Philanthropy has an important role to play in international development. Philanthropists are interested not only in giving money for development causes but in making targeted investments and forming effective partnerships to have the biggest possible impact. Philanthropists want to work with existing aid systems, but often find them to be too bureaucratic and cumbersome. Traditional donor agencies want to work better with the private sector, but don’t have a clear picture of where the best potential lies.

This is why there is a lot of interest from both philanthropists and donor agencies in a new model for funding and designing development programmes: Development Impact Bonds (DIBs). Based on Social Impact Bonds that are taking off in the UK and other developed countries, DIBs capture the best of what a range of development actors (including investors, philanthropic foundations, governments in developing countries, donor agencies, and service providers) can bring to achieving development outcomes.

In a Development Impact Bond, private investors put up the financing for interventions needed to achieve desired results, and work with delivery organisations to ensure that the results are achieved; donors and governments subsequently repay the investors if the interventions succeed, with returns linked to progress achieved. Investors manage the risk that results will be achieved; if interventions are not successful, investors could lose all or some of their capital, so they have both the incentive and the mandate to make sure that programmes are delivered as effectively as possible. If interventions do succeed, investors’ returns are social as well as financial. Meanwhile, the public sector only has to pay for demonstrated results, and can avoid the need associated with up-front public financing to micromanage programmes.

The first Social Impact Bond, launched by Social Finance in 2010 to reduce recidivism among ex-offenders at Peterborough Prison, is beginning to show results that we think demonstrate why this approach is desperately needed in development. In the Peterborough SIB, investors are financing a range of interventions designed to prevent re-offending among a group of short-sentence prisoners. The UK Ministry of Justice published preliminary figures from the project’s first year which show that, between 2008 and 2011, there was a 20% reduction in the frequency of reconvictions in Peterborough compared to the national average for similar prisons. The final results are not in yet and they depend on a more rigorously defined comparison group, so we don’t yet know if investors will get their money back or how large any return might be. But we do know something about what’s working differently in Peterborough: investors have put in place rigorous monitoring systems that provide real-time information about which interventions are working and which are not, and the programme is able to adapt as information is gathered, in ways that are not possible under typical publicly-funded programmes. An intermediary working on investors’ behalf, in this case Social Finance, makes decisions about how to shift resources throughout the course of the programme and ensure that individual ex-offenders are receiving an optimal mix of services. Service providers have reported that they prefer this model of working because it allows them to focus on and respond to clients’ needs.

In development, we are often dealing with complex issues for which blueprint solutions or externally provided plans do not work. DIBs provide an opportunity to test a new business model for development, underpinned by a new financial model, that can create space for local solutions to emerge and generate clear evidence of the results of development interventions. DIBs make development challenges investible opportunities for the private sector; they enable countries and governments to set clear priorities and invest in the things that people need; they give donors, who pay for outcomes, a chance to use funds more efficiently and focus on what is achieved rather than how money is spent; and they give service providers the long-term funding and the freedom to innovate that they need to build services around clients’ needs.

Philanthropic foundations are taking an interest in a number of ways that they could help to pilot DIBs. Philanthropists can invest in DIBs directly with their own assets. They can also catalyze a market for this approach by providing subsidies, perhaps to intermediaries, for whom the up-front transactions costs of early DIB pilots might otherwise be prohibitive, or by supporting a community of practice that can share information and learning from the development of the first DIBs.

The Center for Global Development and Social Finance convened an expert Working Group whose report, Investing in Social Outcomes, lays out recommendations for all of the actors involved, as well as case studies of DIBs and considerations for how DIBs can be designed and the newly emerging DIB market can go forward. It is clear that this new model for collaboration between philanthropists and the traditional aid sector has tremendous potential to create ways of working that get to the root of many of the challenges of delivering services and bringing about change in developing countries.