Sanford Journal of Public Policy - Volume 3 No. 1

7/29/2019 Sanford Journal of Public Policy - Volume 3 No. 1

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SanordJournaloPublicPolicy

Vol. 3, Iss. 1 Spring 2012

ARTICLES

The Feasibility and Future of Social Impact Bonds inthe United States .............................................................. 3Beth Baford

To Disburse or Not to Disburse?Strengthening the World Banks Response toRevolutions and Coups dEtat ..................................... 19Georgia Harley

High Quality New Molecular Entities: Externalities inthe Pharmaceutical Industry ........................................ 35Alex Hartzman

Health Information Exchanges: Potential forUnprecedented Public Health Applications .............. 51Arijit Paul


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SanordJournaloPublic Policy

Mission

The Sanord Journal o Public Policy(SJPP) was created in 2009 as a forum forpublic policy students and professionals to contribute to the current policy

discourse through insightful analysis and innovative solutions.

About

The SJPP is run by the graduate students of the Sanford School of PublicPolicy at Duke University and is published online on an annual basis. The SJPPsolicits articles across the spectrum of public policy in a variety of formats,

including policy research and position papers, issue briefs, opinion pieces,reviews of recently published books, and interviews with policy professionals.The accompanying website is designed to be a place where public policystudents and practitioners a can stay connected to current policy discussions

and express their own views on todays policy challenges.

Visit us online at: http://sjpp.sanford.duke.edu

Te Sanord Journal o Public Policy is a graduate student-run publication. Teviews and opinions expressed in the Journal are the authors own and do notnecessarily represent the views o the Sanord School o Public Policy or Duke

University.

Volume 3 Spring 2012


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Sanford Journal of Public Policy

201 Science Drive

Box 90243

Durham, NC 27708-0239


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Business Manager

Lauren Hungarland

Jeffrey BartelliMariel Beasley

Gregory Callanan

Stephanie DormanKris Fitzpatrick

Lekisha GunnCandice Hewitt

Layout Manager

Gregory Callanan

Andrew MongerJeff PavlakLuke Roniger

Sharita ThomasEmily TiryAmy ToddKatie White

Editors-in-Chie

Managing EditorTJ Lowdermilk

Senior Print Journal EditorJenny Orgill

Senior Web EditorsBlake Holt Evan Krasomil

SubmissionsCoordinators

Jamie AttardAnna Kawar

Staf EditorsDaniel JasperDavid KaplanZarak Khan

Rachel LevenEric Nakano

Christopher MarsicanoMarcella McClatchey

Faculty AdvisorsElizabeth FrankenbergSarah Cohen

Sanord Journal o Public Policy

Mike Burrows Ellen Whelan-Wuest


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Acknowledgements

No endeavor is achieved without the assistance of many people, and the

SJPP is no exception. The Sanford and Duke communities providedus with a great deal of support in bringing this issue to print, and weare particularly grateful to the following individuals and organizations.

We want to thank our faculty advisor, Elizabeth Frankenberg,for her continued leadership and support for the Journal. Fromits inception through this publication, Dr. Frankenberg hasprovided critical and consistent advise and leadership and hercommitment is a key reason for the Journals continued success.

We are also grateful for Saleem Reshamwala, who helped us create andmaintain the new website. Mr. Reshamwalas guidance ensured a sleeker,more user-friendly and manageable website and we thank him for all his

efforts.

We owe a great debt to last years Journal staff- particularlyMatt Tonkin 11, Sofa Balio 11 and Gray Wilson 13, for theirguidance, advice and encouragement throughout this process.

Several members of the Sanford School administration offeredus key support along the way including Helene McAdams, RitaKeating and Stan Paskoff. We are also grateful to the SanfordStudent Council and the Duke University Graduate and ProfessionalSchool Student Council (GPSC) for their generous funding, withoutwhich the Journal could not have been published. We also thankthe people at Zebra Print Solutions for printing our nal product.

We want to thank all of the authors who submitted articles forconsideration, especially the four authors whose articles we selectedfor publication. Their exibility and commitment to working withour editing staff resulted in improved versions of their great work,and we hope they are as proud as we are of their nal products.


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Finally, we are grateful for our fellow students and colleagues-

the graduate students at the Sanford School. Their supportand enthusiasm have kept the idea of the Journal alive andencouraged us to bring this edition to its nal fruition.

To all, thank you.


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Contents

Volume 3 Spring 2012

LETTER FROM THE EDITORS .................................................................... viii

ARICLES

The Feasibility and Future of Social Impact Bonds inthe United States ................................................................................................3Beth Baford

To Disburse or Not to Disburse?Strengthening the World Banks Response to Revolutions andCoups dEtat .................................................................................................... 19Georgia Harley

High Quality New Molecular Entities: Externalities in thePharmaceutical Industry ................................................................................ 35Alex Hartzman

Health Information Exchanges: Potential for UnprecedentedPublic Health Applications ............................................................................ 51Arijit Paul


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Dear Readers:

We are pleased to present the third edition of the Sanford Journal ofPublic Policy. The SJPP is a forum for public policy students and professionalsto share their views on a wide range of current policy issues. Our goal forthis year was to continue the progress made in previous editions to establishthe SJPP as a reputable and interesting source for policy analysis. Our staffworked hard to elicit a more diverse range of submissions and to grow our

online footprint.

The SJPP is composed of a print publication and the accompanyingwebsite: http://www.sjpp.sanford.duke.edu. This year we expanded andimproved the content of the website, incorporating long and short form blogsubmissions from our staff editors. Our goal was to develop a new discussionspace where readers can engage with important policy issues as they arise,while attracting new audiences through the use of strategic linking and social

media networks. The website continues to contain all the material publishedin the print journal.

The quality and quantity of our submissions was impressive this year,making the selection process extremely interesting as well as challenging.Ultimately, we selected four articles for publication based on the relevance ofthe issues they addressed as well as the ne writing and research each contain.These articles address pertinent and crucial matters within the current policyworld, including the possibilities and obstacles surrounding health information

exchanges; the future and potential for social impact bonds; an analysis of howthe World Bank may address revolutions and coups detat; and methods forincreasing the number of high quality new molecular entities that are availableto the public.

We are grateful for the hard work and commitment of everyone involvedwith the Journal. Our staff editors provided us with high quality contentfor the website throughout the year, as well as thorough editing of the nal

four articles selected for publication. Our business team, headed by LaurenHungarland gave us steady guidance and ensured we had sufcient funds to seethe Journal through to publication. Submissions Coordinators Jamie Attardand Anna Kawar worked tirelessly to expand the scope of our submissions,and are primarily responsible for the increase in quality we saw across the

Letter rom the Editors


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board in all the articles we reviewed this year. We are also indebted to GregCallanan, our Layout Manager, who made sure the nal SJPP product has anappearance worthy of the content within.

Our Senior Web Editors, Blake Holt and Evan Krasomil were innovativeand thoughtful in their stewardship of the website and policy blogs. TJLowdermilk, our Managing Editor, provided guidance during stressfulmoments and oversaw innumerable small details that were necessary to keepthe Journal moving forward. We are grateful for our Senior Print JournalEditor, Jenny Orgill, whose talent and diligence are primarily responsible forthe smooth and successful editing process that went into rening each article.

Finally, we are thankful to the Sanford faculty, staff, students, and

administration, whose support and guidance have consistently ensured theJournals publication.

We welcome you to visit our website and join the discussions aroundpolicy issues. We are proud of everything the SJPP produced this year, fromthe blogs to this nal publication, and we know the Journal has a strong futureahead. Enjoy!

Sincerely,

Mike BurrowsEllen Whelan-Wuest

Editors-in-Chief


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Articles


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Vol. 3, Iss. 1 Spring 2012 Sanford Journal of Public Policy

3

Astract

Social Impact Bonds were recently introduced as a new, innovative way to

strengthen social service delivery, improve government spending, and developimpact measurement. While there is potential for this structure to be effective,the excitement surrounding this innovation needs to be managed to provideample space for experimentation and failure. Without setting reasonableexpectations, this product will disappear as quickly, and with the same fervor,as it arrived.

Impact investing, the concept of leveraging private funds for a blendedsocial and nancial return, has become a hot topic in the world of socialimpact and entrepreneurship over the past few years. Collaboration and interestamong large banks, foundations, governments, private investors, universities,and venture funds have elevated the eld, which has set the stage for thecreation of a more supportive nancing ecosystem for social entrepreneurs.

Under the impact investing umbrella, one new vehicle that has garneredattention is the social impact bond (SIB), launched in the UK in September2010. This structure, which is only a bond in name, raises private capital tofund social interventions focused on prevention instead of cure to creategovernment savings. While many countries are experimenting with SIBs, thispaper will focus on the steps the US needs to take to lay a strong foundation

hE FEASIbILIy And FuuREoF SoCIAL ImpAC bondS

In hE unIEd SAESBeth Baford

Beth Bafford holds a Bachelor of Arts in Public Policy Studies from Duke University and will receive her Masters

in Business Administration with a concentration in Social Entrepreneurship from Duke Universitys Fuqua School

of Business in May 2012. Between her studies at Duke, Bafford worked as an associate in private wealth management

at UBS Financial Services, as a Regional Field Director for the 2008 Obama for America campaign, and as a Special

Assistant for the Director at the White House Office of Management and Budget. While at Fuqua, Bafford has focused on

the field of impact investing, with a particular interest in increasing the demand and availability of impact investing for

individuals through innovative financing structures. She will be joining McKinsey & Companys DC office in the fall.


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for the successful implementation of social impact bonds.

SIBs have the potential to shift the government funding cycle, creatinga system centered on prevention and measurable outcomes instead of one

focused on remedial interventions and inputs. This market-driven solutionto the inefciencies found in government spending and social services, ifsuccessful, could catalyze large-scale social change.

But SIBs are far from a silver bullet. There are many challenges that needto be addressed before SIBs can be implemented effectively.

While challenges and risks exist in all links of the SIB value chain, the fourcore issues are:

Managing public expectations and creating space for failure, Attracting commercial capital, Identifying SIB-ready social services and providers, and Preparing the ecosystem to enable the adoption of a new contract

type.

As the players in the US attempt to create social impact bonds in a domesticcontext, they will need to innovatively attack these barriers to unleash thepotential of this new nancing structure.

Te Social Impact Bond

Social impact bonds were created to identify and scale proven socialinterventions to serve vulnerable populations in a more cost-effective way,something that existing systems fail to do. Currently, the only actor incentivizedto provide effective social interventions is the government, but it does not havethe resources or risk tolerance to nd and scale the right social interventionmodels. The SIB structure was created to address this gap.

SIBs align the interests and incentives of all necessary actors to createan ecosystem that allows for social innovation, measurement, and widespreadadoption.

The relationships and cash ow between each entity are described in FigureA. Before any money is allocated, concurrent contracts are written betweenthe intermediary (or the Social Impact Bond Intermediary Organization, theSIBIO) and four parties: the investors, the affected government agencies, the


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service providers, and a third party evaluator. The main provisions of thecontracts will dene:

The social problem they are trying to address, The service model(s) with which to address it, The outcome and output metrics they would like to achieve, The measurement of outputs and outcomes, The relationship between the outcomes and public savings (dollar

amounts), and The allocation of government savings when realized.

Figre A

Once the terms are nalized and the contracts are established, private

investors commit capital to the SIBIO, allowing them to draw down fundsover the life of the intervention period. When drawn, the funds go throughthe SIBIO to the participating service providers to fund the interventions. Atthe end of the dened intervention period, if the interventions are successful,


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the government savings are split between three parties, (1) the governmentagency, (2) the investors (who get both their principal plus an agreed uponannual rate of return), and (3) the SIBIO, which gets a management fee forstructuring the deal and providing oversight throughout the life of the SIB. Ifthe intervention does not achieve the agreed upon outcomes, the investors arenot repaid.

While various SIB structures may exist in the future (see Appendix A fora list of SIB activity around the world), the Peterborough Social Impact Bond,named for the HMP Peterborough Prison in the UK, is the only one currentlyon the market.

Te l SIb te arket: Te peterrg Scial Iactb

Social Finance in the UK, the organization that created and launched thisedgling product, decided that the rst social ill they wanted to attack wasadult recidivism among short-sentence prisoners. They saw both a problem 60 percent of male prisoners released were reoffending within one year andan opportunity, as these prisoners were not receiving any support upon their

release. Social Finance, as the intermediary (or SIBIO), gathered the necessaryparties to sign the rst SIB contract in 2010.

The story of the SIB structure is more easily told through the eyes of eachparticipating party.

i. Te Serice Providers: Te ONE* Serice

The ONE* Service is a coalition of service providers, including

St. Giles Trust, Ormiston Trust, and the YMCA (amongothers), which have had success in helping recently releasedprisoners reenter society effectively in different phases of thereentry life cycle. While their interventions work, they lack thecapital and exibility to scale their operations and impact. Theupfront, guaranteed capital over the life of the SIB providesthem with the exibility and incentive to provide their servicesmost effectively and in coordination with each other.

ii. Te Public Agencies: Te Ministry o Justice and the Big Lottery Fund

The Ministry of Justice is the government agency that will accruesavings if the interventions prove effective. If the ONE* Service


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team is able to reduce the reoffending rates of short-sentenceprisoners, the money saved on these prisoners in the form ofreductions in the prison stay itself, the legal costs, and the lawenforcement resources can be reallocated. The Big LotteryFund also signed on to help the Ministry of Justice make thesepayments should the interventions prove successful. Thesepublic entities get both improved social outcomes and publicsavings, without having to pay for the risks associated with scaling.

iii. Te Intermediary/SIBIO: Social Finance

Social Finance is a non-prot nancial institution founded

in 2007 that created the SIB structure. To run the operationsof the Peterborough SIB, it created a separate legal structurecalled the Social Impact Partnership, which is the SocialImpact Bond Issuing Organization for the Peterborough SIB.Success is important for Social Finance for two reasons, (1) toimplement more SIBs in the future (and thus create a largerimpact), it needs to prove that the model can be successful,and (2) it receives a fee for managing the project. For the

organization to be self-sustaining, it must structure and managemultiple bonds concurrently to bring in the necessary income.

i. Te Priate Investors: Foundations and High-Net-Worth Indiiduals

There are seventeen private investors in the Peterborough Bond.The majority are foundations and high-net-worth individuals.These investors stand to gain socially by leveraging their capital

to provide better support to vulnerable populations. They alsostand to gain nancially from the agreed-upon annual return ifthe SIB is successful. In addition to the return, this structure isattractive nancially because it is not correlated with traditionalasset classes and can therefore reduce overall portfolio risk. Inthe case of the Peterborough project, investors can receive upto a 13 percent annual return on their investment, but stand tolose everything if the interventions fail. While this projects

return was attractive for these foundations and individuals,the ability to attract commercial capital remains uncertain.


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. Te Measurement Organization

In order to determine the effectiveness of the model, areputable third-party evaluator must track and measure the

success of the interventions. If the outcome metrics are hit,the investors get repaid their principal along with an annualizedreturn. If not, the investors lose their investment. Theorganization that acts as this independent assessor enters intoa contract with the intermediary and is paid for its services.

i. Te arget Population: 3,000 Recently Released Short-term Prisoners

The population receiving services needs to be clearly denedso the service providers cannot cherry-pick a population thatis most susceptible to reform. There also needs to be either acontrol group or a projected baseline with which to comparethe improvements. In the case of the Peterborough SIB, theinterventions are focused on 3,000 male, recently released,short-term prisoners. The control group is a similar group ofshort-sentenced male prisoners across the UK pulled from the

Police National Computeri

. The target population benetsfrom better support given by well-resourced social serviceproviders who care about the recipients future and success.

The Peterborough Social Impact Bond completed its rst year in November2011. While the rst years report showed progress and anecdotal impact,there are three more years of intervention before any results are calculated and

reported. However, other countries and jurisdictions are not waiting for theresults; they are moving ahead with their own experiments, as evidenced by theactivity and excitement in the US.

Scial Iact bs i te uS

The social impact bond concept was introduced in the US in 2011 undertwo names. The Fiscal Year 2012 Federal Budget released by the ObamaAdministration included funding for a similar structure, but called them Payfor Success bonds. A few days after the Budget was released, a Social Financeofce was opened in Boston and expressed its intent to create Social ImpactBonds across the US.ii Since 2011, there have been numerous states and citiesintrigued by this model and attempting to develop their own SIBs. As of the


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writing of this paper, it appears that Massachusetts will be the rst state toconduct a SIB, with other states, such as New York, Minnesota, Rhode Island,and California, close behind.

SIbs are eee i te uS t si te gveret ig ccle

The public sector in the US, much like the UK, is stuck in a spending trapthat focuses on emergency interventions. This leaves minimal public dollarsavailable for prevention or early intervention spending that would reduce thecosts to both the government and society. SIB models in the US are meant toaddress this negative spending cycle.iii

There are two main reasons why this funding trap exists in the US: (1) earlyinterventions are risky and typically require large amounts of up-front capitalto implement, a risk that the government is not willing to take with tax-payerdollars; and (2) spending focuses on inputs instead of on measurement ofresults to decide where funding is best spent.iv This translates into governmentspending that is reactionary, unplanned, and often wasted on interventions orservices that are unproven and do not work.

Social Impact Bonds are intended to: inject private capital into social service

providers to absorb the risk needed to discover and scale proven interventions;increase the integrity of non-prot data collection and metrics throughcompetition for funds; measure the success or failure of these programs; andprove and collect government savings to return to investors, all while creatinga learning laboratory for the government to adopt the best programs to growand scale.

pa-r-perrace els i te uS ave set a ati ric t lac sccessl SIbs

While the SIB structure was considered new when announced, thebackbone of the SIB structure, the pay-for-performance contract, is not asnovel. The history and success of pay-for-performance programs have helpedpave the way for the social impact bond model to gain broad acceptance in theUS, and they provide strong examples for interventions that may work wellwithin the SIB structure.

Pay-for-performance programs have gained traction in the past decadeas local, state, and federal government budgets search for ways to improveservices while maximizing cost effectiveness. While the majority of theseprograms have resided in the health care delivery and prevention eld, others


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are nding innovative ways to put quality, evidence-based mechanisms to workin other service areas to save scarce government resources.

The state program that seems most closely aligned with the Social Impact

Bond concept is the Maryland Opportunity Compact founded in 2005. TheCompact solicits private investment for seed capital to implement a newprogram, proves the program works and saves public dollars, then reinveststhe savings to expand the program to broaden its reach. While the model isslightly different from SIBs because the investors provide grants without anexpected return and the savings are recycled back into the programming, themotivations are aligned. The Compact website states that it aims to breakthe inefcient cycle of last resort spending by targeting resources to proven

strategies that strengthen vulnerable families, move them to self-sufciencyand prepare them to lead productive lives, all while saving tax dollars.v

Te Itrcti uS SIbs, te pa r Sccess

The Fiscal Year 2012 and 2013 Budgets released by the ObamaAdministration included $100 million and $109 million, respectively, for Pay forSuccess (PFS) bonds. The FY 2012 budget introduces the PFS structure, stating

that it is designed to promote innovative strategies to reduce the aggregatelevel of government investment needed to achieve successful outcomes andimpose minimal administrative requirements on service providers, so as toallow for maximum exibility to improve efciency and effectiveness.vi Thelanguage in the provision also emphasizes the contractual specications neededin future funding awards, including:

Disbursal of public funds only after outcomes have been

achieved, Objective outcome-measurement methodologies, Payment schedules based on the estimated return on investment

and the probability of achieving benchmarks, Use of funds for other Pay for Success projects should some fail

to meet outcome criteriavii

The FY 2013 budget language shows the progress that was made over

the last year:

Over the course of 2012, the Administration is launching a smallnumber of Pay for Success pilots in criminal justice and workforce


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development. The Presidents 2013 Budget reserves a total ofup to $109 million to test this new nancing mechanism in abroader range of areas including education and homelessness. Ifsuccessful, Pay for Success projects offer a cost-effective way toreplicate effective practices and support continuing innovation asFederal resources become more constrained.viii

With limited state and federal budgets, there has been excitement andenthusiasm around SIBs/PFS structures from both sides of the aisle, butdespite the momentum and push from the Administration, the funding wasnot included in the federal budget written in Congress for FY 2012. It remains

unclear whether it will be included in FY 2013.

uerstaig a aressig te ke calleges

While the social impact bond model has been well received since itsintroduction in the US, there are still major barriers to setup and implementation.The four main challenges are:

Managing public expectations and creating space for failure, Attracting commercial capital, Identifying SIB-ready social services and providers, and Preparing the ecosystem to enable the adoption of a new

contract type.

While these present barriers to adoption, they are not insurmountable.

With each challenge, there are potential solutions that can help mitigate therisks involved.

maagig lic eectatis a creatig sace r ailre

The most important challenge is managing the expectations of the rstfew SIBs in the US. The excitement around this new product has brought withit a heightened level of scrutiny and pressure for it to succeed and succeed

quickly.

But this is not a structure that can be launched overnight. Gaining buy-infrom the government, investors, and service providers will take considerabletime and energy from the SIBIO, which plays the convener and moderator


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role in this process. Once all parties understand the risks involved, writingthe contracts will take months of negotiation to get all parties to agree on theparameters. In the UK, this process took at least a year to complete. Oncethe contract is signed and the SIB is ofcially launched, there is typically a yearallowed for setup, three to ve years of intervention, and a year of evaluationand wrap-up. Patience will be required should the rst (or rst few) SIBs failto hit their predetermined metrics so that the model is not struck down beforeit has a fair chance to prove its potential.

Transparency and information ow will be critical. Organizations like theNonprot Finance Fund and the Rockefeller Foundation, which have set upan unbiased learning hub for SIBs, can help by releasing periodic reports on

the progress of the SIBs operating across the country. These reports wouldoffer a realistic snapshot of the work, highlighting the day-to-day challengesof providing these services. The hope is that with this information widelydisseminated, judgments will shift from a binary choice of success or failure toa more nuanced assessment. If the question can be reframed from does thismodel work? to how can we learn from early failures to rene and improvethe model? SIBs will have a much better chance at long-term success.

In the end, it is the responsibility of all parties involved particularlythe intermediary, investors, and government agencies to remain cautiouslyoptimistic about the potential of the SIB and manage the expectations ofother stakeholders to limit disappointment should the SIB fail.

Attractig Cercial Caital

The SIB structure relies on the availability of commercial capital to open

the social services market to a much larger source of funding than is currentlyaccessible to nonprot organizations. Without this new inux of private capital,the only innovation is the outcome measurement and reward, a combinationthat has already been introduced in the US through aforementioned pay-for-performance contracts.

In the Peterborough SIB, foundations and high-net-worth individualsstepped in to play the investor role. While there is a budding interest amongsocial investors in vehicles with blended returns, the amount of money from

individual investors and foundation program related investments (PRIs) in theUS is inadequate.

Individual Investors. A Hope Consulting report that surveyedindividual investors to gauge interest in impact investing showed


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that 45 percent of respondents were interested in investmentwith a social bonus, and 35 percent were interested in a businesssolution to a social issue. Both could be used to describe SIBs.But when asked how much they were willing to invest in this space,95 percent of respondents said less than $25,000.ix These resultsdo not indicate a current willingness of private investors to putthe necessary amounts of money into a long-term SIB contract.

Program Related Investments (PRIs). While foundations arestarting to look more closely at PRIs, the PRI market is stillfairly small. According to the Foundation Center, foundations

made $310.5 million in PRIs in 2006, but the majority of thiswas concentrated in a few major foundations.x Foundations aregenerally wary of using PRIs because the funds are tied up for along period of time, increasing the risk of default or loss. Thecurrent scarcity of PRI activity does not provide much hope forlarge-scale foundation involvement in SIBs, unless one of themajor foundations, such as Rockefeller, Gates, or Ford, decides totake the lead to help prove the model.

The current structure relies on these sources of capital because of the riskof full principal loss. Because of this risk, the SIB is not an attractive vehiclefor private, commercial investors. Any structure developed in the US needsto mitigate this risk in order to make the rst SIBs attractive to commercialinvestors and to set the precedent for future interest by institutional impactinvestors.

Potential ways to protect the principal of the investment include: Creating a separate, grant-raised loan loss reserve to act as a

principal guarantee should the SIB intervention fail. Layering the capital structure of the SIB to leverage the different

intents of the investors. For example, a foundation could providethe base/rst loss layer, high-net-worth impact investorscould provide the second layer and accept lower returns, while

commercial investors could provide the nal, preferred layer andreceive returns with a reduced risk. Bundling the SIBs into a mutual fund-type instrument once the

market starts to grow so the risk can be diversied across multiple


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projects.

If SIBs are to reach their potential scale and impact in the US, commercial

viability is essential. All efforts should be made to construct the SIB in a waythat is feasible for prudent investors to place money into this structure.

Ietiig SIb-rea Scial Services a prviers

As seen in the UK and through potential interventions in the US, not allsocial ills can be solved through SIBs. There needs to be a clear problem,identiable control group, measurable outcomes, and easy-to-dene, short-

term savings generated for the government to make these work. Therefore,choosing the rst interventions in the US on which to test the model isextremely important to prove to investors, public ofcials, and the generalpublic that the model is feasible.

The federal government and the Massachusetts government, the twoentities that are pushing for SIBs in the US this year, have chosen the followingintervention areas that they think t these criteria:

Criminal justice (juvenile and adult) Workforce development Homelessness Education

The federal government is focusing on all of these interventions,while Massachusetts has zeroed in on homelessness and juvenilejustice. These interventions and their potential to become strongSIB programs are evaluated along a matrix of required elements:

Field ofintervention

Problemdefinition

Desiredoutcome

Targetpopulation

Output orOutcomemetrics

Potential forreturns

Workforcedevelopment

Un- and under-employment of

US workers

Increasedfull time

employment,higher wagesand quality

benets

The un- andunder-

employed in acertain region

Jobs, wages,quality and type

of benets,hours workedper week

Yes, largesavings from

reducedunemploymentinsurance andother welfare

benets


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Field ofintervention

Problemdefinition

Desiredoutcome

Targetpopulation

Output orOutcomemetrics

Potential forreturns

Homelessness Chronicallyhomeless

individuals whorely on a large

number ofcure social

services

Permanenthousing and

access tonecessary health

care

Chronicallyhomeless

individuals,mainly in US

cities

Placementsin permanent

housing,Medicaid

spending, ERvisits

Yes, largesavings frommore efcient

health caredelivery and

reduced costsfrom temporary

housing

Juvenile Justice Juvenileoffenders whoare more likely

to spend part ofadulthood in jail

Reducedrecidivism rates

for juvenilesand successfulreentry into

society

Recent or soonto be releasedoffenders in acertain region

Reducedrecidivism rates,employment andeducation rates

Yes, savingsfrom variableper-prisoner

costs, law andenforcement

costs, andeventuallyclosed cells/

prisons

Education Lack of qualitypublic education

that is notadequatelypreparingstudents

Higherachievement

levels andoutcomes forK-12 children

K-12 children inpublic schools

Test scores,HS and college

graduation rates,employmentrates, income

levels

Yes, but longterm and harder

to track andattribute to one

intervention.

Of these, education faces the greatest challenge because using studenteducational interventions for the initial SIBs could invite controversy overmetrics and outcomes that might raise legitimacy claims about the model.xiThe constant debate on how to measure educational achievement and teacherquality could distract from the core ideas of the SIB structure. Therefore,education is better addressed after the model is proven through less politicizedinterventions.

prearig te EcssteCurrently, most budgeting contracts from the state or federal government

do not span more than one year because of appropriations laws. As thelaw stands, most funds are only made available to agencies for a one to twoyear period, and if unused, they automatically get re-routed to the TreasuryDepartment.xii If sufcient funds cannot be allocated by the government overthe longer-term life of the SIB, investors will perceive more risk in the future

cash ow, undermining the effectiveness of the structure.In order to facilitate longer-term contracting and provide a level of

comfort for the investors, one of two changes needs to occur. One option isto pass full faith and credit legislation at the state and federal level to allow


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for contracting that can promise funding in ve to ten years time, should theintervention prove successful.

Another option is for each department that receives Pay for Success

funding to amend their appropriations language to provide an exception tothe law as currently written. The new law would include a statement that anyfunds obligated for such projects shall remain available for disbursement untilexpended, notwithstanding 31 U.S.C. 1552(a), which states, Provided further,any de-obligated funds from such projects shall immediately be available forPay for Success projects.xiii In order to attract investors, these changes shouldbe implemented before SIB contracts are written with federal or state dollars.

The second infrastructure requirement is the level of measurement anddata analysis of participating service providers. The SIB model dependsheavily on identifying providers that can implement an intervention to createthe intended, measurable outcomes that will translate directly into governmentsavings. This requires sophisticated tracking, measurement, and data collectionthat is not typically found in non-prot organizations. Past studies have shownthat most non-prot organizations, even those who claim to have a focus onoutcome measurement, do not have the sufcient infrastructure in place to

effectively measure their impact.xiv

While not all non-prots are inept at measuring outcomes, for the SIB

model to succeed, they must place more emphasis on outcome measurement,reporting, and standards. This is particularly important for the initial bondscreated, as proven interventions with solid data will be essential to raise privatecapital.

mel a Iterveti RiskThe risks highlighted above are specic to SIB adoption and implementationin the US, where social impact bonds do not yet exist. In addition to thesecategories of risk, there are multiple risks associated with the model itself,including assumptions that:

The intervention works as intended and produces the agreed uponoutcomes,

The control group remains untouched and reliable as acounterfactual,

The government, private investors, and service providers agreeupon metrics so the savings can be accurately calculated and


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allocated. These risks are inherent to the structure and will be a factor

regardless of location.

CclsiInnovation in social services and government spending is rare, which

is why Social Impact Bonds have attracted interest and garnered so muchattention from different stakeholders. This structure, developed by a smallorganization in the UK, has the potential to change how public agencies andservice providers interact and measure their success.

In addition, the excitement around the eld of impact investing has caused

the SIB structure to spread like wild re and created a daunting space for itselfunder a global magnifying glass.

At the end of the day, the social impact bond is complicated and requiresa lot of large, embedded systems to coalesce around its structure. Becauseof these challenges, there needs to be sufcient caution around its potentialto achieve large-scale change, its ability to attract commercial capital, theavailability of relevant social services, and other barriers to implementation

until the model is proven.In order for the US to create a supportive environment for these bonds,

the following steps need to be taken concurrently:

i. All parties involved need to manage expectations around the timelineand potential impact o this product and suspend judgment until multipleSIBs hae succeeded. ransparency and constant communication iscritical to achieing this goal.

ii. Te structure o the product needs to mitigate the risk o ull principal lossthrough a guarantee or rst loss pool to attract and comort commercialinvestors.

iii. Te intermediary and government need to be selectie about whichinterentions will work with the model, ocusing on proven social

interentions in homelessness, juenile justice, and workorcedeelopment that provide short-term, realizable public saings om aneasily identiable population and can be scaled eectiely.

i. Te state and ederal government need to pass or adapt appropriations


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laws to allow or a long-term contract with the intermediary, reducingthe risk to uture cash fows.

. Social serice providers need to deelop more robust measurementprocedures to prove they are capable o achieing and proving the desiredoutcomes.

If these steps are taken, SIBs will have a much greater chance of success atachieving their potential for large-scale social impact in the US.

Aei A: Glal activit Scial Iact bs

United KingdomAgency/Government Intervention Focus Launch or Announcement Date

UK Department of Justice Adult recidivism November 2010

Manchester City CouncilLooked after children and young

people (foster children)March 2012

Greater London Authority andDepartment of Communitiesand Local Government

Rough sleepers (chronicallyhomeless)

March 2012

Scotlands Department of Workand Pensions

At-risk youth March 2012

Australia

Agency/Government Intervention Focus Launch or Announcement Date

New South Wales

Juvenile justice, families at risk,

disability servicesMarch 2012

United States

Agency/Government Intervention Focus Launch or Announcement Date

Massachusetts State government Adult recidivism November 2010

Manchester City CouncilLooked after children and young

people (foster children)March 2012

Minnesota State government Rough sleepers (chronicallyhomeless)

March 2012

New York City government At-risk youth March 2012


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19

Etesi. Social Impact Bonds, The One* Service. One year on. http://www.socialnance.org.

uk/sites/default/les/sf_peterborough_one__year_on.pdf

ii. Social Finance Inc. to bring Social Impact Bonds to the US. February 17, 2011.http://socialnanceus.org/news/social-nance-inc-bring-social-impact-bonds-us

iii. Social Finance Report. Towards a new social economy: Blended value creationthrough social impact bonds. March 2010.

iv. Center for American Progress, Social Impact Bonds: A promising new nancingmodel to accelerate social innovation and improve government performance. JeffreyB. Liebman, February 2011.

v. Maryland Opportunity Compact, http://moreformaryland.org/page.php?id=30

vi. General Provisions Government-wide, FY 2012 Budget, February 2011. http://www.whitehouse.gov/sites/default/les/omb/budget/fy2012/assets/ggp.pdf

vii. Ibid.

viii. The FY 2013 Federal Budget, http://www.whitehouse.gov/sites/default/les/omb/budget/fy2013/assets/cutting.pdf

ix. Money for Good. May 2010. http://www.hopeconsulting.us/pdf/Money%20for%20Good_Final.pdf

x. http://www.philanthropyjournal.org/resources/special-reports/nance-accounting/program-related-investments-provide-needed-relief

xi. Why Standardized Tests dont Measure Educational Quality. http://www.ascd.org/publications/educational-leadership/mar99/vol56/num06/Why-Standardized-Tests-Dont-Measure-Educational-Quality.aspx

xii. Center for American Progress, Social Impact Bonds: A promising new nancingmodel to accelerate social innovation and improve government performance. JeffreyB. Liebman, February 2011.

xiii. US Department of Justice FY 2012 Performance Budget, Ofce of Justice Programs.February 2011. http://www.justice.gov/jmd/2012justication/pdf/fy12-ojp-justication.pdf

xiv. Outcome Measurement in Nonprot Organizations: Current Practices andRecommendations. Morley, Vinson, and Hatry, 2001. http://www.iyi.org/resources/mentor/pdf/Outcome_Measurement.pdf


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Abstract

How does the World Bank respond when one of its partner governments isoverthrown in a coup detat or revolution? Such power transitions remain

frequent in the developing world. Their occurrence gives rise to vexingchallenges for the Bank, whose mandate prohibits it from considering politicsin its decision-making. To disburse, or not to disburse? That is the question.

The paper analyzes the Banks policy for responding to this question.Operational Policy OP7.30 outlines the circumstances under which theBank may suspend disbursements under existing financing agreements to

governments that have changed power through coup detat, revolution orother means outside that countrys constitution. The policy lacks clarity,

precision and guidance. Recent practice suggests that the policy is not beingapplied faithfully and that extraneous issues are being considered, including

political considerations in contravention of the Banks Articles of Agreement.

The paper proposes four recommendations to strengthen the Banks policy.The Bank should (1) issue a clarification reconciling the Banks Articlesof Agreement with OP 7.30; (2) publish its decisions and rationale for

suspending disbursements to de facto governments; (3) amend OP 7.30 toclarify the effective control test; and (4) amend OP 7.30 to authorize the Bankto consider the views of relevant organizations in its decision-making. Whilethese recommendations will not resolve all outstanding issues, their adoptionwould strengthen the effectiveness and legitimacy of Bank decision-making inthis challenging area.

Georgia Harley

Georgia Harley is an Executive Legal Adviser with the Australian Department of Foreign Affairs and Trade and aConsultant to the Justice Reform Unit of the Legal Vice Presidency at the World Bank. In May 2012, Ms Harley will

graduate from Duke University with a Masters in International Development Policy, specializing in applied economics

and peace and conflict resolution. She previously graduated with a Bachelor of Arts and Bachelor of Laws (Hons) from the

University of Queensland and a Masters of Laws (International Law) from the Australian National University. The views

expressed in this paper are Ms Harleys alone, and are not attributable to the World Bank or the Australian Government.

o dISbuRSE oR no o dISbuRSE?Strengthening the World Banks Response

to Revolutions and Coups dEtat


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Strengthening the World Banks policy on de facto governments

i. Te World Bank and de acto governments

a. The World Bank

In 2010, the Bank committed more than $72 billion in assistance topartner governments in the developing world for the purposes of economicdevelopment and poverty alleviation.i In conducting its operations, the Banksmandate is governed by the International Bank for Reconstruction and

Development Articles of Agreement, which prohibits the Bank from havingregard to political considerations in its decision-making.ii The Articles of

Agreement requires that the Bank and its ofcers shall not interfere in thepolitical affairs of any member; nor shall they be inuenced in their decisions bythe political character of the member or members concerned. Only economicconsiderations shall be relevant to their decisions, and these considerationsshall be weighed impartially.iii To date, 187 Bank Member States have ratiedthe Articles of Agreement, making it one of the most widely endorsed treatiesin the world.

Despite this, the World Bank has long been accused of being a tool ofits developed country shareholders.iv Empirical studies have shown positiverelationships between the Banks lending practices and recipient countriesvoting behavior in the UN.v Yet, there has been little scrutiny or scholarshipon the role of political considerations in Bank decision-making after a lendingoperation has been approved. Focusing on scenarios where disbursementshave begun to ow, researchers can control for a range of pre-approvalfactors, including political considerations that may be masked during the pre-

approval phase. Further, there is a paucity of academic scholarship on theBanks decision-making regarding the suspension of disbursements underexisting nancing operations to de facto governments.vi This article takes astep toward addressing that void.

b. De-facto Governments

A de facto government is one that arises by means outside of that countrys

own system of political governance. De facto governments may come topower following a coup detat or revolution, or by usurpation, abrogation orsuspension of that countrys constitution.vii They need not come to powerthrough the use of armed force or violence (though often they do), andthey can arise in countries of any political governance (whether democratic,


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authoritarian, theocratic, etc.). What characterizes these governments is thefact that they arise outside of the rule of law, but in actuality govern the country.

De facto governments frequently arise in the developing world. In the last

decade alone, more than 30 coups detat were attempted in over 20 countries,mostly in sub-Saharan Africa. The Bank had existing nancing arrangementswith the overwhelming majority of those countries.

c. Implications of dealing with de-facto governments

Political instability is closely linked with the Banks goals of poverty andeconomic under-development. Among the predominant causes of coupsdetat and revolutions are low income and slow growth.viii Political crisescan also jeopardize a countrys economic stability, as investors ee and thelocal currency uctuates, economic growth is often stunted, pushing people(further) into poverty. For these and other reasons, countries that experiencede facto governments are more likely than other developing countries to needassistance from the Bank.

However, de facto transitions of political power are the realm of highpolitics that place where Bank ofcials fear to tread. When one of those

countries has an existing agreement with the Bank, the Bank can nd itselfsquarely in the middle of a contested and controversial space. This is ampliedwhen, as is often the case, the Bank is a large donor in the country.

Continuing disbursements may lend condence and legitimacy to a defacto government, signaling stability and trustworthiness, and increasing thelikelihood that other countries and organizations will recognize the legitimacyof the new government. Continuing disbursements can also strengthen the

governments ability to conduct state functions and further entrench its controlover territory. Whereas, suspending disbursements may deal that governmenta fatal blow in terms of condence, legitimacy and nance. Further, theBank often plays intermediary and donor coordination roles in the countries,conferring on it considerable informal inuence with donor governments,international organizations, and NGOs.

d. Parallels with broader governance challenges facing the Bank

Parallels may be drawn between the Banks approach to dealing with defacto governments, and the Banks approach to dealing with governance andanti-corruption challenges more broadly.

For much of its history, the Bank had been silent on issues of governance


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and corruption because it deems them too political. By the late 1980s,evidence of the relationship between governance and economic developmenthad strengthened.ix Lessons were emerging about the failure of macro-centric structural adjustment policies to cater for the prevailing governanceand institutional environment in recipient countries. By the mid-1990s,governance and institutional quality were squarely on the agenda, and theBanks longstanding hesitancy to address governance concerns gave way toincreasing engagement with corruption, nancial accountability, and civilservice reform.x Two decades on, criticism persists that the Banks work ingovernance is overly selective and that the Bank is forever chasing its owntail, in an effort to remove the political form of its work on institutions,

accountability, legal reform, increase participation and so on.xi

Like in the broader governance debate, the Bank appears wedged on

this issue between its Articles of Agreement and the evolving directions ofeconomic development policy.

ii. Te Banks policy on suspending disbursements to de acto governments

In 2001, the Bank adopted Operational Policy 7.30: Dealing with De Facto

Governments (OP7.30), which outlines the conditions under which the Bankshall either continue or suspend disbursements under existing operations to ade facto government.xii OP7.30 stipulates that the Bank may not unilaterallysuspend disbursements under existing loans, provided that the Bank is satisedthat the situation meets the following ve criteria:xiii

Criterion A - holds effective control of the country; Criterion B - recognizes the countrys past international obligations; Criterion C - states it is willing and able to assume all of its

predecessors obligations to the Bank; Criterion D - ensures the continued implementation of Bank

projects and programs; Criterion E - authorizes a representative for the purpose of

withdrawals.

OP7.30 is supported by Bank Procedure (BP7.30), which requires that

immediately upon a change of government power, staff must gather allrelevant information about the status, policies, and public acceptance of thenew government, and initiate an internal process to determine whether tocontinue or suspend disbursements.xiv If, upon analysis, the policy criteriaabove are met, the Bank is obliged to continue disbursements under its existing


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agreement. The decision to continue or suspend is made by the relevantRegional Vice President, in consultation with the Country Director, the LegalVice President and the Credit Risk Group.

a. Lack of clarity and guidance in OP7.30

OP7.30 fails to provide Bank ofcials with the necessary guidance inresponding to de facto governments.

Criterion A, effective control, is vague and imprecise. The term effectivecontrol has overlapping meanings under international law. Under the lawsof armed conict, it refers to the circumstances when a belligerent armed

force is in control of a hostile territory such that their forces become obligedto provide certain minimum guarantees to civilians in that territory as anoccupying power.xvUnder human rights law, the term refers to whether a Stateoperating extra-territorially has sufcient control over an individual such thatit must protect their rights.xvi In a third context, the UN Secretary General hasused the term to specify which of two rival governments, exercises effectiveauthority within the territory of the State and is habitually obeyed by the bulkof the population.xvii It is not clear whether Criterion A of OP7.30 refers toone of these concepts or to an internal concept of the same name.

Criteria B and C, assuming obligations, and Criterion D, ensuringimplementation, are difcult to apply in practice. These criteria emphasize thatthe policys primary concern is the solvency of the Banks investment. Thissuggests that nancial risk is indeed more relevant than political considerationsin Bank decision-making. Though this prioritization may draw its critics,the focus on lending is faithful to the Articles of Agreement and the Banks

traditional economics rst approach. However, a de facto governmentscommitment to international obligations and Bank projects and programscannot be known ex ante. As a result, much of the Banks assessment underOP7.30 requires prediction and conjecture by Bank staff about the credibilityand veracity of the new governments statements. This introduces subjectivityto the policy, and creates potential space for extraneous considerations,including political considerations.

Lastly, Criterion E, authorizing a representative, is a formality: it merelyrequires that de facto governments nominate a payee for the disbursement ofchecks.

In all, OP7.30 provides Bank ofcials with little objective guidance onthe precise meaning of the ve criteria, creating wiggle room for the Bank to


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continue or suspend disbursements in a given case.

b. Lack of transparency in applying OP7.30

OP7.30 and BP7.30 are publicly available. However, they include a caveatthat they are not necessarily a complete treatment of the subject, withoutreferring to additional guidelines or documents to elucidate a more completetreatment. Bank ofcials, including advisers and decision-makers, as wellas observers and de facto governments themselves, are all thus left with anincomplete framework for the Banks decision-making.

Further, the Bank does not disclose its decisions or deliberations, and is

selective in addressing the issue in the media. It is thus difcult to discernthe Banks exact practice. Not knowing how these decisions are made reducesaccountability, hinders experiential learning and limits the ability of the Bankand other actors to improve the Banks practice in dealing with de factogovernments over time. Further, the opacity does not align well with the Banksstated commitment to transparency and its track record as a leader in access toinformation and open development.xviii

iii. OP7.30 in practice

The author has collated over a dozen case studies of de facto governmentsthat have arisen over the last ve years. Below are some illustrative examplesof the application of OP7.30 in those cases, based on the limited publiclyavailable information.

a. Recent case studies of the Banks application of OP7.30

i. Coup detat in Honduras, 2009

The Banks suspension of disbursements in response to the 2009 coupdetat in Honduras appears at odds with OP7.30. When a military coupreplaced then-President, Manuel Zelaya, with Congressional President,Roberto Micheletti, the new government quickly gained control of the territoryand functions of government, including economic policy. In response, theInter-American Development Bank (IADB) suspended all loans and the

Organization for American States (OAS) suspended Honduras membership.The Bank suspended $250 million in loans. In explaining the position, BankPresident Robert Zoellick noted that the Bank was working closely with theOAS and looking to the OAS to deal with its handling of the crisis under its


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democratic charter.xix When asked under what conditions the Bank wouldconsider resuming lending, Zoellick stated that the situation was in ux anduid and that the Bank was trying to play a supportive role with the regionand its overall goals to restore democracy.xx No mention was made of anyOP7.30 criteria, such as the governments effective control or its ability tomeet Bank commitments. Zoellicks statement suggests that the positionof regional organizations, such as the OAS and the IADB, factored into thedecision-making process, along with overarching considerations of democracyand the rule of the law.

ii. Election stand-off in Cote dIvoire, 2010

The Banks suspension to Cote dIvoire during the 2010 post-electionstand-off is also difcult to reconcile with OP7.30. In early December 2010,the Bank and the African Development Bank (AfDB) issued a joint statementexpressing concern over the post-election crisis, in particular concerns aboutgovernance, peace and stability.xxi In late December, the Bank suspended alldisbursements to Cote dIvoire, stating that it supported ECOWAS and theAU in sending the message to President Gbagbo that he lost the elections andhe needs to step down in favor of President-elect Alassane Ouattara.xxii The

international communitys response has been described as a remarkably unitedinternational coalition intent on cutting funds to Gbagbo.xxiii

However at that time, Gbagbo maintained control throughout CotedIvoire, including the government and business capitals. Meanwhile, Ouattarawas conned in an Abidjan hotel and the militia groups that ultimately seizedcontrol were only just beginning to mount in the north of the country. Further,applying Criterion C, there is little to suggest that Gbagbos economic policieshad changed since before the election, when he was the de juregovernmentand funds were owing, nor that his government had changed so drasticallyto render the Banks existing projects and agreements unworkable. Lastly,applying Criteria B, there is little indication that Gbagbo would not honor theobligations his government had assumed during the previous 10 years of hispresidency. In April 2011, Ouattaras forces defeated Gbagbo and formed agovernment, at which time the Bank and other donors immediately reactivateddisbursements.

iii. Tunisian Revolution, 2011The Banks continued disbursements to Tunisia during the Jasmine

Revolution in 2011 also appear at odds with OP7.30. There, a popular uprisingled to the ouster of President Ben Ali and the appointment of an Interim


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Authority, pending democratic elections. Within a week the Interim Authorityhad gained authority throughout the country and enjoyed broad support.Donors appeared eager to engage with the Interim Authority, whose statedgoals of development, growth and governance aligned well with those of thedonor community. The Interim Authority stated publicly its willingness tohonor the international obligations of the previous Ben Ali government. Likeothers, the Bank did not suspend disbursements, an outcome which appearsconsistent with OP7.30.

However, there is also evidence to suggest that the Bank took into accountextraneous factors in its decision-making, including democracy promotion andpolitical expediency. In a statement in February 2011, Bank Vice President

Akhtar stated that the root cause of political turmoil in North Africa isfatigue with long-standing authoritarian rule and weak political and economicgovernance as conrmed by public concerns regarding issues of voice, socialjustice, fairness, accountability and access to public services.xxiv The Bankhighlighted the importance of ongoing support to the Interim Authorityand has since fast-tracked programs and increased lending vefold to buildon the revolutions achievements in breaking from past practices, includingincreasing transparency, social accountability, citizens participation and social

and economic inclusion.xxv These statements suggest that the nature of therevolution, including its democratic goals, may have also factored into Bankdecision-making.

iv. Mali, coup detat, 2012

The Banks suspension to Mali during the 2012 military coup detat is alsodifcult to reconcile with OP7.30. Applying Criterion A, the coup leaders wouldprobably not have satised either form of the effective control test. Indeed,

the coup was precipitated by an ongoing rebellion in the north of the country.In the chaotic aftermath of the coup, the Tuareg ethnic group appeared togain control there and sought to proclaim independence. Application of thiscriterion would have been sufcient to suspend disbursements. Within oneday of the coup, the Bank and the AfDB issued a joint statement suspendingdisbursements to Mali.

While this outcome appears supercially consistent with OP7.30, there

is again evidence to suggest that the Bank considered extraneous factors inits decision-making.xxvi In its ve-sentence statement, two sentences referredto democratic governance in Mali. A further sentence conrmed that theBank was join[ing] the African Union and ECOWAS in condemning themilitary coup. No reference was made to any OP 7.30 criteria, such as the


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lack of effective control. A plain ready of the Banks statement thus suggeststhat the non-democratic nature of the transition and the views of regionalorganizations may have factored into the Banks decision-making.

b. Analyzing the divergence between the Banks policy and itsrecent practice

The examples above suggest that the Banks decisions are coordinatedwith the international community and, in particular, with the regionalorganizations and major bilateral donors operating in a particular country. Incases where disbursements were suspended in Cote dIvoire, Honduras and

Mali, the Bank stated publicly that it was following the lead of others, or atleast closely considering their views. This practice is curious for two reasons.First, consideration of the views of regional organizations and donors is nota criterion under OP7.30 for deciding whether to suspend disbursementsunder existing agreements to partner governments (though it is a criterionfor considering new lending). Second, regional organizations and donorsoften make politically motivated decisions, unencumbered by the Banks rulesprohibiting political considerations. In spite of OP7.30, the Bank consistently

arrives at the same conclusions as political organizations, while generallyperpetuating the idea that it bases its decisions on non-political criteria.

The examples may also suggest that the Bank is less likely to suspenddisbursements to countries that are geo-politically or strategically important.While the world watched revolutions unfold in North Africa in 2011, theBank was quick to reinstate disbursements to Tunisia and did not suspenddisbursements to Egypt. Meanwhile, after coups detat in less prominent

countries like Mauritania, Mali and Niger, the Bank was quick to suspenddisbursements. This trend of differential treatment based upon geo-politicalstatus suggests that the Bank takes into account political considerations incontravention of its Articles of Agreement.

i. Policy recommendations to strengthen OP7.30

The recommendations below aim to strengthen the Banks policy to dealwith de facto governments, by improving the consistency and quality of Bank

decision-making and ensuring compliance with the Articles of Agreement.


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a. Aligning the Banks Articles of Agreement and OP7.30

Presently, the Bank is exposed, as its policy and practice in the publicdomain would appear at odds with its founding Articles of Agreement.

Theoretically, the option exists to amend the Articles of Agreement tobroaden the Banks capacity to consider political governance when dealingwith governments. However, such a proposal would be highly unlikely to gainsupport, given popular critiques that the Bank is already overly politicized, andgiven the technical and logistical challenges of amending such a large multi-lateral treaty.xxvii

More likely, the Bank could issue a legal opinion clarifying a modern dayinterpretation of the Agreement that aligns the Banks practice with the Articlesof Agreement. Such a clarication was issued by the Banks General Counselin the 1990s to support the Banks work in governance.xxviii Another was issuedin 2006 to support the Banks work in human rights.xxix A clarication ondealing with de facto governments could reconcile the apparent inconsistencyby enabling the Bank to consider the de facto governments institutional qualityand governance arrangements, while still prohibiting the political color of theregime from being itself a consideration.

b. Improving transparency of decision-making under OP7.30

The Bank should also publish the results and rationale of the decisions itmakes to suspend disbursements under OP7.30. Publishing decisions couldsignicantly improve accountability and predictability in the Banks dealingswith de facto governments, and would encourage experiential learning andprecedential guidance. Like the Banks other knowledge generation efforts,

publication of Bank decision-making under OP7.30 may enhance the Banksinuence by encouraging other international organizations, donor governmentsand non-governmental organizations to follow the Banks policy and practice.The Banks policy and practice has previously inuenced other organizationsin this area, and publication of these decisions could reasonably be expectedto have a similar effect.xxx Publication would also give guidance to potentialemerging de facto leaders and rival governments in the event of a politicaltransition. Such a policy would seem to align well with the Banks existingcommitment to transparency and open development.

As with the publication of any material, the publication of decisions tosuspend or continue disbursements poses the risk that such decisions maybe criticized. That risk would need to be managed carefully during the period


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leading up to each decision, in consultation with the legal and public affairsdepartments of the Bank. However, the risk could be expected to decline overtime as consistency and experiential learning improves.

c. Amending OP7.30 to clarify the scope of the effective controlcriterion

The policy should be amended to clarify that the scope of the effectivecontrol test used in Criterion A is an objective assessment of the extent towhich the de facto government is in actual control of the territory, using thesame as that applied under the laws of armed conict.

Adoption of this test would best align with the Banks existing frameworkas an inter-governmental body that deals primarily with countries rather thanindividuals. By comparison to other tests, this test provides the most clarityand precedents, thus providing the Bank with maximum guidance. This testis not foolproof, and may continue to give rise to some divergence of views.However, that divergence would be narrower than the contestation andambiguity that prevails under the existing policy.

Further, application of this test would avert the need for the Bank toconsider whether a particular government is habitually obeyed by the bulkof the population, which could raise concerns that the Bank is consideringdemocratic governance and politics in contravention of its Articles ofAgreement.

d. Amending OP7.30 to authorize consideration of the views ofrelevant organizations

The Bank should amend OP7.30 to add a criterion that authorizesBank ofcials to consider the views of relevant international and regionalorganizations when determining its response to a de facto government. Suchan amendment to OP7.30 would not require the Bank to follow the views ofrelevant international or regional organizations, but would enable the Bankto consider those views in a given situation. The Bank could thus align itspractice with that of key international and regional organizations when it

considers doing so is appropriate, while still enabling the Bank to go it aloneif deemed necessary by decision-makers.

The policy on new lending to de facto governments already enables theBank to consider the views of relevant international organizations. As a result,


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amendment to this policy would align the two policies that deal with de factogovernments. Recent practice suggests that the Bank already considers theseviews in its decision-making. This amendment would merely align policy withprevailing practice and thus improve policy coherence and streamline decision-making.

Adoption of this amendment may promote greater coordination andconsistency among donors working in politically unstable environments.Gaining consensus for a common voice on this issue is in the Banks interestfor several reasons. First, decisions to suspend or disburse funds may bemore impactful when organizations and governments maintain a coherentand consistent line with the recipient government. Second, the process of

securing consensus may enhance the Banks coordinating role and conveningpower among organizations and donors. It would also be consistent with theBanks role as a UN agency.

Adoption of this amendment poses the risk that the Bank would followthe politically motivated views of others, rather than deciding the appropriateuse of its own funds under an existing binding loan agreement. A furtherdownside is that the Bank could be perceived as following regional opinion

rather than providing global leadership. However, that risk balances favorablyagainst that of the current practice: considering those views without expressauthorization under OP7.30.

Cclsi

The Bank is in a difcult position, wedged between its Articles ofAgreement, the evolving realities in economic development and the decisions

and opinions of others. This paper has proposed four recommendations,both substantive and procedural, to strengthen the Banks policy for dealingwith de facto governments. The Bank should:

i. clariy the policys consistency with the Articles o Agreement;

ii. publish its decisions under OP7.30;

iii. amend clariy the eectie control test; and

i. amend the policy to authorize the Bank to consider the iews o releantorganizations. Adoption o these recommendations could ensure thatthe Banks work in these challenging environments is more eectie,


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legitimate, and consistent with its ounding principles.

Etes

i. See http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22635131~pagePK:64257043~piPK:437376~theSitePK:4607,00.html. For theFY2012 World Bank budget at, http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2011/08/15/000333038_20110815235914/Rendered/PDF/622300BR0Revis000public00BOX361530B.pdf.

ii. International Bank for Reconstruction and Development Articles of Agreement,Bretton Woods, 1944.

iii. Article 4 Section, Articles of Agreement.

iv. A Dreher, JE Sturm, and JR Vreeland, Development Aid and International Politics:Does Membership on the UN Security Council Inuence World Bank Decisions?,Journal of Development Economics 88, no. 1 (2009); Gwin, C. (1997). U.S. relationswith the World Bank, 19451992. In D. Kapur, J. P. Lewis & R. Webb (Eds.), TheWorld Bank: its rst half century (Vol. 2, pp. 243274). Washington: Brookings

Institute.v. A. Dreher and J.E. Sturm, Do the IMF and the World Bank Inuence Voting in the

UN General Assembly?,Public Choice, Spring, vol.151(1) 363-397, (2012).

vi. The author is aware of only one publication dealing directly with OP7.30: a soundlegal analysis by Nesbitt in 2007. See M. Nesbitt, World Bank and De FactoGovernments: A Call for Transparency in the Banks Operational Policy, Queens LJ32(2006).

vii. OP7.30, paragraph 1.

viii. P. Collier and A. Hoefer, Coup Traps: Why Does Africa Have So Many CoupsDtat?, (2005).

ix. D.C. North, Institutions, Transaction Costs and Economic Growth, EconomicInquiry 25, no. 3 (1987); D.C. North, Institutions, Institutional Change and EconomicPerformance (Cambridge university press, 2009); D.C. North, Institutions Matter,Economic History (1994); D.C. North, Institutions and Credible Commitment,Journal of Institutional and Theoretical Economics 149(1993).

x. Stein, The World Bank and the Making of the Governance Agenda., available at

http://www.institutions-africa.org/trackingdevelopment_archived/resources/docs/PaperASSR-Amsterdam-October-09--Stein-Final2.pdf; D. Williams and T. Young,Governance, the World Bank and Liberal Theory, Political Studies 42, no. 1 (1994).,p93; Governance and Development, (Washington DC: World Bank, 1992).

xi. H. Marquette, Corruption, Democracy and the World Bank, Crime, law and social


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change 36, no. 4 (2001) at 13.

xii. Prior to 1994, the World Bank lacked any stated policy on dealing with de factogovernments. In 1994, the Bank adopted an initial policy on dealing with de factogovernments, but it was sparse and few ofcial records of it are available. The 2001

policy elaborates and replaces the 1994 version.

xiii. OP7.30, paragraph 1. It is also worth complimenting the Bank for having a policy ondealing with de facto governments. Many international and bilateral organizationsdo not, and they base their decisions on whether to suspend programs, or pull out ofcountries, on an ad hoc basis.

xiv. BP7.30, paragraph 1.

xv. WM Reisman, Criteria for the Lawful Use of Force in International Law, Yale Journalof International Law, 1984. See also, Antonio Cassese, The Nicaragua and Tadic TestsRevisited n Light of the ICJ Judgment on Genocide in Rwanda, European Journal ofInternational Law Vol. 18 no. 4 EJIL 2007.

xvi. See for example, the case of Al-Skeini v the United Kingdom, where the EuropeanCourt of Human Rights held that UK forces had sufcient control over civilians andprisoners in Basra, Iraq, that they were obliged to ensure and protect their humanrights. Available at http://cmiskp.echr.coe.int/tkp197/view.asp?action=html&documentId=887952&portal=hbkm&source=externalbydocnumber&table=F69A27FD8FB86142BF01C1166DEA398649.

xvii. UN Secretary General Trygvie Lie, Memorandum on the Legal Aspects of theProblem of Representation in the United Nations, 1950, UN Doc S/1466.

xviii. See http://www.worldbank.org/open/. The Bank is probably the internationaldonor that is the most transparent in its decision-making. See also, the Banks 2009Transparency Review Approach Paper, available at http://siteresources.worldbank.org/INFODISCLOSURE/Resources/5033530-1236640024078/English_full.pdf.

xix. http://news.bbc.co.uk/2/hi/americas/8127503.stm

xx. http://www.reuters.com/article/2009/06/30/idUSN30445897

xxi. http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/CDIVOIREEXTN/0,,contentMDK:22782465~menuPK:50003484~pagePK:2865066~piPK:2865079~theSitePK:382607,00.html.

xxii. http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/CDIVOIREEXTN/0,,contentMDK:22795867~menuPK:50003484~pagePK:2865066~piPK:2865079~theSitePK:382607,00.html. The Bank must necessarily haveapplied OP7.30 and assessed that Gbagbos refusal to step down amounted to anassumption of power by extra-constitutional means. On this rationale, Gbagbo and

his team became a de facto government, without the de jureauthority of a democraticelectoral process. Presumably, the Bank then also assessed that Gbagbos team did notsatisfy the criteria outlined in OP7.30.

xxiii. J. Cooke, Cote Divoire Standoff Continues, Center for Strategic and InternationalStudies 2011. Available at http://csis.org/publication/cote-divoire-standoff-


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continues.

xxiv. See speech by Shamshad Akhtar , then-Vice President Middle East and NorthAfrica , Brussels , February 23, 2011. Available at http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/0,,contentMDK:22843216~p

agePK:146736~piPK:146830~theSitePK:256299,00.html.

xxv. See http://www.worldbank.org/en/country/tunisia/overview. Later in 2011, IngersAnderson, Bank Vice President for the Middle East and North Africa, praised TunisiasInterim Prime Minister for his efforts to create a more open and democratic society a success that would set an example for the world. See http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/TUNISIAEXTN/0,,contentMDK:23017990~menuPK:310036~pagePK:141137~piPK:141127~theSitePK:310015,00.html.

xxvi. See http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/0,,contentMDK:23150732~menuPK:2246551~pagePK:2865106~piPK:2865128~theSitePK:258644,00.html.

xxvii. Article 6 of the Agreement requires that an amendment would require approval ofthe Executive Board and acceptance by three-fths of the 187 Member States having85% of the total voting power. http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/IDA/0,,contentMDK:20052531~menuPK:115747~pagePK:83988~piPK:84004~theSitePK:73154,00.html.

xxviii.

See Issues of Governance in Borrowing MembersThe Extent of Their Relevanceunder the Banks Articles of Agreement, Legal Memorandum of the GeneralCounsel, December 21, 1990 (SecM91-131, February 5, 1991); Prohibition ofPolitical Activities in the Banks Work, Legal Opinion of the General Counsel, July 11,1995 (SecM95-707, July 12, 1995). See also, Helping Countries Combat Corruption:The Role of the World Bank, available at http://www1.worldbank.org/publicsector/anticorrupt/corruptn/cor03.htm.

xxix. See, Legal Opinion on Human Rights and the Work of the World Bank, whichconcluded that The Articles of Agreement permit, and in some cases require, the

Bank to recognize the human rights dimensions of its development policies andactivities, since it is now evident that human rights are an intrinsic part of the Banksmission. Available at http://www.iwatchnet.org/sites/iwatchnet.org/les/DaninoLegalOpinion0106.pdf See also, The Way Forward: Human Rights and theWorld Bank, available at http://siteresources.worldbank.org/EXTSITETOOLS/Resources/PalacioDevtOutreach.pdf.

xxx. The Banks policy on dealing with de facto governments has already inuencedother agencies to develop their own policies. See for example, the policy of theInternational Fund for Agricultural Development, available at http://www.ifad.org/pub/basic/governments/defacto_e.pdf. The Asian Development Bank took a similarapproach in deciding whether to deal with a de facto government in Fiji. See http://developmentasia.org/Documents/Economic_Updates/FIJ/in43-11.pdf at page 4.


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Alex Hartzman

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hIGh QuALIy nEw moLECuLAREnIIES:

Alex Hartzman

Astract

High quality new molecular entities (NMEs) are drug therapies that provide the mostvalue to the public and are the measure of innovation within the pharmaceuticalindustry. However, these drugs are not the most profitable for the industry and the

pipeline appears to be slowing. Thus, high quality NMEs represent a positive externalityin the pharmaceutical market. In this paper I examine the status quo and two policyalternatives: creating a Translational Research Center within the National Institutesof Health to directly increase the number of high quality NMEs, and changingregulations at the Center for Drug Evaluation and Research to incentivize industry

to increase the number of high quality NMEs. Due to the complexities of research anddevelopment as well as the pharmaceuticals market, I recommend that the federal

government create a Translational Research Center.

Itrcti

High quality new molecular entities (NMEs)i are drug therapies with novel

chemical formulations that offer more effective or less harmful treatmentsthan previous therapiesincluding effective therapies for previously untreateddiseases. The most protable drugs for the pharmaceutical industry, however,are generally not novel chemical formulations. Because NMEs do not providethe greatest benet for the pharmaceutical industry but do provide a benetbeyond their market valuation, high quality NMEs represent a positiveexternality in the pharmaceuticals market.

Alex Hartzman is a masters candidate (2012) in the public health and public affairs programs at the University of

Wisconsin - Madison and works in the public health emergency preparedness unit at the Wisconsin Department of

Health Services. In 2010 he was the first recipient of the Ina Jo Rosenberg and Shiri Eve Leah Gumbiner Fellowship

for health policy studies. Prior to his masters education, Alex worked as a student health advocate at the Center for

Patient Partnerships. He holds a Bachelor of Science in Astro-physics and Physics (2009), also from UW-Ma

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