An international coalition is launching a consultation today on development impact bonds, a new financing instrument to provide public services in developing countries.

Development impact bonds are an adaptation of social impact bonds – money from investors is channelled to local public and private service providers. If they achieve set results, the government and donors repay the investors plus a financial return linked to performance.

A development impact bond working group was convened by the Center for Global Development and Social Finance. The working group members include thought leaders from the worlds of finance, government, civil society, foundations and official aid. The Omidyar Network and the Rockefeller Foundation are financing the group’s work.

CGD and Social Finance will present in London today on the working group’s emerging conclusions on how development impact bonds could be implemented. The event marks the beginning of a public consultation on the report that will run for six weeks until 17 July.

Elizabeth Littlefield, president and CEO of OPIC and a co-chair of the working group welcomed the report:

“Innovative financing mechanisms such as social impact bonds stand to improve the efficiency of development assistance in the coming years – and that is what has brought us to the working group. As a vital component of the impact investing sector, outcomes-based finance can be a powerful means of enhancing the effectiveness of aid and development finance”.

“Development impact bonds are part of a wider movement to explore new financial instruments that better align the incentives of various players to improve outcomes for poor people in developing countries,” said CGD president Nancy Birdsall. “I believe that this has huge potential and that the consultations on the draft report will help to strengthen the proposal and increase the chances of success.”

There are pilot development impact bonds in various stages of feasibility, development and negotiation.  Bonds are being developed by Social Finance (for reducing sleeping sickness in Uganda), Lion’s Head Global Partners, a London-based merchant bank (for education in Pakistan), Instiglio, a non-profit that designs social impact bonds (for avoiding teen pregnancy in Colombia), the US Overseas Private Investment Corporation (OPIC), a US government agency (for investment in clean energy) and Dalberg, a development advisory firm (for fighting malaria in Mozambique).

Toby Eccles, development director at Social Finance and a co-chair of the working group, said:

“Development impact bonds turn social services into investible opportunities. There is huge demand among investors for opportunities to do good while doing well, and development impact bonds will enable investors for the first time to bring their resources, expertise and energy to the world’s most pressing social problems.”

The key characteristics of a development impact bond are:

• Some or all project financing is provided by investors who assume risk for project performance
• An outcome funder (such as a government or a donor agency) must be willing to pay for pre-defined results after they are achieved
• Financial returns to investors are based on the achievement of social outcomes
• Outcome funders do not specify interventions – strategies for achieving outcomes are agreed between investors and service providers, usually through an intermediary or cooordinating agency, with some flexibility for adaptation through the duration of the programme
• Contract outcomes and outputs are independently verified to ensure that both investors and outcome funders are confident about the extent to which results have been achieved