Guest Column | April 16, 2015

Development Impact Bonds: A New Paradigm For Public-Private Partnerships?

Part 2 of a two-part series[1]

By Julie King

In Part 1, Development Impact Bonds (DIBs) were introduced as a new, innovative financing tool and business model in international development finance.  Part 1 also defined the characteristics and strengths of DIBs with a general comparison with public-private partnerships (PPPs) and suggested that there is significant crossover between ‘developing countries’ and ‘emerging markets’ in geography, commercial and humanitarian interests, markets, and nations.

Part 1 also outlined areas where the principles of DIBs could be integrated within PPPs contracts to elevate performance standards and as the framework for collaboration between commercial, public, and civil society[2] partners to achieve the social and environmental ultimate goals of a project:  to establish and maintain long-term social impact for the project’s intended beneficiaries.


Part 2 of this article follows on from the Strengths of DIBs to an abbreviated ‘SWOT analysis’, with important technical features and Weaknesses of DIBs. It also identifies new Opportunities as the next generation of DIBs evolves.  And finally, it explores Threats identified by interviewees to DIBs and the more comprehensive goal of achieving actual impact through performance standards contained in project agreements.

Weaknesses Of DIBs

Technical construction

The current DIB structure differs from PPPs in key ways, which poses investment-side concerns. 

“From the 50,000-foot view, I think DIBs can be characterized as PPPs,” says Derek Strocher, CFO at Calvert Foundation.[3]  “Coming down from a 50,000-foot view, though, DIBs become quite different from PPPs quite quickly.”

Strocher elaborates. “PPPs are generally much longer-term than the DIB [and] often have a build-out phase with higher risk, and an operational phase that follows; DIB proposals are generally operational only.  There are often two kinds of private actors directly involved in DIBs — direct project investors and non-public service providers ...whereas in traditional PPPs there is typically one main private sector contractor.”

Strocher continues. “DIBs will also have two or more public sector entities with aid donors, potentially public-sector service providers...and recipient country-public actors. [This] is typically not the case with PPPs, where one sponsoring government agency is usually managing the whole public sector role... [So] in the case of DIBs, instead of ‘3-P projects (PPP)’ it is more like ‘5-P projects (PPPPP), which changes the project’s risk profile, return analysis, administrative requirements, and fundamentally changes the kinds of projects that appropriately fit the financing structure.”

Risk transfer and cost effectiveness

Both PPPs and DIBs include risk transfer as a benefit — and weakness — of their structure.[4]   Strocher explains that for DIBs, “in transferring risk to the private sector, the interest cost of financing would increase for the public sector (relative to self-financing structures); because with an increase in their risk, private investors increase their demands (e.g. a premium return). And if the financial benefit is largely about the transfer of risk for the public sector, the question is: what kind of project requires the public sector to seek such a risk transfer, and is the DIB the most efficient way to finance that type of project? 

Finding projects appropriate for DIBs

During his tenure at the World Bank, Strocher confirms there was a dearth of projects suitable for DIBs.  “The real difficulty is in finding the right projects, where risk transfer is ... important to the public sector, is acceptable (i.e., can truly occur), ...can be priced efficiently, ... [and] where investors will accept an appropriate premium for that risk that doesn’t make the project look like expensive aid.”

He continues.  “With typical SIBs — it may be more likely to find those types of projects because the objective is often less ‘humanitarian’ by nature and the sole public sector actor is not an aid donor... When the sole public entity is the host government [e.g., SIBs], projects experientially have leaned towards areas where risk of failure — though not desirable or acceptable — may be transferred efficiently...  The cost of that transfer may also be more acceptable as the ‘payer’ host government’s analysis seems to rely on achieving a positive NPV of the project including long-term economic benefits... In DIBs, the aid ‘payer’ does not receive the long-term economic or social benefits directly and hence is subject to an efficiency of aid analysis that looks very different from the economic NPV analysis. This difference in profitability/efficiency analysis matters.”

A team of researchers at the John F. Kennedy School of Government, Harvard University wrote a report for the Federal Reserve Bank of San Francisco on the lessons learned from the deployment of SIBs to date. Their findings support Strocher’s conclusions.  The team concluded:  “After two years ... there is still much to be learned about how best to structure these contracts and whether they can indeed produce better results for government social spending.”[5]

Aligning risk-reward

In the DIB construction, investment funds provide up-front operational capital for not-for-profit service providers to scale proven services. The successful achievement of the project’s impact goals in turn triggers payment by the payer of the principal and a return on investment to investors. 

Linda Habgood, a Director at Delphos International underwrites and structures transactions on behalf of investors and lenders for projects in emerging markets.  She challenges this basic structure:

What struck me [about DIBs] is that repayment of all the principal and returns is subject to another party’s ability to deliver...  Investors will not put all money at risk against achieving performance goals that they don’t have direct responsibility for … and control over... It would be more interesting to investors if the people at risk for non-payment were the parties responsible for effecting the project.  I like the accountability [of DIBs]. We just need to make sure that risk-rewards measures are aligned.”

Considering a recent DIB-funded project in India, Habgood suggests an alternative.  “The private equity model is an interesting model to use to compare and contrast with DIBs...The limited partner (LP) comes in; but they are not in control. The control partner (GP) owes an LP a hurdle rate on his money before the GP receives any of its upside compensation.  Typically, the GP has to return 8 percent before sharing in the returns with the LP.   On the UBS deal investors had everything at risk (deliverables within and outside of their control) and even if the results were 100 percent achieved, the highest level of return possible was 15 percent ... which is far below typical minimum return rates for emerging markets.”

Below market rates of return

This highlights another perceived weakness in impact investing, generally. Habgood takes issue with the assumption that impact investors need to accept below market rates of return. 

“In my experience, having only a 7 to 15 percent return is not of interest, even to impact investors,” Habgood explains.  “Some [Private Equity] fund managers like Vital Capital — one of the largest impact investors in Africa today ... has a ‘no trade-offs’ policy.   They are not willing to concede that achieving impact results means having to sacrifice financial returns.  Vital is achieving 20-plus percent on investments in Africa for their investors.  Their philosophy is that if we go about this in the right way, we don’t have to compromise.”


Such constructive criticism greatly assists in identifying where substantive improvements can be made in the next generation of DIBs and international development finance, generally.  It also creates new perspectives on how to more effectively monetize social impact.

‘Skin in the game’ — DIBs 2.0   

From Derek Strocher’s work with impact bonds at the World Bank Group, and now with impact investments at the Calvert Foundation, his comments reinforce Habgood’s suggestion that private equity be considered in the DIB model.

“At the [World] Bank we focused on ‘skin in the game’... [W]ith a traditional PPP structure, the main contractors have skin in the game and the government does as well.  With the first generation of DIBs, that was kind of missing for all participants... So instead of a [NFP] service provider receiving a donation, we were looking for a small to mid-sized company or social enterprise to receive investment financing to scale as a project service provider, which would mean they then had skin in the game... [This also] has the potential to build up the private sector in developing countries... We called this DIBs 2.0.”

Social Impact Bonds Model — ‘SIBs 2.0’

In vetting the effectiveness of DIBs, another idea is to question or revise original assumptions. One variation is to structure DIBs like the original SIB model, where the public sector payer is the national government and not an aid agency.  Derek Strocher explains the reasoning:

“The World Bank Group has looked at the possibility of supporting the design of social impact bonds in developing countries.  The government payer would be the host government of the developing country.  That country may source its funding for the project through its more standard mechanisms — as happens in the developed world to finance SIBs.  Then the host government can take a longer-term view of the project investment via the future economic benefits that will accrue to that government and determine if the project is NPV positive.”  Taken together with DIBs 2.0, this creates what Strocher calls “SIBs 2.0”.

Expanding the scope of performance clauses

Performance clauses in project finance agreements are common for infrastructure projects. They are used to define and enforce environmental and social standards with which contracting parties are expected to comply in order to trigger the release of the next tranche of funding.

However, Habgood notes, “As things are now, performance standards are about hitting the minimum requirements, about not breaking rules... Perhaps on DIBs we should think about establishing base line returns and then offering bonuses to implementers and investors if minimum objectives are exceeded... Particularly in DIB situations where investors receive no return (even on principal) unless certain threshold tests are met — perhaps you could attract more interest if in parallel higher returns were possible (higher than 15 percent for sure!) if those thresholds are well-exceeded.”

Incorporate other tools into project finance agreements

Incorporating existing institutional and industry tools into DIB and PPP project agreements can be another way to structure and elevate impact standards.  Habgood points to The Equator Principles (EPs)[6] as an example. They are a risk management framework for determining, assessing and managing environmental and social risk in projects.  Eighty signatory institutions from thirty-five countries have committed not to “provide Project Finance or Project-Related Corporate Loans to projects where the client will not, or is unable to, comply with the EPs...”  This covers over 70 percent of international Project Finance debt in emerging markets.

  • The Hydropower Sustainability Protocol

Another promising tool being used in the water sector to ensure a project’s long-term social and environmental sustainability is the Hydropower Sustainability Assessment Protocol (‘Protocol’).  While this tool applies specifically to hydropower projects, its principles are also relevant to achieving sustainability objectives for other projects.    

Dr. Jian-hua Meng, WWF International Water Security Lead believes the Protocol can be included in project agreements as a measurement and auditing tool to ensure that sustainability objectives continue to be met, from pre-planning throughout long-term operations.

“It is possible to incorporate the Protocol into project contracts”, Dr. Meng suggests. “It is fit to be a checklist or scorecard [with] both ‘soft components’ — i.e., capacity building, stakeholder dialogue tools, etc., as well as ‘hard components,’ such as clear-cut decision making tools, with the same measurement yardstick, the same language, criteria, etc. [P]roject developers, financiers, and others can use [the Protocol] as a basis for decision-making, in order to achieve a better sustainability performance, including social standards, ... no matter what the financial mechanism might be.”

Critically, the Protocol provides the framework and processes to generate on-going stakeholder dialogue and consensus.

“Very often a project elicits many opinions,” observes Meng.  “But it is hard to see the facts.  The Protocol helps to focus and inform stakeholder discussions and to bring a climate of dialogue into the room... The Protocol also helps with capacity building and self-education for companies and agencies within their own four-walls, as a check to their own thinking about a project.  Some companies are aligning their internal decision-making around the issues addressed in the Protocol and assess their projects against the Protocol.”

Additionally, the Protocol requires operators to achieve strong stakeholder support in order to retain the Social License to Operate, and like DIBs and the Equator Principles, it emphasizes engaging local communities.

“It is important to highlight community engagement,” continues Dr. Meng. “If a powerful operator, which means to ‘do good,’ but doesn’t in the eyes of the community, that is counter-productive... It requires a lot of dialogue and capacity and developers must incorporate what the perceived consequences of their actions will be.  In many cases communities start with a significant amount of distrust and caution when confronted with another project.  In order to truly engage a community, there needs to be an intelligent dialogue...”


Unconditional contracts

While a project’s impact objectives are increasingly being prioritized, all interviewees identified a stiff undercurrent at work, which poses a direct threat to these efforts.  

Stuart Orr of WWF International is direct: “Conditional loans are competing against unconditional loans, [which] makes it more difficult to impose requirements to achieve impact-results from development dollars.”

Linda Habgood agrees.  “The model of ‘unconditional loans’ and facilitation fees is very detrimental... [T]here are some countries whose lack of standards continue to undermine the marketplace [by] agreeing to execute on public projects without an eye on social impacts, human and labor rights, etc.  Investments like this ruin the foundation for viable long-term investment — it is a very large problem... Investors are very aware of this and some are saying no, because they see the devastating effects.  It is very important to fully educate local government officials about ways to get things accomplished without ‘facilitation,’ but the traditions are hard to break and the corrupt behavior is hard to police.  It is the way things have always been done and it won’t change easily.”                             

Taking commitments ‘to the edge of the knife’

It is encouraging to hear about investor and stakeholder commitments to achieving impact standards. Still, there remains scope for improvement.  But while the rhetoric is increasing around impact, innovation, sustainability, scaling and collaboration, the will to take these commitments, as Derek Strocher says, “to the edge of the knife” — in cutting business deals, creating meaningful partnerships, as well as taking the risks to scale the impact of proven solutions in emerging markets — can be found wanting.

‘Silo’ mentality

One threat to DIBs as a business model for collaboration is from what Rasoul Dashtbani Mikkelssen of Grundfos Lifelink describes as the “silo mentality”.  This is where sector developers focus on their area alone, never once looking up and across the invisible divide between adjacent or complementary sectors to recognize the synergy and efficiency that can be created by working together.  For example, medical organizations, which focus on eradicating waterborne illnesses ignore or overlook opportunities to collaborate with clean water delivery companies — and vice versa — to build more holistic, comprehensive projects — and thereby, solutions — for the recipient community.


The principles behind DIBs — whether structured as DIBs 2.0 or SIBs 2.0 or integrated into PPP contracts — provide an opportunity — a big one.  It is a chance, as Mikkelssen says, “to align agendas” — of corporate service providers, project financiers, not-for-profit and non-governmental organizations, as well as the public sector — to achieve positive, ‘game-changing’ impact for recipient communities and nations.   The real threat is in not trying; it is about the will to execute.  As Stuart Orr says, we’ve got to “get this stuff right.”

Julie King is Managing Director of the Galileo Agency, a boutique agency, which packages and develops projects and commercial opportunities for both for-profit companies and not-for-profit organizations to monetize social impact — particularly in the water, environmental, and education sectors.


[1] Interviews for this article were conducted with industry professionals:  Linda S. Habgood, Director, Delphos International, Washington, DC.  Delphos is a specialized advisory firm, focusing exclusively on emerging market financing: Dashtbani Mikkelsen, Director, Global Partnerships, Grundfos Lifelink, Copenhagen: Lifelink is a “business with a social purpose”, and is a subsidiary of Grundfos. Lifelink is designed to combine Grundfos technologies and innovative R&D with professional service networks to support reliable, sustainable water supply in the developing world: Orr, Head, Water Stewardship, World Wildlife Fund for Nature, Geneva and Dr. Jian-hua Meng, WWF International Water Security Lead.  WWF helps governments and businesses work together to better manage water resources: Strocher, CFO, Calvert Foundation, Washington, DC. Derek was formerly Senior Financial Officer at the World Bank where he led the Innovative Finance portfolio, including Impact Bonds.  Calvert Foundation is a Community Development Financial Institution and Impact Investing Firm:  Interview notes on file with the author and interviewees.

[2] “The aggregate of non-governmental organizations and institutions that manifest interests and will of citizens; individuals and organizations in a society which are independent of the government”:

[3] Derek Strocher, CFO, Calvert Foundation was formerly Senior Financial Officer at the World Bank where he led the Innovative Finance portfolio, which included DIBs. He was also part of the DIB Working Group organized by Social Finance UK and Centre for Global Development:  This group was an off-shoot of the originators of the Social Impact Bond (SIB) with specific focus on adjusting the SIB for international development projects, as opposed to domestic programs targeted by SIBs.

[4] PPP Guide, p. 41.

[5] Social Impact Bonds: Lessons Learned So Far, (’SIBs: Lessons’)Hanna Azemati, Michael Belinsky, Ryan Gillette, Jeffrey Liebman, Alina Sellman, and Angela Wyse, John F. Kennedy School of Government, Harvard University. Federal Reserve Bank of San Francisco, p. 23-33: