I recently had the privilege of participating in a half-day private workshop on the suitability of development impact bonds (DIBs) to the nutrition sector, organized by some serious rockstars at the Center for Global Development (CGD). Participants included an impressive mix of nutrition experts, finance professionals, innovation gurus, and leaders from across the government, nonprofit and international organizational sectors. If you’re asking how in the hell I got invited (good question), I used to support CGD’s work on development impact bonds.
Here are my three main takeaways from these discussions.
1. While we shouldn’t expect DIBs (or any instrument for that matter) to be a “magic bullet” in solving all the nutrition sector’s problems, there is strong appetite among the nutrition community to try something new, and DIBs offer a promising new business model to test out.
Yes, progress has been made: the global prevalence of stunting in children under the age of 5 has decreased from an estimated 40% in 1990 to 26% in 2011 – that’s a whopping 35% reduction (UNICEF 2013 Report). But progress is fragile and unevenly distributed across the globe, with some countries making huge strides (i.e. China, which accounts for the bulk of that progress) while others fall behind. In 2011, stunting affected a staggering 165 million children, mostly in Asia and sub-Saharan Africa.
How much will it cost to make this problem go away? In 2013, The Lancet estimated that scaling up 10 “proven” nutrition interventions in 34 high-burden countries would reduce global stunting prevalence by 20% and cost $9.6 billion…per year. Just to put this in perspective, last summer world leaders convening in London for an historic “golden moment” focused on tackling undernutrition raised $4.15 billion up to 2020. Not exactly a “sexy” international development issue.
Even then, raising the money is only part of the solution – you’ve still got to deliver results. And that means understanding not just the direct causes of undernutrition but also its underlying causes – things like poverty, agricultural productivity, climate change, behavioral norms, gender inequality – and getting everyone to agree and work towards the same goals in a coordinated, collaborative and flexible manner. I’m going to go out on a limb here and say that’s probably not going to happen… unless we radically change the way we do aid.
By providing upfront funding, aligning incentives and establishing a coordinating body singularly focused on achieving results and managing performance, DIBs offer a promising new business model for aid…one that has yet to be tested.
2. “Value-for-money” does not mean “cheap.”
In the wake of the global financial crisis and tightening aid budgets, donors are eager to get “value for money,” hence their active interest in DIBs and other instruments that aim to improve the effectiveness of aid and/or get private actors to pick up some of the slack. However, although DIBs could offer donors incredible value for money (they pay for results ex poste, thereby outsourcing risk to private investors), that doesn’t mean they come cheap.
Conducting feasibility studies, running cost-benefit analyses, negotiating contracts, agreeing suitable outcome metrics, setting up data collection and measurement systems are all key to setting up a rigorous DIB pilot, but unfortunately come at a price, especially if they are to be done right. Just ask Dalberg, the development consultancy firm that’s now in its second year of putting together a bond for malaria in Mozambique.
But is this really such a bad thing? If we – the aid community – aren’t already doing all these things, shouldn’t we be? And aren’t DIBs exactly the kind of instrument we’ve been looking for to help us do all the things we know we should do – but can’t seem to operationalize?
I think an important distinction needs to be made here between “transactions costs” vs. the cost of doing aid well. While there will certainly be very real transactions costs associated with doing early DIBs, as with any new initiative, these costs are likely to decrease with time and practice. What we shouldn’t try to avoid are costs associated with making sure our aid money does what it’s intended to do. We just can’t afford to.
3. Partner governments’ involvement in the design, co-financing and/or implementation of DIB pilots will be key to their long-term sustainability and scale-up.
The sheer magnitude and complexity of today’s global development challenges means that donor resources alone just aren’t going to cut it, even if it’s channeled through an innovative financing mechanism like DIBs.
According to Development Initiatives, government spending in developing countries is now $5.9 trillion per year and growing at a rate of over 5% per year, presenting a huge opportunity for developing country governments to participate and advance their own development agendas.
Granted, not all developing countries are growing at equal rates. The poorest countries still face severe spending constraints that are likely to continue. The role of DIBs in these countries will be to target donor resources and build up the capacity of local governments to commission and oversee effective service delivery. However, donors would be wise to rollout DIBs as part of a broader package aimed at strengthening partner countries’ capacity, like helping to put a plug on illicit financial flows that drain billions from developing countries’ budgets, often ending up in secret bank accounts in those same donor countries (click here to see CGD’s work on this).
In the ever-growing number of middle-income countries, which exhibit exceptionally high growth rates but face unsustainably high levels of inequality, donors could play an important role in testing out a new and innovative model that, if proven to work, could move developing country governments to adopt it for themselves.