Development impact bonds (DIBs) are an innovative new financing mechanism that brings together the increasing emphasis on results-based financing with impact investing. Palladium is pioneering the use of impact bonds in a development context, inspired by recent successes in mobilising private funding to achieve social impact in more developed economies.
In the DIB model, private investors pay in advance for interventions to reach agreed development goals. They are remunerated by donors and/or governments only if the interventions succeed in achieving their anticipated results. The core feature of a DIB is the designation of a payment metric on which a target value is agreed. If the target is reached, the program is deemed successful and the outcome funder releases the agreed payment – the upfront capital plus the success premium – to investors. This structure gives flexibility for investors, intermediaries and service providers to be responsive and adaptable to changing circumstances in order to achieve the most cost-effective, value-adding solution, which is a key difference from many other forms of payment by results mechanisms.