Impact Bonds Conference: Pathways to Scale

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1 Impact Bonds Conference: Pathways to Scale January 18th, 2018 Session: Village Enterprise Development Impact Bond Speakers: Radana Crhova & Jessica Cartwright (DFID) Avnish Gungadurdoss (Instiglio) Richard Sedlmayr (University of Oxford)

2 DFID and Impact Bonds More pay-for-success contracts Up to three quarters (est.) of new centrally-procured contracts by value have a pay-for-success element (Note: figure varies as new contracts are added) Learning about financial implications 93% of suppliers surveyed use own financing to fund delivery, and 78% of these use own unrestricted cash reserves. Pay-for-success may not be feasible for a proportion of potentially capable suppliers New partnerships with the private sector 36 Social Impact Bonds have been launched in the UK, growing evidence on value of investor finance and relationship DFID aims to test model in developing country context Our first structured DIBs programme established ca 18 months ago Criteria for project selection? Alignment with country profile and policy direction Manageable size 6.3m to fund a small number of first pilots Readiness to launch

3 WHY PAYMENT-BY-RESULTS IN POVERTY ALLEVIATION? The Challenge of Scaling Graduation in the Face of Heterogeneous Evidence Cost-Benefit Ratios in Six Graduation Sites 500% India Ethiopia Pakistan Peru Ghana Honduras 400% 300% 200% 100% 0% -100% -200% Source: Banerjee et al (2015): A multifaceted program causes lasting progress for the very poor: Evidence from six countries, Science

4 THREE WIDESPREAD CONCERNS ABOUT PAYMENT-BY-RESULTS And How We Dealt With Them In the Village Enterprise Project Concern Innovation Motivation Crowding Behavioral Design : Framing as Customer<>Entrepreneur (as opposed to Principal<>Agent) Donor I Bilateral Contracting Transaction Costs Donor II Outcomes Fund Implementer (VE) Capital Markets Donor III Gaming / Incentive Distortion Net Present Value of Payments = Net Present Value of Incremental Consumption (=Ultimate Outcome)

5 Contracting structure 9 DIB Advisory Group Group of outside experts Outcome payers: Anonymous donor, USAID, DFID Regular reporting Capital providers Capital recipients Verifier Provision of Provision of 1 3 funds 2 working capital Signature of 7 Pay for 8 Success Agreement Evaluated impact Trustee: GDI 5 Project manager & process evaluator: Instiglio 6 Fulfilled conditions trigger payments Service provider: Village Enterprise 4 Pre-financiers (investors and other funders): Delta Fund + tbc Intervention outcomes to min. 12,800 households Conditional payments: outcome payers to pay $1 for every $1 of increase in income (as proxied by increases in household level of consumption and of assets.) Project oversight and advice Outcomes evaluator: IDinsight 5

6 What have we learned so far? Strong rationale for using a DIB Transfer risk Focus on outcomes Empower VE to decide most impactful approach flexibility Beneficiaries become clients Value of collaborative design Funders and Service Provider Alignment of incentives Partners joining at different times may be a challenge Investor capability unknown Range of technical expertise needed Subject area evidence Risk assessment Outcome evaluation Challenging existing norms VE culture suits RBF, but new skills needed VE already selected History of venture philanthropy Values results measurement Ensuring all staff understand Negotiating investment Our processes not (yet) optimal Tailoring of templates Managing exchange rates Payments less predictable: ODA implications Time and effort upfront Intensive design period Enables us to step back during delivery - more flexibility Though due diligence and monitoring still necessary