Giving Compass' Take:

• India Development Review breaks down Development Impact Bonds, explaining the practices, players, motivations, consequences, and controversies of the method. 

• How can funders help to guide DIBs to impact? Does this method make sense in your issue area(s)?

• Learn about India's first DIB in education

A Development Impact Bond, or DIB, is a results-based investment instrument that involves three parties: a private investor, an outcome payer, and an implementing partner/service provider. In practice, a DIB can have more than one of each type of partner. The private investor—usually a fund or group of investors—gives money to carry out a development project that promises certain social outcomes.

The service provider, usually a nonprofit organisation, is responsible for the project and its outcomes. If the outcomes are achieved, the investor is paid back the capital plus interest by the outcome payer, usually a philanthropic funder or organisation.

DIBs allow the focus in development aid to shift from inputs (e.g. the number of text books for students) to outcomes (e.g. an increase in students’ learning outcomes).

The consequences of the service provider not meeting targets can vary according to the terms negotiated at the design stage. Typically, the outcome payer pays back the risk investor, but without any return, or with a certain percentage of the capital forfeited.

Sometimes, payments are made on a sliding percentage scale. For instance, if 90 percent of the results are met, 85 percent of the working capital will be paid back by the outcome funder; if 80 percent of the results are met, only 70 percent of the capital will be paid back, and so on.

There are four key players involved in a DIB:

  1. Service provider: The development sector organization or nonprofit that actually carries out the project and aims to achieve some set targets.
  2. Investor/Risk investor: An investor or organization that provides upfront capital to the service provider to carry out the project and achieve the targets.
  3. Outcome funder: Usually a philanthropic organization that pays back the original principal plus a return to the investor, if the targets are met.
  4. Evaluator: An independent organization that evaluates and validates the work of the service provider.

Read the full article about Development Impact Bonds by Saahil Kejriwal with inputs and insights from Divya Pamnani at India Development Review.