Funding for Impact: How ‘Payment by Results’ Could Revolutionize Development Funding
A pioneering new approach to funding social development projects has completed its first year — with promising results.
Nearly four million girls, between ages 6 and 13, aren’t attending school in India. That’s a big problem. Development economists have long known that educating girls is one of the fastest ways to improve the economic outlook of the world’s poorest economies. Studies show that every girl who stays in school goes on to earn at least 10% more income every year in her future and is far less likely to be married early and far more likely to raise children of her own who will themselves go to school and go on to better jobs. More girls in school, therefore, creates a boost to the economy that in the long run can help break the cycle of poverty.
For development funders, finding solutions that can help get girls into school — and stay and succeed there — is a priority. But how do we tell which programs work and avoid wasting precious funds on programs that don’t deliver?
Educate Girls may have an answer. Founded in 2007 to improve enrollment, retention and learning for girls in rural areas, the nonprofit mobilizes volunteers to go door-to-door to encourage families to enroll their daughters in school. It also trains volunteers to teach in local village schools. By 2015, Educate Girls had already enrolled girls into schools in over 8,000 villages.
How many more girls could they reach if they could prove their effectiveness to funders?
Last year, they got their chance to find out. Educate Girls was approached by two foundations to test out a radical new approach to investing in social development: The Development Impact Bond (DIB).
The DIB is a new funding approach that seeks to address a challenge of traditional philanthropy — the one that believes nonprofits need to raise money before they can demonstrate results. The DIB turns this on its head. Instead of putting money up beforehand, a funder (the ‘outcome payer’) sets service provider specific social outcomes and commits to pay once these outcomes have been achieved. The service provider raises upfront investment from an investor to deliver the program, and the investor gets repaid if the service provider delivers. In this way, payment is only made for success.
In the case of Educate Girls, the outcome payer turned out to be the Children’s Investment Fund (‘CIFF’), one of the largest foundations in the world supporting childhood development. CIFF had been looking to try out this new financing approach, and it teamed up with the UBS Optimus Foundation, which was willing to be the pioneer investor in Educate Girls, investing an initial US$267K.
The funders gave Educate Girls a target of getting 18,000 children in the north Indian state of Rajasthan into school, along with improving their grades in Hindi, Math and English to specified levels. If Educate Girls was able to achieve these targets, CIFF agreed to make a single payment at the end of three years that would repay the original investment together with a return of 15%. If the targets were only partially met, the payment would be scaled back accordingly. An independent evaluator, IDinsight, was appointed to keep track of the target during the three years, and the whole process was managed by Instiglio, a social investment specialist.
The DIB launched last year and the first year’s results, published this July, are now in. They show that 44% of the girls targeted in Rajasthan have already been successfully enrolled in schools and test scores in Hindi, English and Math are up 23%. The UBS Optimus Foundation is already in line to recoup at least 40% of its investment — after only one year.
All parties are excited by the results so far. For Safeena Husain, Executive Director of Educate Girls, the DIB’s focus on data collection and analysis has already had a profound effect on the organization’s way of working.
“The DIB has actually transformed the way we think about our impact,” she said. “Because of this focus on results, we have increased the feedback of data from the field that is shared among all staff. We are continually analyzing where things are working well and where we need to make changes. This flexible and responsive approach is now being adopted across our other programs.”
For the funders, the potential for this pilot to unlock the door for others to follow and open up a major new funding sector is hugely exciting.
Phyllis Costanza, CEO of the UBS Optimus Foundation said, “Harnessing the power of private capital will be crucial to raising the trillions of dollars needed to achieve the world’s new development goals. While this first Development Impact Bond is not the only game in town, it is leading the way in demonstrating how such innovative financing models can unlock new and much-needed sources of funding and deliver even greater impact on the ground.”
Others will be watching this experiment closely, eager to learn the lessons. If they succeed, expect many more Development Impact Bonds to follow.
This article is the third in a series on ‘Innovation in Social Finance’ written by Mark Cheng (@chelcap) and Laura Kromminga (@laurakromminga) from Ashoka. UBS and Ashoka have partnered up to launch the UBS Social Innovators program — an international, multi-year search and support package for social entrepreneurs looking to scale their social businesses. Follow the conversation online by searching #UBSInnovate on Twitter.
This article was first published on Forbes.com on 15th August 2016.