An Introduction to Impact Bonds
The unavailability of public resources and their inefficient use has led to an increased interest in exploring alternatives to traditional models of funding public services. Impact Bonds (“ IB”) are innovative financial instruments that pull private investment to finance high-impact social programs[1]. They are a way for the public and private sector to partner with not-for-profits to deliver social services. IBs are designed and/or implemented in early childhood education, global health, and workforce development, including recidivism and employment.[2]
What is an impact bond?
In an IB, private investors provide capital up-front for social services, and are repaid by an outcome payer contingent on the achievement of agreed-upon objectives.[3]An outcome payer is either a government or a philanthropic entity.[4] If the objectives are met, the outcome payer repays the capital along with interest to the private investors. Investors lose their investment if the agreed-upon outcomes are not achieved.[5] Analysis of early IBs indicates that most of them have returned the investment along with positive returns.[6]
“Educate Girls”, an impact bond, was launched in 2015 in the Bhilwara district of Rajasthan. The private investor, UBS Optimus Foundation, provided the upfront working capital to the service provider, Educate Girls. The aim was to increase enrolment numbers for out-of-school girls as well as their learning outcomes in literacy. The evaluation report of “Educate Girls” showed that it surpassed its targets. The investor recovered his initial funding along with a 15% return from the outcome payer.
Why are IBs relevant?
IBs offer upfront funding to service providers. On account of this, service providers do not have to fundraise continuously for their working needs. This financial independence allows space for experimentation and adaptability, which facilitates faster social innovation.[9]
Governments are accountable for the delivery of public services. In IBs, when private investor(s) fund a project, the financial cost and political risk is deferred from the government. Under this model, private investor(s) and the service providers are accountable. The government only pays the private investor(s) for the project once the agreed-upon outcomes are met. Instead of paying for services, governments pay for outcomes.[10] Arguably, up-front private investment is a clever innovation to address the funding gaps in the government and not-for-profit sector for delivery of public services.[11]
IBs warrant greater accountability from all stakeholders. Investors only realize returns if the agreed-upon outcomes are achieved.This solves the incentives problem, improves transparency and adds layer of checks to ensure success.[13]
Conclusion
IBs can create a win-win situation if adopted in the right manner.[14] They have the potential to establish a new market for financial innovation that brings together government, investors, companies and not-for-profits.[15]This demands a balanced and coordinated relationship between the outcome payer, investors and service providers. As such, the structuring of IBs is complex and costly.[16] It helps to have a clear understanding of the objectives and associated risks along with a rigorous evaluation of the proposed project.
( This post has been authored by Shiuli Mandloi, an intern from National Law Institute University, Bhopal, with inputs from Vijayant Singh, Associate, and Nehaa Chaudhari, Public Policy Lead.)
[4] If the outcome payer is the Government then it is a Social Impact Bond (SIB). But if it’s a philanthropic entity or a donor foundation agreeing to pay the investor, when the desired outcome is achieved, then it is a Development Impact Bond (DIB).
[7]LiveMint, Outcome-based financing for development in India, dated 25 thApril 2018, available at
[12]India Development Review, Development Impact Bond, dated 28th November 2019, available at https://idronline.org/idr-explains-development-impact-bonds/.
Originally published at https://www.ikigailaw.com on May 30, 2019.
