Social sector financing has emerged as a critical need to achieve the SDGs for developing countries like India by 2030. This blog explores why the Indian government should focus on outcomes-based financing instruments like impact bonds to ensure development objectives stay on track. This is particularly important at a time when fiscal challenges are likely to persist and hinder the expansion of existing welfare programs.
SIBs can make development spending more effective
In late 2019, the IFC estimated an annual gap in Sustainable Development Goal (SDG) financing worth nearly USD 2.5 trillion in developing countries.[1] According to the OECD, the COVID-19 pandemic increased this shortfall by USD 1.7 trillion in 2020. This amount included a gap of USD 1 trillion in pandemic recovery measures by advanced economies. In June 2021, estimates indicated that India needed USD 2.64 trillion to meet the SDGs by 2030. While fiscal budgets will remain crucial to meet SDGs, the widening financing gaps highlight the case for private capital to support development outcomes.
Results- or outcomes-based financing (RBF or OBF) are an essential mechanism that can help private actors contribute considerably to development goals. Impact bonds are a specific RBF approach that has gained traction over the past decade. They are outcomes-based contracts where private investors provide upfront capital for a development project or service. They are repaid with interest only if the project achieves pre-defined results, evaluated by a third-party assessor. Social impact bonds (SIBs) and development impact bonds (DIBs) shift the focus of development projects from activities and inputs to outcomes. They connect outcome payers,[2] service providers, and private investors to deliver measurable impact within specified timeframes. Impact bonds align risks and social returns and create incentives for all stakeholders, particularly investors, to ensure efficient project execution and rigorous monitoring and evaluation.
Since the first SIB launched in 2010 and DIB in 2015, investor appetite for these instruments has risen steadily. As of August 2021, 214 impact bonds were contracted in 35 countries across six sectors, with USD 437 million in upfront investments and more than USD 460 million in total committed outcome funding.[3]
Impact bonds have been used across various thematic areas—healthcare, education, clean water and sanitation, climate change, and skilling and employment.
The potential role for SIBs in India and the developing world
Pandemic-induced public spending has increased fiscal deficits and constrained the short-term development budgets of several countries, such as India. National and sub-national governments can consider using SIBs to overcome this hurdle for specific interventions for which outcomes can be quantified. The arrangement facilitates financial risk-sharing and encourages fiscal prudence as payments are made if outcomes are delivered. Moreover, governments get the necessary lead-time before payouts, as contracts typically last over a reasonable timeframe, often between three to five years. Forecasts depict macroeconomic conditions to stabilizing and improving over that timeframe.
SIB projects differ from traditional government-led ones—they shift the focus of funding from inputs and activities to outcomes. Government-led projects often remain constrained by political prerogatives or rigid procurement and partner selection processes. They tend to be risk-averse at the cost of innovation, unlike SIBs. Hence, government projects generally deliver sub-optimal results in terms of service delivery, meeting budgeted costs and timeframes, and beneficiary targeting. They may fail to address critical needs, such as improving learning outcomes among primary school students or optimizing maternal nutrition. Project failure in such cases sets backs the development impact by years.
SIBs can enable innovation by investing in smaller-scale yet catalytic projects. They provide the initial risk capital to identify successful models that governments can later scale. The multi-stakeholder nature of the approach also facilitates accountability. The interplay between innovation and stakeholder cooperation can help develop new design and development models using a results-based framework. These models can lead to more effective outcomes while assuring double bottom returns for investors.
The Pimpri-Chinchwad Municipal Corporation (PCMC) in Maharashtra has taken the lead in SIBs. It signed an MoU with the United Nations Development Programme (UNDP) in December, 2020 to co-create India’s first SIB to deliver quality, affordable, and accessible healthcare. PCMC will cover costs only if pre-defined targets are met, which limits the risk of inefficient and ineffective spending. Governments can also learn from other successful IB-backed programs, such as the Educate Girls Development Impact Bond in Rajasthan that delivered spectacular impact three years after implementation. The program helped students achieve 160% of final learning targets and surpassed the enrollment target at 116%.
Local and state governments need to identify similar projects to scale up that address fundamental development gaps. SIB-backed projects can create a virtuous cycle[4] of investment commitments. The investment will lead to successful outcomes, led by strong data-driven management and rigorous evaluations. The cycle will enhance the abilities of payers and service providers to attract capital. The approach would help public authorities optimize the use of resources and ensure timely delivery of services.
Aligning public-private effort
As of August 2021, developing countries had only 19 contracted impact bonds—12 DIBs and seven SIBs. The scope for growth in this market is considerable. India and many other developing nations already have relatively well-functioning approaches to public-private projects (PPPs) for significant infrastructure needs, such as the development of airports and roads. There are, however, few parallels in the realm of social infrastructures, such as co-developed healthcare facilities or educational institutions. Impact bonds, while not a panacea,[5] can help co-create scalable and catalytic PPPs to meet development aspirations.
Ultimately, the positive impact of utilizing innovative financing instruments like SIBs now could have long-term benefits. Governments must not allow constrained fiscal capacity to compromise welfare delivery. Prioritizing multi-stakeholder projects even if they are more localized can provide valuable lessons for development programming, funding, and implementation going forward.
[1] Doumbia D., Lauridsen M.L., p.2, Note 73, Fresh Ideas about Business in Emerging Markets, EM Compass (October 2019)
[2] SIBs and DIBs are distinguished by the outcome payer. Governments are outcome payers in SIBs while external donors, such as philanthropic organizations, government aid agencies, or multilateral institutions, are the outcome payers in a DIB.
[3] Gustafsson-Wright E. et al.; Social and development impact bonds by the numbers – July 2021 snapshot, Brookings Institution (July 15, 2021)
[4] Bohra L., Impact Bonds: An emerging market opportunity for innovative financing, ET Government (March 18, 2021)
[5] Nouwen C., Lee D. & Hornberger K., Five myths about impact bonds, India Development Review (May 5, 2020)
a2i, UNCDF and MSC launch FinLab BD to help the poor in Bangladesh
Dhaka-Bangladesh, 24 October 2021: a2i, UNCDF and MSC have launched the Financial Innovation Lab Bangladesh-FinLab BD to serve the low and moderate-income populations of Bangladesh by advancing sustainable pro-poor growth. Hon’ble State Minister for ICT Division, Bangladesh, Mr. Zunaid Ahmed Palak, MP, inaugurated the FinLab BD on 24 October 2021 (Sunday) through an inaugural ceremony as the chief guest. Deputy Governor of the Bangladesh Bank Mr. Ahmed Jamal, Policy Adviser of a2i Mr. Anir Chowdhury and Regional Coordinator Asia of UNCDF Ms. Maria Perdomo attended the event as special guests while Project Director (Joint Secretary) of a2i Dr. Dewan Muhammad Humayun Kabir chaired the event.
Speaking at the event the Hon’ble State Minister of ICT Division Mr. Zunaid Ahmed Palak, MP, said, “Promoting digital financial inclusion is the core pillar of building a digital Bangladesh. The government is working to create a common platform Interoperable Digital Transaction Platform (IDTP) for digital financial transactions. This increases penetration of the online population alongside bringing integrity in public service delivery. We are now providing social safety net allowance to beneficiaries through mobile financial services. For this purpose, millions of MFS accounts were also created for these beneficiaries, bringing them one step closer to financial inclusion. The ICT State Minister said, “The youth, the entrepreneurs and startups in Bangladesh have the potential to resolve problems and create a positive social impact. All they need is support guidance, funding and mentoring in the correct direction. For this purpose, FinLab Bangladesh will enhance financial inclusion through technology and a digital-first approach to help us reach our goals even faster. The collaboration will be crucial for the success of the lab. As startups, industry experts, financial service providers, regulators, investors, and donors come together, we can collectively contribute to our realizing the vision of the financially included digital Bangladesh.”
Deputy Governor of Bangladesh Bank Mr. Ahmed Jamal said, “FinLab will foster the innovation and capacity of FinTech in the Bangladesh market. Technology has touched all aspects of our everyday life with the use of the Fourth Industrial Revolution (4IR). Bangladesh Bank has built a safe, secure and efficient payment ecosystem of the country to align the payment system with the goal of digital Bangladesh and also to monitor and supervise from the central point. Bangladesh Bank will provide full support to FinLab.”
Anir Chowdhury, Policy Advisor of a2i said, “The a2i has been working diligently to build digital Bangladesh focusing to build a customer-centric public service ecosystem to simplify the life of end-users – the resident of Bangladesh by making services more inclusive, affordable and reliable. One of the core components is to catalyze digital financial services and FinTech innovation. We are jointly working on Bangladesh Bank, different ministries and departments, development and technology partners, financial service providers, international organizations and donors to involve the marginalized people in the formal economy for the last three years. We have conceptualized UN Capital Development Fund (UNCDF) and MSC (MicroSave Consulting) to create an innovation lab that focuses exclusively on enhancing financial inclusion of low and moderate-income people.”
Maria Perdomo, Regional Manager for Asia, Inclusive Digital Economies at UNCDF said, “UNCDF intends to accelerate the growth and competitiveness of FinTech and other tech-based DFS initiatives in different sectors and segments to achieve an inclusive digital economy. We are very excited to have a2i and MSC working with us in realizing this. The role of innovation in financial service and technology is crucial to accelerate the growth of digital financial service, to bridge the gap and ensure that no one is left behind”
Mr. Anil Kumar Gupta, Partner at MSC said, “Despite so much progress, a large segment of the population is unable to benefit from the digital revolution. Incumbents find it difficult to serve them due to high costs. FinLab BD is our attempt to bring various partners and innovative solutions to serve the underserved segments at a scale. MSC profusely thanks MetLife Foundation for their support to launch this initiative.”
The panel discussion on “How FinTech startups and incumbents can play a role in improving the financial health of the LMI segment of Bangladesh” was held after the inauguration of FinLab BD. Experts discussed on how FinTech startups and incumbents can play a role in improving the financial health of the low and moderate-income populations of Bangladesh. Director-Asia of MetLife Foundation Krishna Thacker, Country Manager-Bangladesh, Nepal and Bhutan-of VISA Soumya Basu, Co-founder and COO of Sheba Platform Limited Ilmul H Sajib and CEO of UpaySydul Haque Khandaker was present as the panelists. Managing Director of MSC Manoj K Sharma moderated the panel discussion. Program Manager-Digital Access & Digital Financial Service of a2i Md. Tohurul Hasan conducted the panel discussion.
Zunaid Ahmed Palak MP, Honorable State Minister, ICT Division, the People’s Republic of Bangladesh shared the highlights of the FinLab BD launch event through his YouTube channel
India’s gender-responsive policies during COVID-19
COVID-19 pandemic has been difficult for the world and particularly for women. They faced pressing questions regarding food, fuel, employment, and income. In-kind and cash benefits from the GoI’s PMGKY assistance package continue to support the holistic needs of marginalized women in India and the households they look after. The GoI provided all female #PMJDY account holders with INR 500 (USD 6.77) per month for three months.
While PMGKY has a dedicated focus on poor women, poor communication, lack of digital and financial literacy, and presence of social norms are some key underlying challenges women face while enrolling and accessing gender-focused G2P programs, as is the case with the GOIs PMGKY package. MSC believes G2P programs for women can be enhanced through gender-sensitive considerations in communication and a friendly-banking environment.
India’s gender-responsive policies during COVID-19
A review of the effectiveness of India’s Direct Benefit Transfer system during COVID-19: Lessons for India and the world
During the COVID-19 pandemic, the Government of India (GoI) announced a relief package in March 2020 worth USD 23.2 billion under the Pradhan Mantri Garib Kalyan Yojana (PMGKY) program. Within two weeks from the announcement of the PMGKY program, the GoI used the DBT system to transfer USD 3.9 billion to 318 million beneficiaries. However, the delivery of cash benefits has been fraught with various challenges. Therefore, it is necessary to understand the efficiency of various cash transfer delivery mechanisms and the challenges associated with benefit delivery during the pandemic.
This paper examines the use of existing cash transfer programs and the payment infrastructure used for the timely delivery of PMGKY benefits during the COVID-19 pandemic in India. Additionally, the paper draws insights from PMGKY beneficiaries’ cash withdrawal/access preferences and experiences from MicroSave Consulting’s (MSC) two rounds of assessment of the GoI’s response to COVID-19.