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A New Way of Financing Health Outcomes?

Toby Eccles's picture
July 2, 2013
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This is a joint post with Peter Nicholas from Social Finance

In a recent RBF blog post Victoria Fan and Amanda Glassman noted that RBF represents a shift in global health and development aid from an "auditing and accounting paradigm" to a "performance and results paradigm." A recently released consultation document suggests that this welcome paradigm shift can be taken a stage further through the use of Development Impact Bonds (DIBs), whereby private investors provide project financing up-front and take the risk that agreed results may not be achieved. Outcome payments are financed by donors/Governments, but implementation modalities are determined by the investors in conjunction with a specialized convenor, such as Social Finance, and carried out by specialized service providers. Donors/governments take no implementation or financial risk, since no disbursements are made until tangible results are verifiably achieved.

DIBs are still at a relatively early stage of development, but a similar model of social impact bonds (SIB) is being increasingly piloted in OECD countries. In 2010 Social Finance launched the world’s first SIB when it raised £5 million to provide comprehensive assistance to 3,000 men released after serving short-term jail sentences in a British prison. Their reconviction rates are tracked following discharge and independently compared to a control group. If rates fall compared to the control group, the British government will repay the investors their principal plus interest. The higher the drop in recidivism rates, the higher the government payment to investors, capped at 13 per cent per year. If the threshold is not met, investors will lose their investment. Such SIBs have the advantages of up-front private sector finance, a move to the performance and results paradigm, flexible and adaptive implementation, and assurance of cost-effective public spending.

DIBs would have similar benefits. In the health sector, a notable advantage would be that implementation modalities could be adapted and refined “on the run." Responsibility for achieving results ultimately rests with the investors rather than donors or governments, and the experience to date with SIBs suggests that this allows a considerably faster reaction time to lessons learnt in the field.
 
A number of health DIBs are under active consideration. For example, in Uganda, Social Finance UK has been working with DfID and H20 Ventures to design a DIB that would reduce the incidence of acute sleeping sickness through mass treatment of cattle, which are the main reservoir of the infective parasite--see also this blogInvestors would finance the program, and would start to be repaid as treatment is effectively delivered with full repayment and a possible profit if the incidence of the human infective parasite declines significantly over an eight year period. These outcome payments (if any) would be financed by donors, but the implementation risk would be taken by investors. This approach facilitates:
 
- Management of complex programs. DIBs create incentives for investors to put in place client-focused mechanisms: feedback loops, data collection, performance management systems. In the Uganda case, success depends on sustained coordination of multiple actors, and the DIB structure provides for flexible and adaptive management by a performance manager hired and monitored by the investors in conjunction with the specialized convenor.
 
- Sustained Investment. Some development challenges require not only rapid scaling-up of interventions, but also sustaining the interventions over many years. For the Uganda program to work, interventions will have to be implemented at scale (8  million cows across 50 districts) and sustained over the years, and the DIB would provide not only the capital to do this, but also the incentives (through the link of outcome payments to reduced parasite prevalence up to year eight) to sustain treatment.
 
- Shifting risk to investors. DIBs could bring more finance to results-based programs by shifting risk to private investors. In the Uganda case, an approach that could have very high development returns, but has never been tested on a large scale – and is therefore inherently risky – could be piloted with assured access to up-front funding, but without any potential for loss of public funds if the pilot does not live up to expectations.
 
The consultation document  explains in more detail how a DIB would work. We would welcome your thoughts and comments on the document until July 17, 2013 at dib@cgdev.orgMore information is available at www.cgdev.org/dib and www.socialfinance.org.uk/work/developmentimpactbonds

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