The UK Government’s development policy has been considered to be at the forefront of innovation for decades, but has been the target of recent accusations that it is not responding adequately to evolving challenges. In this sense, perhaps there are similarities between the once-mighty Sean Connery-as-James-Bond, and the 84 year old that he is today, less able to flatten villains.

Last year it was announced that DfID (the UK Government’s Department for International Development), acknowledging the need for new ideas, has turned to Bond. Development Impact Bond.

So, what bond is this? A new bond. Like how Daniel Craig was new in 2006. Development Impact Bonds are a way of sourcing finance for development projects. The bonds aim to improve the quality of development projects, reduce wastage, reduce risk for donor governments, encourage innovative projects and encourage private investors to get involved. Sounds decent, hey. 

A hypothetical example of how it can work

An NGO in Malawi specialises in providing affordable housing for the locals, and wants to build better, cheaper houses in a part of the country. To do it on a significant scale, they’re going to need significant cash. This can be obtained by creating a development impact bond, which is a financial agreement between three or more parties. Let’s say those parties are a wealthy German investor, DfID, and the Malawian NGO.

The NGO will declare that with a £5 million investment, they can design and build 700 of their new houses, and that they’ll be good enough to pass a quality test carried out by an independent engineer. The German investor will say “Ok, I’ll invest my £5 million in this. If you can’t pull it off, my money is gone. If you can pull it off, I get my money back, plus an extra amount of money on top of that that makes it worthwhile for me to take this risk”. So who’s paying the rich German guy back if the project works? DfID.

DfID wants these houses built, and if the project goes to plan, it’s DfID’s money that makes it happen. It’s in the interests of all three parties that the houses get built. The NGO wants to prove that they’re worthy of more support in the future, the rich German guy wants a return on his investment, and DfID wants its development budget to be used on successful development projects. With all three parties strongly motivated to achieve success, smarter ideas, better teamwork, and more efficiency are expected to follow.

Here's a diagram, because diagrams can help:

The concept of development impact bonds is adapted from Social Impact Bonds, which have helped social projects to get off the ground in developed countries. Over the past three years, governments in North America, Australia, Africa, and Asia have started designing social impact bonds to tackle development challenges around the world. While development impact bonds aren’t the most appropriate solution for all development financing challenges, DfID getting involved in development impact bonds is welcome news for those who want to see the villain of extreme poverty defeated in elegant British style.

And what has DfID picked as its first test of development bonds? Uganda, and sleeping sickness. Sleeping sickness is a disease transmitted to humans by flies, and it killed around 9,000 people in 2010. Check out the project details here!