Outcome-based financing for development in India
It would signal the government’s interest in promoting innovative and evidence-based programmes in line with current policy priorities
Different levels of government and policymakers attribute funds for the delivery of social programmes aimed at tackling poverty, hunger, malnutrition and other critical policy issues. These programmes, while necessary, have met with varying degrees of success. Their social impact and performance are not rigorously measured or assessed. This makes it challenging for governments to make informed, evidence-based choices about their spending.
As governments continue to search for the best ways to achieve real impact, certain provider-participant relationships can be incentivized such that they inform the design of government programmes. These include pay-for-success programmes and instruments such as social and development bonds. When implemented effectively, payment structures based on successfully meeting agreed social outcomes can increase efficiency, lower costs and have a profound impact on programme success.
Innovative financing instruments such as social and development impact bonds and innovation funds stand out as promising instruments for addressing various policy challenges. In these arrangements, non-government investors cover the upfront costs necessary to set up the interventions implemented by service providers, while the government or development agency commits to pay a return on investment if predefined desired outcomes are reached. When investment is tied to outcomes, rather than activities, service providers gain greater flexibility to innovate and improve their programmes. Governments and taxpayers transfer the risks of programme performance to the private sector, and enhance the value for money of a given intervention—by clearly specifying the cost of the measurable outcomes, instead of the inputs, of any programme ex-ante.
The world’s first development impact bond was launched in 2015 in India. Called Educate Girls, it consisted of a three-year intervention focusing on improved learning outcomes and enrolment numbers for out-of-school girls. It targeted 18,260 school-going children in the Bhilwara district of Rajasthan. UBS Optimus Foundation is the private funder and the Children’s Investment Fund Foundation (CIFF), the outcome payer. As the intervention enters its last year in 2018, preliminary intervention results have already been made public and have shown positive improvements in learning outcomes and enrolment rates. Another bond was launched on November 2017 on maternal and newborn deaths. Known as the the Utkrisht impact bond, it is funded by the UBS Optimus Foundation, with USAID and MSD for Mothers committing to making the outcome payments if the three-year-long programme targets are met. Within the intervention, the implementing non-governmental organizations are targeting quality of care in 440 private healthcare facilities to positively impact 600,000 pregnant women in Rajasthan.
Research here has benefitted immensely from the cross-fertilization of lessons learned across countries. For example, strong leadership and enlisting and engaging champions within the government have proven to be critical in initial design, development and delivery. Much can be learned from lessons from abroad. The UK is one of the most developed social impact bond (SIB) and pay-for-success markets in the world. It led the way with the launch of the SIB in the world. Most of the ecosystem has been developed from the top down through government commitment and encouragement of evidence-based policymaking. Such policy commitments positively signal markets and help in the development of a robust ecosystem for impact investing and such instruments.
The promotion of such instruments in India would require the existence of local institutional frameworks that allow and promote all the necessary stakeholders to perform properly. Internationally, the UK cabinet office established a knowledge centre for SIBs known as the Centre for Social Impact Bonds and set up a separate Social Outcomes and Life Chances Fund (LCF) to add additional money for SIBs. Today, the LCF has a combined value of £80 million and expects to leverage a further £320m in outcomes payments from local commissioners, creating a total pot of £400m for SIB contracts. Since its inception, the UK government has launched six outcomes funds. In the US, the Barack Obama administration played a key role in galvanizing interest in pay-for-success mechanisms from its earliest days. This included the establishment of the Social Innovation Fund. As of 2015, the fund had already awarded $177 million in grants for SIBs reaching more than 270,000 beneficiaries.
The Indian government could also set up an innovation fund to finance impact bonds. This would signal the government’s interest in promoting innovative and evidence-based programmes in line with current policy priorities, such as those in healthcare, education and employability. Investing in such a fund would galvanize private investor interest, build state and local-level appetite for such instruments, ensure capacity and autonomy for contracting social services and give public procurement authorization for these partnerships. Such a fund would also build the evidence base for SIBs on both the costs and effectiveness of interventions. It would also be seen as a means of facilitating greater collaboration across government silos, as well as local and national authorities.
A shift towards payment by results and channelling taxpayer money toward programmes that work will make impact bonds attractive for government and state actors in India. What’s required now is for the lessons from the first two development bonds in Rajasthan to be translated across policy and government circles.
As data culture is imbedded in government programmes and efforts shift from inputs to outcomes, governments need to be driven not only by cost-effectiveness but also by a commitment to providing full transparency to taxpayers. SIBs and a robust impact investing market in India would ensure just that.
Shamika Ravi and Prerna Sharma are, respectively, research director and senior fellow, Brookings India, and member, economic advisory council to the prime minister, and research associate, Brookings India.