Opinion | The quest for innovative ways to finance development

An estimated $7 billion has been spent under corporate social responsibility (CSR) programmes in the last four years until March 2019 in India. That is more than what the government spends on the Mahatma Gandhi National Rural Employment Guarantee Scheme every year. That is a substantial sum spent by corporate houses for development. Recently, Wipro’s Azim Premji committed $7.5 billion to charity. This is a philanthropic exercise, quite distinct from the legally-mandated CSR expenditure by companies. It is increasingly clear that traditional aid/development assistance and government finance are not enough to fund the scale of the developmental challenge facing the globe. The estimated investment gap that requires to be bridged to achieve our sustainable development goals (SDGs) worldwide is $2.5-3 trillion annually. This makes it imperative to unlock new funding sources, debt and equity, for development. It is in this context that one should look at the emergence and increasing use of social impact and development impact bonds (SIBs/DIBs). These are at the confluence of blended finance, public private partnerships, impact investing and results-based financing or pay-for-success.

SIBs and DIBs entail the involvement of an outcome funder (governments in SIBs, and a third party, such as donor agencies or foundations, in DIBs) to commit financial resources for the achievement of a pre-decided set of developmental outcomes, such as improved health-seeking behaviour and a decrease in school drop-outs. DIBs are mostly in use in developing countries, where donors and foundations have significant exposure. For India, DIBs are especially relevant and have already been tried for high-impact causes such as the education of girls.

Impact bonds offer some valuable positives. These include unlocking new funding streams and the privatization of risks for public benefits. As SIBs and DIBs maintain a razor-sharp focus on outcomes, based on which payments are made to investors, these instruments also up the stakes in terms of programme implementation, performance management, and monitoring. This helps achieve transparency and forces programmes to adapt to changing circumstances, while continuously learning from the ongoing evaluation exercises and results.

However, the deployment of SIBs/DIBs to fund development poses challenges.

First, there is no evidence that SIBs/DIBs are a more efficient way of financing development. Their value for money vis-à-vis other forms of financing is not established, but only a matter of theory so far. In fact, because of their technical complexity, SIBs/DIBs entail substantial transaction costs. These instruments entail legal and commercial technicalities that a traditional programme may not have to contend with.

Second, the verification of specific developmental outcomes, underpinning the return on investments, remains mired in the same set of problems that traditional output monitoring and outcome evaluations of public policy and development interventions typically face. The elephant in the room, of course, is the question of attribution: Can the programme be credited with changes for the better, given the existence of several extraneous factors?

Third, the DIB focus on outcomes, on which financial returns are contingent, spurred optimism that new innovations and models for delivery will be tried to achieve these outcomes. However, there has so far been no strong evidence of such innovation. In fact, most programmes funded by DIBs use tried and tested models for service delivery. Moreover, with financial returns at stake, funders may choose not to venture into difficult and likely-to-fail developmental interventions, the kind that require structural and system-level changes. The proclivity of investors to cash out on pre-contracted outcomes may also bring into question the sustainability of such programmes.

Fourth, the ecosystem is still small and closed to an extent, comprising more or less the same set of donor agencies, foundations and sometimes governments. There is little evidence of more and fresh investment getting crowding in. Essentially, this means that these financial instruments are not adequately attracting new funders into the development space. There needs to be a highly compelling case for the wider array of institutional investors to think of developmental programmes as viable investment instruments.

Fifth, SIBs/DIBs come loaded with a philosophical challenge. The model, while worth trying out and too new to criticize, tends to give precedence to funders and intermediaries in setting the terms of intervention. The pursuit of profit may engender a certain commercial approach to developmental problems, wherein intervention mechanisms and even outcomes that suit investors may be adopted. This relegates the community whose welfare is being targeted to the back seat. The relevance of developmental interventions to the community and their involvement in the planning and design of programmes may get throttled in the process.

Yet, SIBs and DIBs remain a strong alternative financing model for development, particularly in view of persistent funding deficits in trying to achieve SDGs. They offer an exciting paradigm for development finance and are in sync with the global shift towards public-private partnerships, blended finance and results-based financing mechanisms.