In early 2018, Bangladesh fulfilled all three eligibility criteria for graduation from the list of Least Developed Countries (LDCs) of the United Nations. This is a cause for celebration for a country which has made remarkable progress in reducing poverty (from 44% in 1991 to 15% in 2017), driven by sustained economic growth (average GDP growth of 6.5% in the last decade). In addition, key human development indicators like life expectancy, literacy rates and per capita food production have also shown significant improvement.
However, this graduation from LDC status also means that traditional grants and aid to Bangladesh will reduce significantly – at the same time as it needs to be making greater strides to maintain economic growth and combat new challenges – such as building skills and employability for its youth, as identified by the Sustainable Development Goals (SDGs). Achieving the SDGs by 2030 will take an estimated $5 to $7 trillion per year, with a financing gap of $2.5 trillion. In Bangladesh, the challenge has translated into a financing gap of almost $928 billion.
In this article, we highlight some key discussion points from the workshop panels held in October this year.
Panel speakers included Ms Judith Herbertson, Head of DFID Bangladesh; Mr Asif Saleh, Chief Executive of BRAC; Mr Tushar Thakkar, Specialist in Investing for Development at Dalberg; Mr Prabu Thiruppathy, Principal at Kois; Ms Christy Lazicky, an Economist at IDInsight and Mr Arastoo Khan, member secretary of the National Advisory Board – Impact Investment and Ms Abha Thorat-Shah, Executive Director for Social Finance at the British Asian Trust.
The Case for ‘Pay for Results’ Contracts and Global Trends
The opening panel focused on differentiating the traditional channels of funding and pay-for-results contracts. Richard Hawkes, Chief Executive of the British Asian Trust, kicked off the discussion on pay-for-results tools by providing an overview of pay-for-results tools, including impact bonds.
Setting the context for the need for pay-for-results, Judith Herbertson said that as the nature of the social challenges evolve, risks are getting higher and targeting the right organisations is getting more complex and expensive. This is why pay-for-results tools, such as DIBs, are critical to shift the risks and pay only for the impact created. Asif Saleh shared that Bangladesh is one of the five countries in the world fighting against extreme poverty, and BRAC’s Ultra-Poor programme was launched in Bangladesh in 2002 with tax-payers money to the tune of $38 million to combat this. While sustainable development needs huge amounts of funding and strategic partnerships, there are few mechanisms to drive these and they often become event-driven (such as aid for a catastrophic natural disaster).
Impact Bonds are the new paradigm for tackling recent cultural change and overcoming the limitations of traditional funding. Unlike traditional activity-based funding, they focus on rigorous, data-backed evaluation and alignment of partners on specific outcomes. According to Tushar Thakkar, there are specific drivers that can help bring these tools to developing countries: (i) Tested models from developed countries, which can be adapted to developing countries, (ii) Data systems to ensure robust monitoring and evaluation, and (iii) Wider participation, particularly from government.
On the other hand, the group also discussed that while DIBs can help shift the risk from donors to investors, they also increase reputational risk and costs for the service providers and funders.
Learning from Other Impact Bonds
The second panel presented the structure of, and learnings from, the three DIBs: the Educate Girls DIB, the Quality Education India DIB and the Humanitarian Bond from ICRC. All the speakers agreed that a key success factor for all the instruments was having a robust evaluation process and methodology, as well as defining the outcomes clearly at the beginning.
The view of Abha Thorat-Shah was that poorly defined outcomes will drive away investors. The key, she said, is to keep the outcomes simple and measurable and to focus on one or two outcomes rather than have too many. Prabu Thiruppathy added that having clear objectives and outcomes was also critical for the pricing and structuring of the instrument. Christy Lazicky added that it is also important to standardise the outcome, and that there are three key principles for this: (i) Aligning outcomes to real challenge, (ii) Ensuring measurability, and (iii) Ensuring that they don’t create perverse incentives for any stakeholder.
Key takeaways for Bangladesh
Given Bangladesh’s move to middle-income status, and the funding gap created by a reduction in aid from international agencies, innovative financing mechanisms are critical to continue Bangladesh’s current impressive trajectory on development goals. It is also important to identify key sectors where impact bonds might be most effective and have the greatest impact in spurring sectoral growth.
Arastoo Khan shared that the idea of impact bonds has been recently seeded in Bangladesh by the introduction of the Impact Investment Fund, created by the Security Exchange Commission, and it would be happy to support such innovative funding models moving forward.
Krisha Mathur, Manager, Social Finance - the British Asian Trust
 Source: World Bank, Poverty data based on international poverty line of $1.90 a day (using purchasing power parity exchange rate).