DIBs and SIBs in Practice: Linking Capital Market Financing to Development Results

A public-private partnership that allows private (impact) investors to upfront capital for public projects that deliver social and environmental outcomes. If the project succeeds, the investors are repaid by the Government (Social Impact Bonds) or an aid agency or other philanthropic funder (Development Impact Bonds) with capital plus interest. If the project fails, the interest and part of the capital is lost. While commonly referred as a “bond”, the solution replicates in essence a payment-for-result scheme.

DIBs are a relatively new results-based financing instrument being piloted as a new way of financing innovative activities. DIBs are results-based contracts in which one or more private investors provide working capital for social programs, implemented by service providers (e.g., NGOs), and one or more outcome funders (e.g., public sector agencies, donors, etc.) pays back the investors their principal plus a return if, and only if, these programmes succeed in delivering results. They are the same as SIBs, with one key difference. In a SIB the outcome payer is typically the government in high-income countries, while in a DIB the outcome payer is typically a private donor or aid agency.

The African Development Bank started issuing themed bonds in 2010, responding to investor demand, seeking to buy bonds that not only satisfied their investment criteria and preferences, but more importantly, addressed pressing social and environmental needs. Since 2015, the range of themes the Bank has considered for issuing bonds has been restricted to our five operational priority areas, the High 5s, with the aim to showcase some of the good work we are doing on the continent. For instance, the “Light Up and Power Africa” Bond, issued in 2017, supports the African Development Bank’s ambition to achieve an important goal of realizing Africa’s energy potential and bridging the continent’s energy deficit.

By establishing the Green Bond Framework in 2013 and launching the inaugural green bond benchmark transaction, AfDB has further demonstrated their commitment and support to the nascent green bond market, as well as showed leadership on the continent in terms of addressing the issue of climate change. Unfortunately, the African green bond market remains relatively small, as there have been a limited number of sovereign/sovereign-guaranteed green bond issuances.

Certainly, MDBs can assist potential capital market borrowers through the process of issuance, but philanthropic organizations can certainly help as well, in particular by helping to establish the framework and platforms for issuance, as well as by aggregating reporting. Indeed, Environment and Social, Governance (ESG) markets are relatively new and many potential African sovereign/sub-sovereign issuers are not familiar with the requirements to issue into these markets, nor do they have the required staffing to establish a framework for issuance. Similarly, many of these potential issuers do not have an ESG function or department focused on assessing and communicating on ESG related results, which are a key requirement when it comes to reporting. Philanthropic organizations based on their expertise, for instance Bloomberg Philanthropies, share their expertise in setting up such functions, or help in engaging consultants that can assist potential issuers on that.

In 2017, the African Development Bank launched its Social Bond Program. In May 2018, it successfully priced a EUR 1.25 billion 10-year social bond transaction. This particular transaction displays the African Development Bank’s established positioning in the social bond market, representing its largest EUR-currency benchmark ever.

The Bank was able to diversify its investor base and reach out to Socially Responsible Investors (SRIs), who have incorporated ESG standards into their investment decisions, which remain though secure investments with risks taken on the issuer (‘credit risk’) and not directly on the underlying projects.

Consequently, another innovation that is being harnessed for social good are Social Impact Bonds (SIBs). SIBs raise investments to alleviate social issues, and fund interventions addressing unmet needs of vulnerable groups. Investors pay for a set of interventions to improve a social outcome of interest to a government or agency but one where the payment for the delivery of an intervention is separate from the payment for the success of that intervention. It can be viewed as an alternative Public-Private Partnership (PPP) funding solution based on the provision of social services through a performance-based contract.

The mechanics are fairly straightforward. An impact driven organization like a foundation or DFI can enter into a contract to pay for specific, measurable social outputs and outcomes whereas investors provide the external financing needed to achieve those outputs. An intermediary or project coordinator disburses the funds to the service provider and the service provider works to deliver the social outputs and outcomes in a flexible manner not defined by the outcome payer (for example, the foundation). Then an independent evaluator assesses the outcomes of the program and verifies the results to determine success and repayment.


The first SIB in the world was issued in the UK in 2010 to finance a prisoner rehabilitation program. It was a 6-year pilot scheme targeting 3,000 short-term prisoners with the objective of funding rehabilitation services to reduce the potential of prisoners reoffending post-release. The social contract was such that if reoffending was not reduced by at least 7.5%, the investors would receive no return on their investment. Since that time, there have been at least 60 registered SIBs launched in over 15 countries with up to USD 216 million raised, and a positive impact on an estimated 90,000 people.


The main investors in SIBs are trust funds and charitable organizations like philanthropies and even some high net worth individuals. Trusts and foundations can also serve as outcome funders. In Africa, SIBs have birthed a further innovation with Development Impact Bonds (DIBs) which the African Development Bank is also exploring, as SIBs and DIBs represent one of the best ways to link financing to results while raising additional funds.

The Bank also received support from the BMGF to pursue innovation around the sustainability for our most concessional funding vehicle – the African Development Fund (ADF) – which resources our operations in over 30 low income countries across Africa. The ADF Policy Innovation Lab (the Lab) was created, under the BMGF Trust Fund, to think critically about the place of the ADF in the financing landscape, in response to the changing reality of its clients. Positioned as an independent think-tank, the objectives of the Lab were to examine the future of the ADF and its strategic positioning vis-à-vis other development institutions as well as to amplify the voice of Africa in the debate about the future of concessional finance. The core innovation recommended by the High-Level Panel of the ADF Policy Lab which included Ngozi Okonjo-Iweala, Board Chair of GAVI, the Vaccine Alliance and Mary Robinson, President of the Mary Robinson Foundation consists of frontloading ODA through a ‘Big Bond’ supported by enhanced policy dialogue.

The ingenuity and timeliness of this approach is apparent. With interest rates in donor countries near historical lows (the yield on the 30-year United States Treasury bond is now at about 3%), a window of opportunity exists to raise up to USD 100 billion by securitizing annual ODA flows of about USD 5 billion over a 30-year period. This proposed frontloading has several advantages. First, it does not require additional resources from existing donors, but rather recognizes that Africa needs a big push on infrastructure and human capital in order to grow. Such a big push is better achieved by USD 100 billion upfront than an equivalent present value stream of USD 5 billion a year over the next 30 years.

Philanthropic resources can be used to help service these bonds. The resources needed to service the bond are less than 11% of the annual USD 45 billion in ODA grants currently provided by donor countries and institutions. This percentage could be lower if new foundations, impact investors and private sector entities committed to such a bond. The initial commitments sought from donors would aim to support a funding target of USD 100 billion. The concept of the Big Bond as already proven by GAVI is designed to accept commitments and guarantees from sovereign donors as well as nonprofit entities such as foundations and social impact investors.

There have been many investment forums featuring DIBs, and there is an increasing level of awareness amongst “social-first” investors about the instrument. Nevertheless, for the vast majority of investors, DIBs are a very new concept. Continued sharing of data and lessons learnt from existing DIBs will be important to raise awareness and confidence among potential new investors. With greater focus on outcomes instead of inputs, DIBs create space for more innovation, local problem-solving, and adaptation.