Development impact bonds: learning from the Asháninka cocoa and coffee case in Peru

Abstract

Impact bonds effectively allow the risk of implementing social development activities to be shared with private sector investors. Social or development impact bonds replace the upfront financing of charitable activities with a pay-for-success contract. Four actors together agree upon the outcomes and their indicators: outcome sponsor, investor, project implementers, and verifier. Under such a contract, a charitable donor or government (‘outcome sponsor’) takes the obligation to pay the ‘investor’ an amount determined by a set of objective indicators reflecting the outcome desired by the donor. The investor, expecting contract-based future payout, can recruit and pre-finance project implementers (‘service provider’) to achieve the agreed results. The achievements of the outcome indicators are assessed by an independent verifier to conclude the payout from donor to investor according to the contract. The structure allows charitable donors to transfer a significant share of risk to investors and/or financial markets. The Common Fund for Commodities (CFC), the Schmidt Family Foundation (SFF), Rainforest Foundation UK (RFUK), and the Royal Tropical Institute (KIT) were the first to apply the model in the agricultural sector in an emerging economy. The main objective of the impact bond was to increase productivity and market sales of cocoa and coffee produced by the Asháninka people, an indigenous community living in the Peruvian Amazon. This pilot provides valuable lessons learned to contribute to the development of the mechanism.