We designed and set up a pioneering $10million development impact bond that is on track to support over 1,600 villages in rural Cambodia to install toilets, helping to prevent the spread of disease and enhance people’s safety and dignity.
Across rural Cambodia, many villages have limited access to safe sanitation and defecation is done in fields, on open ground and in watercourses.
This contaminates drinking water, causes disease, and can leave children malnourished as a result of damage to their digestive systems.
It also affects the safety and dignity of whole communities, but especially women, girls, and older people.
The Cambodian government was working to address this along with philanthropic investors, the Stone Family Foundation, and iDE, a non-governmental organisation specialising in water, sanitation and hygiene (WASH). Using a market-based approach – supporting a network of local businesses and entrepreneurs to make, sell and install toilets – they had made significant progress, increasing ownership of toilets, from 29% in 2009 to 73% in 2019.
However, IDE found it difficult to reach the poorest and most marginalised people, especially in more remote rural communities. And the grant funding model they were using had limitations that prevented them trialling innovative ways to adapt their approach. iDE wanted to:
Work more closely with local governments and community leaders to help people understand the benefits of installing a toilet.
Find a way to make buying and installing toilets more attractive and accessible for poor households without disrupting the local market for sanitation products.
Have the freedom to continually and quickly adapt their approach in response to the varied and changing situations of the communities they worked with.
We researched, tested and developed an innovative financing approach that would give iDE the flexibility they needed to learn and adapt as they continued to scale up. This was a development impact bond (DIB).
A DIB is a type of social outcomes contract, meaning funding is not tied to specific activities and outputs, as with a traditional grant, but to the outcomes it is aiming to deliver. In this case, a measurable reduction in open defecation.
This was the world’s first development impact bond in the WASH sector but, based on our extensive experience of using impact bonds in international development, we were confident it would help the programme achieve its aims. Having created the world’s first social outcomes contract more than 10 years ago, we have since supported the development, contracting and delivery of over 100 outcomes-based contracts, across 50 countries.
A development impact bond is a type of social outcomes contract where funding is not tied to specific activities and outputs, as with a grant, but to the outcomes it is aiming to deliver. It needs three partners:
A impact investor who can provide upfront funding with no guarantee they’ll get it back – often a private philanthropic organisation or individual
An implementing organisation to deliver the programme – usually an NGO with deep experience in delivering relevant projects on the ground
An outcomes funder who will pay back the investor if and when the project achieves the desired outcomes – often a government or international development agency
As well as offering the implementing organisation much more flexibility to adapt and innovate, a DIB reduces the administrative burden for funders, removing the need to check that a pre-agreed plan is being followed, as with a grant.
It also builds a closer connection between the funder and implementer and ensures both are strongly incentivised to make the programme succeed. To achieve this requires careful analysis, goal setting, alignment of partners and incentives before the contract is developed.
We completed the design of the DIB in just nine months, and at a relatively low cost.
We began with rigorous analysis to understand the challenge, which population would be targeted by iDE’s programme, what intervention was needed, how much it would cost in total and what outcomes might be measured and delivered.
We ran a feasibility study to test whether a development impact bond was the most suitable and powerful funding approach to achieve the aims of the programme.
Our team has deep expertise in partnership working across the public, private and non-profit sectors, enabling us to bridge different sectors and support collaboration. We helped to bring the partners on board and make the case for a DIB with:
The Stone Family Foundation switching to a new role as an impact investor rather than grant funder.
iDE continuing as implementing partner on the ground.
USAID joining as outcomes funder – something they already had experience of.
We carried out the core work of setting up the DIB including:
Understanding the needs of the partners.
Financial analysis of iDE’s programme, to understand costs and revenues.
Defining the outcomes metrics.
Designing the mechanism that would trigger payments once outcomes were achieved.
Structuring the funding flows.
It was important that the financial support for the programme was in the form of ‘smart subsidies’. This means funding is targeted to those who need it most, and flows in a way that enhances the working of the market, rather than disrupting it.
Poorly targeted subsidies can be inefficient and distort local markets. For example, handing out one-off subsidies that lower the cost of providing and installing toilets for everyone, means some money is spent on people who can already afford to pay for a toilet. This undermines the long-term business prospects of local sanitation entrepreneurs.
Smart subsidies work differently: they are targeted to the people who need them and are designed in a way that supports a vibrant local market. By only paying for pre-agreed outcomes, delivered by local entrepreneurs, the impact bond is a great mechanism for making sanitation grants in a smart, market-friendly way.
Our hope is that the impact bond serves as an example of how long-term finance and support can address the critical challenge of universal sanitation, and demonstrates it is possible to use impact investment to enable both high social impact and financial return.
Stone Family Foundation
The four-year funding programme began in 2019 with a target to enable 1,600 villages in Cambodia to become open defecation free by the end of 2023.
By November 2021 the DIB had helped 1,000 villages to declare open defecation free status – well on track to meet the target. This means 176,000 households have been impacted.
Through developing the DIB, we also enabled:
USAID to fund real outcomes rather than just inputs, and to pay nothing until outcome milestones were reached.
The Stone Family Foundation to have a greater impact as they get money back if outcomes are achieved which they can choose to reinvest.
iDE to pivot their programme by building closer links with local authorities and community leaders.
The programme to flex in response to Covid-19 and stay on track.
The DIB concluded in 2023. Key achievements included:
This was the most rapid development from initial design to launch of any impact bond we’ve led and at a relatively low cost. We were able to deliver this by building on our learnings and experience from other impact bonds. These were the key factors:
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