Apr 13 2014, 2:26pm CDT | by Forbes
Following the lead of the U.K. , the U.S., and other places, the Inter-American Development Bank (IADB), which provides development financing for Latin America and the Caribbean, recently announced that its Multilateral Investment Fund (MIF) is testing out the new approach with a $5.3 million program.
The IADB provides loans, grants, and technical assistance to the region, while The MIF works with innovative, somewhat riskier projects.
Social Impact Bonds, which I’ve written about before, are a new way for socially minded private investors to work with governments and nongovernmental organizations or other service providers addressing deeply rooted problems among low-income or vulnerable populations. The particular issue that’s targeted depends on the society and culture involved. A recent one in Massachusetts, for example, aims at curbing recidivism among young inmates. Whatever the problem, the outcomes must be measurable.
They’re also known as Pay for Success, because, if the project reaches its goal as determined by a third-party evaluator, the government pays back donors with a small profit. If those objectives aren’t reached, there’s no return. So governments and taxpayers only pay up if a program is successful in addressing a particular problem.
I like this definition from the Center for American Progress: Social Impact Bonds are “an arrangement between one or more government agencies and an external organization where the government specifies an outcome (or outcomes) and promises to pay the external organization a pre-agreed sum (or sums) if it is able to accomplish the outcome(s).”
According to Zachary Levey and George Neumann, associates with the MIF, the organization is the first development finance institution to support social impact bonds. The program, which is in its early stages, will include $2.3 million in grants to build a social impact bond ecosystem with all the players needed to be successful and $3 million in investment capital to help launch up to three pilots. The goal, says Levey, is to be the “anchor investor”, thereby giving the project the organization’s crucial blessing and making public and private sector participants more confident in the outcome. The first investment might be made by early next year.
The organization still hasn’t pinpointed the countries or issues. But in any case, the areas need to have experience with public-private partnerships (PPPs) and a solid regulatory framework around PPPs, along with well developed financial markets, capable service providers, and availability of historic data on social sector issues. Some early candidates include Brazil, Uruguay, Mexico, Colombia, and Chile.
Social ills to target could include anything from preventive health to violence against women, depending on the country. For more research into the question, here‘s a white paper the MIF co-wrote with Instiglio, a nonprofit social impact bond intermediary based in Boston and Medellin, Colombia, called Social Impact Bonds in Education in Latin America and the Caribbean.
Just to make things more confusing, there’s another financial mechanism called a Development Impact Bond, which is a spinoff of the Social Impact variety, but applied to the development and aid sector. Instead of the government being the payer, a donor agency, such as USAID, plays that role. The MIF’s approach is to focus on the Social Impact Bond model, though it might consider a hybrid, in which a third party and government provide part of the outcome payment. It’s early days.
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