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 programme 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.
Palladium actively promotes and supports innovation in a development context through innovation challenge funds, complemented by expert assistance. The goal of innovation funds is to identify and support innovations with the potential to create social impact. We focus on market-driven solutions to intractable social issues in areas such as health, education and pro-poor economic development.
Typical innovation challenge funds follow a three-step process. First, applicants submit a concept note outlining their idea and its intended social impact, which is reviewed and scored by a technical review panel. If approved, applicants then submit a detailed business plan, which is assessed by an independent grant committee. Successful applications then receive funding through the challenge fund. Throughout the process, applicants receive ongoing expert technical support to ensure the sustainability of their projects.