Social Finance - Thu, 06/27/2013 - 07:30
The launching and exponentially important consideration of Social Impact Bonds (SIBs) in recent times have elevated the interest for other “pay-for-performance” (PFP) structures. But what do PFPs (including SIBs) have in common? And what is the potential for the use of PFP structures outside of SIBs? Much has been discussed publicly about SIBs and this post is intended to encourage making use of PFP structures for uses other than those that are possible under SIB structures.
Commonality amongst pay-for-performance structures
What PFP structures have in common is that the governments that are currently providing the needed funds get to only provide such funding under certain conditions, which are linked to positive outcomes/performance. Examples of these structures include “pay-for-performance Grants” and “Conditionally Guaranteed Development Impact Bonds” (as I call them). Both of these structures, like SIBs:
- Contemplate measuring outcomes, allowing governments to deploy funds only if and after positive outcomes are achieved
- Involve the private sector by deploying up-front funds and taking outcomes risks
- Provide an additional source of funding
- Create a natural alignment of the parties involved towards succeeding in achieving positive outcomes.
A “Pay-for-performance grant” involves up-front funding provided by a private sector organization, which is directed to fund interventions executed by specialized non-profits, with the objective of addressing specific social issues that are of the private sector organization’s “interest”. For example, companies engaged in oil or mining businesses, would likely be more interested in addressing social issues in areas where they operate. In such PFP structure, the government funding is provided only if and after the intervention has succeeded, as measured by selected metrics. In this case, the up-front funding is returned to the private sector organization, which is expected to use such funds in another PFP grant. Should the interventions not succeed however, the government is not required to reimburse the private sector funder.
Conditionally Guaranteed Development Impact Bond
A “Conditionally Guaranteed Development Impact Bond” involves replacing or complementing existing government debt investments in small and medium-sized enterprises (SMEs), aimed at promoting economic development (within its country, or in other developing countries), by debt investments provided by the private sector (investors) which are conditionally guaranteed by the government. The condition of such guarantee relates to the financing succeeding in achieving economic development, as measured by selected metrics, despite of the specific investee’s default, due to temporary financial difficulties that are typical of SMEs. For more on Development Impact Bonds, please see the consultation draft of the report of the Working Group on Development Impact Bonds.
The above brief explanations may well allow for confusions, so please feel free to reach me for clarification and/or to discuss details.
Editor's Note: Christian Novak, Frontier Markets Advisors, can be reached at firstname.lastname@example.org