Development Impact Bonds and Impact Investing – genuine Impact, or snake oil?

The private finance people in development baffle me. They speak a different language; great swirling clouds of jargon, the fuzziest of fuzzwords, all laced with a level of macho market can-do talk that makes me deeply suspicious. Baffled but sceptical – not a good place to be.

And there’s a lot going on at the moment – new ideas, a caravan of conferences and seminars, and a lot of interest from DFID and others. To try andsocial impact bond clarify things, I turned to two of our in house finance gurus, Nicholas Colloff and Alan Doran. Both managed somehow to resist my demands for a guest post, so you’ll have to make do with this splicing together by me of emails and conversations.

There are two broad areas to discuss – one is how to get reliable and affordable financial services directly into the hands of poor people – not just credit (which can be a mixed blessing), but safe savings services and insurance to reduce risks.  But I’ll focus here on the second area – raising private capital for broader development purposes.

Let’s start with the indefatigable Center for Global Development, which is pushing its ideas for Development Impact Bonds via a working group and a draft report. The DIB idea is seductive:

‘DIBs would provide upfront funding for development programs by private investors, who would be remunerated by donors or host-country governments—and earn a return—if evidence shows that programs achieve pre-agreed outcomes.’

So it’s both a way to access new sources of capital, and a shift to payment by results that will mollify aid critics of the ‘money down a rathole’ persuasion.

But DIBs get pretty short shrift from Nicholas Colloff:

‘My first thought is that to date the UK has one, yes that is one, social impact bond [the famous Peterborough social impact bond]. The investors in that bond were not representatives of the ‘market’ but primarily foundations and foundations not utilising their endowment money but diverting the money they would have previously used for grants. Since it is new, nobody has, in fact, any idea if it will actually work and if one feature of its working was to attract new money, it has already failed. [But note, there are several other UK bonds now in the launch phase.]

The designer of the bond admitted that he thought they had a useful, if limited function to play. Of the key limits two that are critical are: can you find an intervention whose consequence can clearly demonstrate a reduction in future cost? Recidivism amongst perpetrators of crime (the subject of the Peterborough bond) is a good one because it is relatively easy to measure against known benchmarks and there is reasonable certainty about what works to deliver it. But how many of these ‘easy wins’ can we actually find?  From a potential CSO provider’s point of view, the second limit is does civil society have the capacity to deliver against such narrowly defined criteria and would they want to? Would it, in fact, restrict a programme’s ability to respond to the unexpected opportunity and stifle rather than promote innovation? It works if civil society organisations are functioning as narrow service providers, not as advocates of change.

I suspect it is simply a diversion from taking sensible (and political) decisions on who and how to tax and spend the revenue.’

At which point I will move swiftly on, but await the rapier response of Owen Barder or his fellow DIBistas.

p3 partnershipThe second area I want to cover is the much vaguer concept of ‘impact investing’ (adding the word ‘impact’ to everything is clearly an important aspect of branding. I’m thinking of changing my title to Strategic Impact Adviser (Impact)). Alan Doran filled me in on a recent high level event – under the Impact Investing banner – Government, City, Foundations, World Economic Forum, representatives from 30+ countries including many in global South etc to launch the ‘London Principles’  “a statement of intent and integrity” for policy makers in this area.

Alan was struck by just how fuzzy the term has become. ‘The mission drift is massive. Impact Investing started off as how to make investment a bit softer and more friendly, especially for small and medium enterprises (SMEs). It said to investors you can make money and do good, get a social as well as financial return. But now it’s gone way beyond that: the only common feature is using private capital to achieve policy objectives.‘ Approaches discussed included reinventing public private partnerships to reward outcomes instead of outputs, using social enterprises to provide community services, as well as the development version of social impact bonds

The proponents seem to draw no distinction between agriculture, roads and health and education. No sphere of activity is off limits to private investors. I’m sure I’m influenced by my UK context, where many of the attempts to lure the private sector into public services have bombed (PFI and SERCO are not exactly the best adverts for the wonders of private provision), but this all raises real alarm bells for me. Not only do we have a catalogue of failures in which unscrupulous or incompetent private investors have abused the system and messed up the services, but there’s a deeper underlying problem. Essential services like education and health are a crucial part of building the social contract between citizen and state. They are also vital ways of building a public ethos in society – reducing them to ‘service delivery’ to ‘customers’ ignores all of that.

More generally, there is no recognition of power and self-interest. Alan again: ‘it is assumed that the use of an enterprise approach with better contracts and supervisory structures will result in truly pro-poor outcomes.’ This may sometimes be true, but the optimistic talk of ‘shared values’ seems to overlook the fact that, for better or worse, businesses’ main concern is to make money (often in the short term for a few people) while states’ main concern should be the welfare of their citizens (often in the longer term and for many or all people). This doesn’t mean that government and enterprise are always at odds, but neither should we pretend these fundamental differences do not exist.  Can you really draw up such clever contracts that they can prevent such conflicts ever becoming a problem? Incentives, incentives…..

And the evidence base for all this hype is decidedly thin – donors’ usual insistence on ‘show me the results’ seems to fade before the dazzle of the private sector sales pitch. A few examples here and there, but the rest is heavy on spin and light on stats. Which means my sceptical instincts kick in, as I start to wonder if a well-intentioned effort to reform markets for poor people is in practice reverting to breaking open new markets for profit maximization.snake oil Little is certain here except that the financial institutions packaging and selling the products (and selling them increasingly hard) and managing the transactions will make some money.

Any chance we could just try and sort out tax avoidance and evasion, build a progressive tax system, and focus on improving the quantity, quality and accountability of public services, as well as ensuring that poor people get access to the financial services they need? Wouldn’t that be better than swooning at the feet of the snakeoil sellers? Sorry to be a financial Neanderthal, but that’s just the way I feel.

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5 Responses to “Development Impact Bonds and Impact Investing – genuine Impact, or snake oil?”
  1. Stefano Barazzetta

    Hi Duncan,
    my two cents from the dark side of the moon.

    I work for a small impact fund, and I understand what you say, and why you say it.
    The risk of trying to substitute what should be up to the Goverments with private-run businesses is real.
    It’s also true that the same is sometimes valid for NGO workm but still it’s a problem.

    “Impact fund” is surrounded by a lot of hype, and it’s entirely possible that it’s going to attract the wrong kind of people, but I honestly see a lot of potential: coming from the NGO world, and seeing how badly designed and executed are many so-called income generating activities (which are so common), I don’t have doubts that a more structured and business-like approach could really provide significant benefits.

    I try to be honest and I fear that speculation will come: when I see some impact funds promising double digits returns, well, I think that it might be already here.

    In any case, the most important thing is to make clear – to investors and donors above all – that this is not going to eliminate the need for grants and more traditional assistance, because so many development-related problems – intractable by nature – are simply intractable with a business-like approach.

    There are so many more things to say but I am a bit in rush now, I’d be happy to elaborate more on this later.


  2. Hi Duncan,

    Great post, thanks for that.

    You rather combine two different ideas of impact investing in the blog post. Although often conflated under a generic ‘private sector financing’ banner, I think they are very different and should remain so.

    Firstly, you talk about different ways in which the governments can pay the private sector to do work that would otherwise need to be done by government. I basically agree with you that experience to date shows that this doesn’t work particularly well.

    Secondly, you talk about what I would consider ‘true’ impact investment; trying to encourage private sector investment in things which the government wouldn’t do; any kind of business, farming, etc which is typically the primary realm of the private sector. For example, contract farming, setting up processing plants, factories, or providing financial services. Impact investment tries to encourage these when they are being underprovided due to market failure, or tries to influence the private sector to provide them in a more pro-poor way (for example, using smallholder farmers rather than big commerical farmers.)

    To put it simplistically, I think the former generally doesn’t work. The latter is a very promising avenue, though as Stephano rightly says not the only solution.

    So while I agree with the problems of private finance fuzzwords, I think the solution is to search for a bit more clarity rather than writing it all off.

  3. Jeff Mowatt

    From my experience which is of trying to leverage investment for vulnerable children, is that the concept of invest without a for profit intermediary falls on deaf ears. The most intractable problems which typically involve corrution will be bypassed in favour of those offering a quick return.

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