Development Aid: No longer Just About Good Intentions

Traditionally, social development projects have largely been centred around non-profit organisations working in underdeveloped countries, implementing a preconceived plan that they believe will solve an issue. These organisations have often been backed by grants from governments, or development institutions, and must adhere to a strict budget and timeline. However, recently, this model has come under scrutiny for its effectiveness and sustainability - and major changes are beginning to occur in the development field.

One emerging shift is a transformation in the form of aid given. In his book, The Business of Changing the World: How Billionaires, Tech Disrupters, and Social Entrepreneurs Are Transforming the Global Aid Industry, Raj Kumar highlights that we are amid a transitional phase in development funding. To explain what he means, he refers to two concepts: old aid and new aid. Old aid is what we naturally think of when we consider development aid: non-conditional funding (largely in the form of grants) aimed towards organisations coming in from the outside with a predetermined Big Idea. Contrastingly, new aid focuses on engaging with local people to discover what is holding them back, and aims to maximise the effectiveness of the funding.

This paradigmatic change has important consequences for social organisations that are trying to attract funding. It is no longer sufficient simply to have good intentions; development investors are beginning to demand that their funds produce measurable social impacts and that organisations have a concrete Theory of Change as to how the funds will be used to produce favourable results. An example of a new-aid funding instrument is a Social Impact Bond (SIB). A SIB is an outcomes-based financing mechanism whereby an investor agrees to take a risk on a development project for a potential payoff if it succeeds[1]. SIBs typically involve multiples parties, including private investors who provide the start-up capital for a social project, social enterprises who use the capital to implement the project, and outcome funders (government entities) who agree to repay investors their investment capital, plus some rate of interest, if the project reaches certain pre-agreed social outcome benchmarks[2]. If the development goals aren’t met, investors can lose their interest return or some or all their capital investment.

An example of this, in South Africa, is the recently implemented Impact Bond Innovation Fund (IBIF) – a SIB that focuses on Early Childhood Development (ECD) in the Western Cape. The SIB targets home visitation services to more than 2000 children aged 3-5 over the course of three years. In the model:

· The outcome funders are The Western Cape Department of Social Justice and the ApexHi Charitable Trust;

· The investors, who have provided upfront capital of R7.5 million, are the Standard Bank Tutuwa Community Foundation, Futuregrowth Asset Management and LGT Venture Philanthropy; and

· The primary service provider (who will actually implement the ECD programme) is the Western Cape Foundation for Community Work[3]

Repayment of the investors’ capital (plus a financial return) will depend on whether the programme sufficiently improves ECD recruitment, attendance and children’s Early Learning Outcome Measures (a tool that measures children’s pre-school development). The structure of this financial instrument means that the investors have every incentive to monitor and ensure that the programme will be successful in its social impact. The novelty of the SIB is that, rather than just handing out free funding with little focus on its effectiveness, it engenders and aligns incentives to ensure that all involved parties are working hard to get the best solutions for the people involved[4].

SIBs are just one example of new development funding models that are emerging out of the transition from old aid to new aid. These outcomes-based models are still in the early phase of their application, but if they begin to show results, they could encourage traditional aid funders to adopt more innovative, results-based approaches. With the 2030 deadline of the United Nation’s Sustainable Development Goals rapidly approaching, changes and innovations like these will undoubtedly be vital to improving the effectiveness and sustainability of development work in ameliorating urgent issues such as poverty, hunger and climate change.

[1] Kumar, R. The Business of Changing the World: How Billionaires, Tech Disrupters, and Social Entrepreneurs Are Transforming the Global Aid Industry.

[2] https://www.cgdev.org/sites/default/files/structuring-funding-development-impact-bonds-for-health-nine-lessons.pdf

[3] For more on the IBIF, visit: https://www.brookings.edu/blog/education-plus-development/2018/09/25/a-landmark-month-for-impact-bonds-in-education/

[4] For a more detailed analysis of the Impact Bond Innovation Fund visit http://skoll.org/2018/11/01/mothers2mothers-deconstructs-their-social-impact-bond-experience/