When Are Development Impact Bonds Appropriate?

Giving Compass’ Take:

• Vikram Gandhi breaks down the challenges and opportunities presented by Development Impact Bonds (DIBs).

• How could Development Impact Bonds be used to further your causes? 

• Learn about the basics of Development Impact Bonds. 

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Given the increasing buzz around Development Impact Bonds (DIBs)* and impact bonds generally—both in India and elsewhere, we have seen and heard about the advantages they bring to the table: a result orientation in funders and nonprofits alike, an alignment in mission amongst them, increased accountability towards achieving outcomes, greater flexibility in the way money is invested in different aspects of the programme, and generally, more rigour to the whole ecosystem.

Because DIBs are a relatively new approach vis-à-vis traditional development funding, they also come with a number of challenges. Given how development is understood and implemented in our country today—low outcome orientation and challenges with governance and accountability—it’s critical that we understand which contexts, conditions, and sectors lend themselves to a successful DIB.

Challenges associated with impact bonds

1. A DIB can be quite complicated and expensive
2. Government departments in India have not yet bought into the concept
3. Donors are not entirely comfortable giving up control

We believe that like with any approach, there are certain conditions that are more conducive to success, than others. Similarly, DIBs are no silver bullet; they have a greater chance of success when certain conditions are met. From our research globally and in developing countries, we have formed a core hypothesis around when it makes sense to design and implement a DIB.

1. The outcomes should be quantitatively measurable
2. There should be a clear distinction between funding inputs and outputs
3. There needs to be some ambiguity/risk in the underlying model, which warrants the need for external capital. However, there should also be a balance between innovation and evidence.

An assessment of whether there is an enabling environment for a DIB must also include an evaluation of the specific sector itself—how mature is it, what are the major gaps, how developed is the value chain, and how much evidence exists on outcomes.

Read the full article about Development Impact Bonds by Vikram Gandhi at India Development Review.