Invest Early, Invest for Impact: Social and Development Impact Bonds for Early Childhood Development in Developing Countries

With the United Nations General Assembly underway, the streets of upper Manhattan were cordoned off and black town cars and Suburbans with tinted windows ferried around world leaders to discuss education, climate change, and burgeoning global health crises. The words “post-2015” rolled off of the multilingual tongues of heads of state and global policymakers as they discussed a future development agenda that may affect citizens across the globe.

Nearby, a different kind of conversation was happening. Those in the room were not your usual policymakers and bureaucrats, but included business leaders and entrepreneurs with innovative ideas about how to try tackling some of the world’s most intractable social issues. And the fact that the discussion centered on a tool to bring bureaucrats and business people to the same table to take action was nothing short of trailblazing.

Together with the Global Business Coalition for Education (GBC-Education), the Center for Universal Education co-hosted a panel discussion about the potential to use a relatively recent innovative financing mechanism—social and development impact bonds—to solve some of the problems that occur at the very beginning of an individual’s life. Policies that aim at the period from conception to transition to primary school, or early childhood, are well known to be a good investment and a significantly less costly one than the remedial interventions that are necessary in the absence of proper early childhood care and stimulation. Nevertheless, such policies, particularly in developing countries, are often piecemeal and result in shortfalls both in terms of access and quality.

The panel discussion brought together multiple actors in the current and potentially future world of social and development impact bonds. The first panel included a so-called intermediary, from the first social impact bond (SIB) in the world (in the U.K.), the vice president of an impact investing group that has invested in three of the four SIBs developed so far in the United States, and a service provider in the first U.S. SIB. As the panelists described, in a SIB, an intermediary raises capital from socially motivated investors who mitigate risk to government by financing the delivery of a service which addresses a social problem. If agreed upon outcomes are met, as determined by an independent evaluator, the government repays investors. Development impact bonds (DIBs) rely on a similar structure, with private investors providing initial capital for projects, but in this case generally another party such as a foundation or donor agency (as opposed to government), agrees to repay investors for outcomes achieved. Panelists reflected on how, through participation of public and private entities and a focus on outcomes, SIBs can address issues of government accountability in providing social services and risk aversion in financing interventions which may not yield immediate outcomes. In addition, they noted, the performance management that is brought to the transaction allows for learning-by-doing which yields better results and thereby more effective financing. While there is still much to learn in designing and implementing social and development impact bonds, early experiences are somewhat promising in that, at the very least, they have gotten the bureaucrats, the investors and the providers of services to the same table and with aligned interests at that.

The second panel included a foundation that is the outcome payer for the first development impact bond for education (in India), a former minister of health & social protection in Latin America, a head of health and social protection at a regional development bank, and a director of a foundation working to improve access to a quality of education in Nigeria. Bringing in these varied perspectives, the discussion highlighted the enormous potential of social and development impact bonds for early childhood development, as well as the likely challenges. The panel discussed how an explicit focus on quality coupled with alignment among traditionally disparate players bodes well for the success of SIBs and DIBs for ECD. At the same time, the strong evidence of ECD programs’ impact on childhood outcomes further demonstrates the potential for social and development impact bonds in this space. However, the discussion revealed a number of potential risks, like, for example, the long time-horizon to achieve many of the benefits that can be attributed to key early interventions. They also noted that, in particular in low and middle-income countries, potentially high appropriation risk or the dearth of strong legal systems to ensure that all parties comply with contracts, might make investors shy away. Panelists also considered the role of social and development impact bonds in financing specific ECD services. SIBs and DIBs have the potential to conflict with strong interest groups in a country, and child rights’ advocates for example may raise concerns about investors earning profit from the provision of programs that are considered rights. On the other hand, SIBs and DIBs may serve to poke holes in systems where the desires of such interest groups do not serve the best interest of children. As financing needs for ECD in developing countries are enormous, further research like that which we are conducting here at Brookings, and experimentation, will reveal whether social and development impact bonds for ECD are best positioned for testing out innovations and improving quality of services or for addressing delivery of services at scale in a post-2015 world.