Impact Investing

SIBs, DIBs and Ad-Libs

Does the hype around “pay for performance” financing match the reality?

Social impact bonds (SIBs), development impact bonds (DIBs), and other “pay-for-performance” social financing innovations are hot topics these days. Indeed, the hype has now far outrun reality, with a great many examples of reports and conferences but precious few actual specimens to dissect. As Antony Bugg-Levine, CEO of the Nonprofit Finance Fund told me, “This market is only going to get exciting once things start to move from talk to action.” He admits, however, that a lot of the early “beautiful theorizing” ran into a hard collision with reality, which is “always harder and more complicated” than the boosters predict.

As recently discussed in SSIR, SIB and DIB advocates hope that private foundations and impact investors will use these bonds as a way to facilitate new forms of cooperation and thereby deliver positive impacts at scale. The promise of an impact bond is to create a new market that is attractive to private investors who want to make modest financial but significant social returns. Foundations also may be investors and can play a role in structuring deals, de-risking investments by co-funding certain hard-to-quantify social outcomes, and offering guarantees. Governments, seeking new ways to innovate, are interested in SIB contracting with nonprofits and have done so in the UK.

But of course, a big problem is risk. SIBs and DIBs transfer performance risk from the funder to the implementer (shared with the investor in some circumstances). The implementing agency or service provider has to focus on delivering results. This transfers a fair amount of risk to the service provider, usually a nonprofit organization, since the failure to deliver the promised results means that the end payer is not obliged to provide the funding. Since most foundation funding to nonprofits is based on paying for inputs (such as funding for protecting the environment or reducing youth incarceration), with the funding delivered prior to program implementation, this demands a major change in nonprofit practice—and it's not clear just how many nonprofits have an appetite for this kind of risk.

My organization, East Meets West (EMW), has been involved with pay-for-performance grants for the past seven years and has created a way to reduce our performance risk. As part of a 2007 deal with a program of the World Bank, we were obligated to borrow up to $1 million to develop village water systems in Vietnam. To collateralize the loan, we asked a group of board members and major donors to put up that amount of money in the form of a donation to a guarantee fund. The guarantee fund thus eliminated the risk to our balance sheet, and the World Bank paid us in quarterly installments based on independently audited results (the number of successful household water connections). Once the program ended, we told the donors that they could re-purpose the funds. Some chose to roll them over into our general fund, others directed them to favorite EMW programs, and one asked for his money back.

EMW has completed three major DIB projects in Vietnam, with three more underway at present in Vietnam, Cambodia, and Laos. According to Bugg-Levine, there are at least 30-50 other SIB or DIB deals completed or underway in different parts of the world. Toby Eccles, founder of Social Finance (the organization that originated the SIB and DIB), told me that there needs to be a “major cultural change” both in funding agencies and the nonprofit sector before the market can really take off. “A lot of groups can’t manage this sort of risk,” he noted, arguing that with any promising new social financing innovation, all parties need intermediary organizations like Social Finance to help figure out the most appropriate models.

In fact, says Eccles, the most important promise of SIBS and DIBS is not the financing itself—it's the change in culture. He imagines a day when government funds civil society organizations based on their ability to deliver social outcomes and offers them maximum flexibility to figure out how to accomplish those results. “DIBS and SIBS are really about being outcome-oriented constructs,” he explained, where all parties are focused on quality service, social outcomes, good performance measurement, and customer satisfaction.

At EMW, this cultural change was a major result of our approximately $30 million in pay-for-performance financing for education, clean water, and sanitation. We have been successful in delivering the agreed-on results at the agreed-on cost, but perhaps more importantly, the outlook of the whole organization has shifted from meeting donor requirements to delivering outstanding service. If the customers are not satisfied, we don’t get paid. At times this feels something like performing a trapeze act without a safety net, but for those organizations brave enough to try, Bugg-Levine and Eccles think significant new sources of funds will be coming on line.

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  • BY Guillermo MacLean

    ON June 2, 2014 02:12 PM

    Thanks for your article and congratulations on the excellent work you describe.

    One quick clarification and then a comment: A Social Impact Bond is not remotely a “Bond”

    How ironic your quote, “As Antony Bugg-Levine, CEO of the Nonprofit Finance Fund told me, “This market is only going to get exciting once things start to move from talk to action.” He admits, however, that a lot of the early “beautiful theorizing” ran into a hard collision with reality, which is “always harder and more complicated” than the boosters predict.”

    One of my own “collisions with Reality” (I was DOING, not talking since 2006) was the creation and interest group financing of the dissemination of the term “SIB” and the impressive number of people and “non-profit” organizations and people with political aspirations that wanted so badly to claim “ownership” of “the creation of Social Impact Bonds” that went out of their way to “kill” anyone who dared do anything similar to a SIB or call it something different than a SIB. They claim they want this market to grow but they actually went out of their way to Sabotage great breakthrough milestones in this space.

    One of the main reasons that the “SIB/DIB/ bla bla bla” market is not growing fast enough is precisely because of the paid hype which frames them as a “non-profit funding” instead of a way to unleash trillions of dollars to “finance social Goals” (eliminating the barriers between for-profit/non-profit/Government). Linguistics certainly plays a role here. There is a very large group of paternalistic alleged “non-profit” leaders who believe THEY have solutions and metrics for all things “social”. They are ok “providing charity - food, shelter and education to the maid’s son, but once he grows up he can’t date their daughter”.

    I guess everyone lives in their own “Real” world. I don’t like the hype at all, but the good news, in my opinion, is that the long-term reality will be larger than even today’s hype thanks to those that realize that the wrong type of hype has been created by interest groups. But hopefully, little by little the market will start learning and DOING the real stuff of big impact for the good of society. Hugo Chavez rose to power because “the market” did no offer a better option, HE was the de facto better option to people that voted him in. The same with Putin. So, there are many of us who are working hard to offer the world a de facto market positive option before the world is filled with Tyrants that become the best available option. And then, nobody will care whether there is a SIB a DIB a FIB.

    BTW - a final clarification. I met Antony Bugg Levine and Toby Eccles before Toby executed in what is regarded as the first SIB. I commend them and I hope they are still the people they seemed to be back then, which seemed to be very committed and down-to-earth genuine individuals. They seemed way too polite and politically correct to spell out the horrible political interests that surround them and that ultimately get in the way of helping billions of people who truly need it, including ourselves for a better world.

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