefully invest in building the capacity of the social sector, to enable a more performance-driven culture.
By taking a step toward building the ecosystem for SIBs, the MIF is bringing to one of the most unequal regions of the world an opportunity to bring greater focus to the welfare of vulnerable communities in the development discourse. This will be important for the 80 million people still living in extreme poverty in Latin America and the region’s struggle toward shared prosperity. The next few years will be critical for turning potential to benefits, and paving the way for the growth of SIBs in social service provision. Many challenges lie ahead and the first experiments will likely bring successes and failures, like any innovation is supposed to. We hope to accompany local champions of the public, private and social sectors in responding to this opportunity with thoughtful and effective implementation.
Avnish Gungadurdoss is co-founder and managing partner of Instiglio Inc.