The Impact of an Impact Bond: Improving Health and Sanitation in Cambodia

The Social Challenge

Health and Sanitation

Cambodia’s childhood stunting rates, linked to malnutrition and poor sanitation, are at 32 percent, the highest of the region, despite 7 percent annual economic growth in the decade prior to the COVID-19 economic contraction. Cambodia has seen significant progress in increasing rural sanitation coverage over the past 15 years, with national coverage rates rising from 20 percent to above 60 percent by 2019. However, to realize the health benefits of sanitation within a community, coverage needs to be at least 85 percent. The challenge of realizing universal sanitation coverage in Cambodia has become harder as the remaining households are often the poorest, the most marginalized and the hardest to reach.

The Cambodia Rural Sanitation Development Impact Bond (DIB) aims to dramatically reduce open defecation in rural communities — focusing especially on poorer and harder-to-reach groups — across six provinces in Cambodia: Svay Rieng, Kandal, Prey Veng, Kampong Thom, Siem Reap and Oddar Meanchey.

In communities in which open defecation is routinely practiced, poor sanitation is linked to poor health outcomes, from the spread of disease and childhood stunting to negative effects on mental and social well-being. Beyond the spread of diseases and contamination of drinking water that puts the entire community at risk, open defecation also impacts the safety and dignity of all household members — but especially women, girls and older people.

Over the past decade, iDE’s Sanitation Marketing Scale-Up program1  has provided a different approach to traditional aid, empowering communities by supporting local entrepreneurs to meet demand for modern sanitation through capacity building on both the supply side (e.g., sanitation entrepreneurs) and in demand creation (i.e., through sales agents). The program contributed to sanitation coverage increasing from 29 percent to 67 percent in the Cambodia Rural Sanitation DIB’s target provinces. Now the challenge remains to increase sanitation coverage to 85 percent in these communities to ensure significant health outcomes are achieved. This has been recognized by the Royal Government of Cambodia, whose National Action Plan for Rural Water Supply, Sanitation and Hygiene aims to increase sanitation coverage across the country.

• 1Generous support from the Bill and Melinda Gates Foundation and DFAT enabled iDE to prove the sanitation marketing model that underpins the DIB.

The Partnership

Cambodia Rural Sanitation Development Impact Bond (DIB)

The Partners

• Stone Family Foundation
• iDE
• U.S. Agency for International Development (USAID)

The Idea and the Action

A DIB is a results-based approach designed to strengthen the link between funding and impact; the finance for a program is provided by private risk capital rather than by the implementing organization.

Structures like DIBs are one way to attract impact finance into sectors like sanitation in an aligned and impactful way. DIBs are a partnership between three key actors:

• The social investor, which provides upfront capital for a service to be delivered to achieve specific social outcomes.
• The implementer, which designs and delivers the service to achieve the agreed upon outcomes.
• The outcomes funder, which repays the investor only if the pre-agreed outcomes are achieved.

In the case of the Cambodia Rural Sanitation DIB, the Stone Family Foundation (the social investor) has provided the upfront capital, which is 100 percent at risk. iDE (the implementer) expanded its proven sanitation marketing program, which generates enduring jobs at the local level while linking behavior change with strengthened local capacity.  If pre-agreed outcomes are achieved, the Stone Family Foundation will be repaid by USAID (the outcomes funder), including a premium to reflect the risk taken on by the investor. If outcomes are not achieved, USAID has no obligation to make outcomes payments.

The DIB structure therefore incentivizes the social investor and the implementer to work together to achieve outcomes, using adaptive management techniques based on evidence from the program.

Alongside the Stone Family Foundation’s upfront risk investment, iDE has also made a financial contribution to the DIB, with the opportunity to share in the potential returns. This innovative mechanism further aligns incentives within the DIB — and builds on the strong historic partnership between the two organizations.

In contrast to a traditional grant, which specifies the activities and outputs of a program upfront, the outcomes-based nature of the DIB provides flexibility in how the work is performed and enables the implementer to evolve in a complex and constantly changing market to achieve outcomes.

This flexibility is especially important as iDE tests new strategies for reaching the poorest and most vulnerable households with improved sanitation, ensuring that all people benefit from the drive toward total sanitation.

The Impact

The goal of the DIB is to expand iDE’s proven model for building sanitation markets in order to increase access to safe sanitation and push toward open defecation free (ODF) status in six provinces in Cambodia.

As iDE continues to refine its model to reach poorer, harder-to-reach, “last mile” households, it needs more flexibility than a traditional grant to test innovative approaches and apply outcomes-focused adaptive management techniques. The DIB mechanism incentivizes constant program improvement for delivery of results, allowing iDE to leverage its strengths in rigorous data analysis and adaptive performance management to achieve the outcomes.

USAID makes an outcome payment for each village (up to a maximum of 1,600 villages) achieving ODF status in the program area. This metric was chosen to reflect the goal of minimizing fecal matter in the environment, an accomplishment closely linked to positive health outcomes.

The DIB uses the Royal Government of Cambodia’s definition of ODF, which has recently evolved from simply requiring 85 percent latrine coverage to a much more rigorous set of criteria that brings this metric closer to measuring health outcomes. According to this new definition, a village will be declared ODF if:

• 100 percent of households do not practice open defecation (i.e., each household has access to either improved sanitation in their own home or to a shared latrine).
• At least 85 percent of households have access to a functional improved latrine in their own home (i.e., a maximum of 15 percent use shared latrines).
• All households dispose of infant feces into owned or shared latrines.
• There is no evidence of human excreta in the village environment.
• Households can show a handwashing device with soap.
• The community has formulated and enforced informal and formal actions against open defecation.

To date, after 18 months of implementation, 750 villages have successfully made ODF claims, impacting an estimated 644,904 people.

The Faculty Insight

The complexity of many social challenges requires new approaches to achieve sustainable positive impact, but with innovation comes risk. The public sector alone cannot bear the risk of funding the innovation required to address our social challenges at a global scale. Development impact bonds are partnerships between the public and private sectors that raise private capital to finance innovations that enhance social outcomes by allocating risk and aligning interests.

A DIB provides the money needed for a project through a results-based financing model in which the capital provider invests to earn a return based on the success of the project. This model is in contrast to a traditional grant funding model in which the capital provider donates the money. In both models, the capital provider loses its money if the project is unsuccessful. If the project is successful, however, the DIB returns the investment with a premium to the capital provider because there is another party willing to pay for success. The possibility of the future payment based on success incentivizes the capital provider to monitor the project manager’s progress and provides the opportunity to redeploy the capital for future projects.

An interesting twist in the Cambodia Rural Sanitation DIB is the arrangement with the implementer, iDE. iDE has invested in the project and will share in the potential return alongside the Stone Family Foundation, the primary capital provider. In other impact bonds, the implementer is simply a contractor that receives payment regardless of the outcomes achieved. By directly linking the implementer’s financial success to the social outcome, the Stone Family Foundation has shifted the implementer to a partner with aligned interests in achieving the outcome, reducing the need for monitoring its progress.   

Monitoring progress on this project could be difficult given the fact that iDE focuses on building entrepreneurial ecosystems in individual villages to meet sanitation needs. This objective creates a sustainable solution but also requires adaptability to address the different environments of the individual villages. Focusing on outcomes by financing through the results-based Cambodia Rural Sanitation DIB provides iDE the flexibility to adapt its processes to achieve the social outcome.

While DIBs can help finance innovation for complex social challenges, they can create complexity of their own, introducing costs that can exceed the benefits. The Cambodia Rural Sanitation DIB reduces the complexity of these partnerships in two ways. First, the chosen metric (open defecation status) has significant research establishing the causal link to the desired social outcome (minimize fecal matter) and an established, rigorous definition used by the Cambodian government for verification. Using this metric limits debate over the appropriate outcome and the data collection required, as well as eliminates the need for an expensive randomized controlled trial and external third parties to verify success.

Second, the preexisting relationship can help with the negotiation of the clearly defined contractual arrangements required of a DIB. The prior relationship built trust and expedites each party’s understanding of the other’s incentives and capacity for risk-taking. Without this understanding and trust, creating a contract with optimal allocation of risk and return is more costly.

Reaching scale in addressing social challenges requires innovation in sustainable operations, yet innovation is not free or riskless. Through thoughtful partnering arrangements — such as Cambodia Rural Sanitation DIB — that blend the capital of parties with different financial and risk-taking profiles and align their interests, together we will build the capacity to meet the  U.N.’s sustainable development goals.

The Darden School of Business’ Institute for Business in Society partners with Concordia and the U.S. Department of State Secretary’s Office of Global Partnerships to present the annual P3 Impact Award, which recognizes leading public-private partnerships that improve communities around the world. This year’s award will be presented at the Concordia Annual Summit the week of 20 September 2021. The five finalists will be highlighted on Darden Ideas to Action on Fridays leading up to the event.

This article was developed with the support of Darden’s Institute for Business in Society, at which Mary Margaret Frank is an academic director and Maggie Morse is director of programs.