WHAT IS AN IMPACT BOND?

Social and Development Impact Bonds (SIBs/DIBs) are two other tools that can be characterized under Results-Based Financing (RBF), focusing the allocation of money to social programs that yield effective results. The difference between SIBs/DIBs and traditional Results-Based Financing is the involvement of the private sector, who provides up-front financing to the service providers with the promise of a return once results are achieved. In an Impact Bond model, an investor (or group of investors) provides up-front financing for the operations of a service provider, receiving a return from the outcome payer (usually a government or donor) once results have been achieved.

WHAT’S THE DIFFERENCE BETWEEN A SOCIAL IMPACT BOND AND A DEVELOPMENT IMPACT BOND?

The difference comes from who ultimately pays for outcomes. In a Social Impact Bond the outcome payer is the government, while in a Development Impact Bond the outcome payer is a donor.

WHAT DO IMPACT BONDS LOOK LIKE IN ACTION?

Impact Bonds are Results-Based Financing contracts that finance the up-front delivery of social services. Some examples of how they are used include:

A multinational bank gives a girls’ education non-profit in India enough funds to scale their program to 3 new villages. A large education philanthropy pays back the initial investment plus interest after 3 years based on the number of girls who have been enrolled in school and their learning gains.

A set of impact investors invests in improving the services of diabetes management clinics to work with a specific high-risk population. Over a period of 4 years the government of Mexico pays the investors back for each person who successfully controls his or her diabetes–preventing health complications and saving money for the government.

A set of impact investors puts $25 million to help treat and prevent sleeping sickness in Uganda. DFID pays after 7 years based on how successful they are at eradicating the disease.

WHO USES IMPACT BONDS?

In an Impact Bond, there are five stakeholders that hold different responsibilities:

  1. An outcome payer, which can be a foundation or a government agency, enters into a contract to pay for specific, measurable social outputs and outcomes.
  2. A service provider, or a group of service providers, works to deliver these social outputs and outcomes in a flexible manner that is not defined by the outcome payer.
  3. One or several investors, who can be individuals, foundations or investment firms, provide service providers with up-front working capital.
  4. An independent evaluator assesses the outcomes of the program.
  5. A program manager and/or intermediary coordinates the stakeholders and designs, structures, and implements the project.

A variety of actors are using Impact Bonds to pay for outcomes as outcome payers and to amplifying their impact investment portfolios as investors. Local and national governments in developed nations (e.g. United Kingdom and United States), national governments in middle-income countries (e.g. Mexico and Chile) and international donors (e.g. DFID and Global Fund) are acting as outcome payers, while international banking institutions (e.g. Goldman Sachs and Merrill Lynch) and foundations (e.g. UBS Optimus Foundation and Rockefelle Foundation) are acting as investors.

IN WHAT THEMATIC AREAS CAN IMPACT BONDS BE IMPLEMENTED?

Social and Development Impact Bonds are currently being designed and/or implemented in early childhood education, global health, and workforce development, including recidivism and employment. In order for an issue to be deemed as feasible for an Impact Bond, the theme and program need to meet the following four criteria:

Can produce measurable outcomes.

Can produce outcomes in a short timeframe.

Has previous evidence of success.

Located in an appropriate political & legal environment.

WHY USE IMPACT BONDS RATHER THAN TRADITIONAL FUNDING?

  1. It makes money more effective. By tying funding to measurable results, Impact Bonds reduce the risk of funding programs that do not work.
  2. It allows providers to adapt to change. By shifting focus from activity to impact – that is, by reimbursing results rather than receipts – Impact Bonds give service providers more flexibility to do what they need to do to get results.
  3. It incentives better programs. By tying funding to results, Impact Bonds make it attractive and profitable for service providers to improve their programs.
  4. It focuses the private sector on social issues. By creating an investment opportunity that includes a financial return, Impact Bonds invite the private sector to participate in improving social programs.

WHAT IS THE EVIDENCE THAT IMPACT BONDS WORK?

Impact Bonds may achieve greater impact through a variety of mechanisms by:

Improving the effectiveness of social programs financed through the Impact Bond.

Identifying and demonstrating at-scale cost-effective intervention models for later adoption by the government.

Financing programs that otherwise would not have been financed (for example, by shifting social service spending from treatment to more cost-effective prevention).

Impact Bonds are a new experiment in the early stages of design and testing. As the market develops we will begin to understand more about where, how, and why impact bonds improve effectiveness. It is too early to draw conclusions about the effectiveness of impact bonds.
Nevertheless early evidence from the Peterborough Social Impact Bond suggests that Impact Bonds can improve program performance.