NB Financial Health

Monday
October 5
2015

Sneha Iyer / Rajen Makhijani

NexThought Monday – Applying Wall Street Ideas to NGOs in Rural India: A closer look at the first education impact bond

More than 3 million school-age girls in India do not attend class. In fact, for every 100 girls in rural India, only one will reach grade 12. Yet the benefits of education for girls are manifold: Education increases income, improves nutrition, reduces child marriage and mortality rates, and increases education levels for generations to come.
Educate Girls, an NGO in Rajasthan, a northern Indian state bordering Pakistan, helps communities reap these benefits by leveraging community and government resources to promote and increase girls’ education in India. Recently, the donor-dependent organization’s CEO Safeena Husain wondered if a new funding model could increase flexibility and efficiency in Educate Girls’ programs.

This model applies financial thinking toward social aims. Business and financial buzzwords – “make vs. buy” or “risk and return,” for example – that have long dominated boardrooms and global conference calls, are entering the landscape of rural NGOs working toward development gains. The latest manifestation of this is a new type of bond for development programs that leverages investor and risk dynamics typically found in business deals

The very first of these “development impact bonds” launched in rural India last year provides funding for Educate Girls based on outcomes – more girls in school, for example – instead of actions alone. This payment-by-results model, in contrast to grant funding, rewards efficiency. It also can allow Educate Girls to pivot quickly to adjust programming, if necessary, to achieve better education.

This overall idea is not new. Payment-by-results methods have been toyed with the past few years. They are useful tools for governments and lean foundations looking to “buy” desired social outcomes rather than to “make” them or to “pay on delivery” – to borrow two financial terms. But NGOs rarely had the cash flow to fund operations till the donor payments came in, or the ability to bear the risk of a payment-by-results structure; i.e. the risk being that by the end of the program they may not get paid. Enter investors, who are in the business of bearing risk for a financial return. These days, a new class of impact investors seeks financial returns alongside social impact. This combination of pay-by-results funding and investor interest led to development impact bonds (DIBs) or social impact bonds (SIBs).

 

How DIBs Work

With a DIB structure, the investor (in this case, UBS Optimus Foundation) pays Educate Girls, who uses the funds over the three-year bond period to create pre-agreed-upon levels of educational outcomes (e.g., student enrollment and increased learning). If the desired results are achieved, an outcome payer (in this case, the British charity Children’s Investment Fund Foundation) pays the investor (UBS) their principal invested, plus an agreed rate of return. To ensure that Educate Girls has skin in the game, the investor pays the organization an additional incentive payment linked to achievement of outcomes. An intermediary (in this case, Instiglio, an entity with an exclusive focus on DIBs/SIBs) acts as a coach to all parties, coordinating between actors and serving as a convener.

This structure has been done before, but this is the first such bond outside the developed countries, the first in education, and the first where a foundation – not the government – is the outcome payer.

 

The Benefits – and Risks – of DIBs

The hope for this transformative model is that it will attract more money and new investors into the social sector and redistribute risks (i.e. the risk is neither with the payer nor the executor, but the investor). DIBs also are expected to improve performance by increasing accountability, introducing robust private sector-like performance management systems, and becoming more efficient through competition and innovation. This last one is particularly important. With execution agencies such as Educate Girls solely responsible for the outcomes, the expectation is that they will have more freedom to adapt and innovate in real time to get to the desired results. Private sector participation also is expected to open up new networks, connections, processes and practices for the sector because it creates a confluence of two worlds that help connect each other to new sources of ideas and best practices.

However, these potential benefits come with costs and risks. Costs include high search and diligence expenses in order to get the right stakeholders at the table, prohibitive administrative costs, and the high price of rigorously measuring the outcomes. Key risks include project failure and its impact on the reputation of the service provider because strong outcome measurement will create greater transparency.

The development community has been excited about the idea of DIBs for years. All involved in the Educate Girls DIBs decided early on it would be crucial to capture lessons learned throughout the lifespan of the first development impact bond – from design, launch and execution to closure. Dalberg Global Development Advisors, a strategy consulting firm working in international development, has been tracking the DIBs’ progress. So far, several interesting points have emerged. Early involvement of stakeholders is crucial, as are: careful choices on selection of the sector, and definition of outcomes and measurement methods; enumeration of risks and mitigants; and engaging the government, among others.

 

Stay Tuned

So what’s the verdict? Do the benefits of DIBs outweigh the costs and risks? It is too early to tell. Among the indicators identified by Dalberg, six are evaluated as positive, nine are mixed and 10 are neutral (i.e. the evaluation result will be known at the end of the three-year bond).

But what can already be said is this: The world of development is alive and vibrant, and experimenting and exploring what different disciplines have to offer. The business world, in turn, often faces criticism for pursuing profit while leaving large swaths of the population behind. The Educate Girls development impact bond is a small indicator that innovations in business are finding application for a new, higher purpose. The language of Wall Street need not be irrelevant to the needs of the disadvantaged.

 

Rajen Makhijani is an Associate Partner with Dalberg Global Development Advisors, a strategy and policy advisory firm focused on innovations in global development. He is based in Singapore.

Sneha Iyer is a consultant based out of Dalberg’s Mumbai office.

Categories
Entrepreneurship, Impact Assessment
Tags
impact investing, NGO, nonprofit, social impact, social impact bonds