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A recent FT article on impact bonds points out that the ‘scalability of the asset class proves elusive’, but over a decade since the launch of the first impact bond in the UK, the emerging evidence suggests a more nuanced picture.

It is far from clear whether impact bonds have lived up to their hype. What we can say with certainty is that there is a high degree of variation and malleability in impact bond arrangements. The key to achieving some of the early promises of the tool rests in our ability to understand how the different dimensions of an impact bond, and the interplay between them, can lead to the achievement of specific policy objectives.

Veterans of the impact bond space have for long recognised the confusion that stems from the term ‘bond’, and over the last few years, there has been a shift towards referring to these outcomes-focused partnerships as ‘social outcomes contracts’ or ‘social outcomes partnerships’. These terms aim to better capture the potential of this tool to manage outcomes-oriented cross-sector partnerships for the provision of social programmes, rather than as a mere financial instrument. But the ‘impact bond’ label has proven sticky. Unfortunately, it’s also unhelpful, as it obscures the great variation in the form that these partnerships take. Impact bonds have been used to fund education programmes in India, tackle homelessness in the UK, reduce child mortality in Cameroon and support refugee integration into the labour market in Finland. Over 250 impact bonds have been launched around the world, and they vary widely in the reason they were set up, how they work and what social challenges they seek to address.

This is why, rather than fixating on the label, it’s far more fruitful to think of it as a flexible tool for cross-sector collaboration that is being stretched and flexed to respond to different social challenges in very different contexts. Research conducted by the Government Outcomes Lab found four core dimensions across which impact bond projects vary:

  1. The nature and amount of payment by results. Not all impact bonds pay investors back purely on the basis of outcomes; many take a blended approach, with some payments tied to inputs or activities – a move away from the initial impact bond model.
  2. The nature of the working capital. Within the ‘textbook’ SIB approach, all of the investor capital is at risk. In practice, a range of investment approaches have been adopted. Provider organisations may take a share of the risk (and potential reward) associated with their performance in delivering the desired outcomes. In some UK SIBs, service providers receive a bonus for good performance, or take on losses in the event of poor performance.
  3. The social intent of the provider organisation. In the UK, one of the earliest justifications for SIBs was that they diversify public service provision, opening up payment-by-results contracts to non-profits/ the VCSE sector who may lack working capital. However, in practice, providers have not been exclusively from this sector, and in any case, the benefits of VCSE service provision are unclear at best.
  4. The performance management approach. Given the financial imperative for good performance in SIBs, projects often bring in external staff to undertake one or more parts of a performance management cycle – data collection, data synthesis, and data-informed change. Sometimes intermediary organisations or SPVs play this role. In other instances, investors provide performance management support directly. The function could also be placed within providers or outcome funders (potentially building more sustainable performance management capacity beyond the life of the project), but this is rare in practice.

Other recent evaluation work points in the same direction. A recent report on the impact bonds funded through the Commissioning Better Outcomes Fund – a £40 million outcomes fund supported by the National Lottery Community Fund in England – found that many impact bonds have evolved away from the original concept, and that impact bonds ‘have metamorphosised into different shapes, subject to different pressures, priorities and preferences’.

It is time to move away from a simplistic understanding of impact bonds as an asset class or financing instrument, and see them as flexible tools for more effective cross-sector collaboration. Understanding this flexibility will enable us to design them more effectively, and it’s in this way that they stand a chance of living up to their early promises.

Seen in this light, the value of impact bonds, or social outcomes contracts, lies not so much in their ‘scalability ’ - indeed sometimes this might go against the logic of why an impact bond was set up in the first place. Instead, their real value may be in how they can lead not only to a more effective use of funding, but also to better ways of working between public sector organisations and their partners in the private and voluntary sectors.

Looking at SIBs in this way makes them a source of powerful insights into how governments can work effectively with VCSEs and the private sector (through grants, contracts or looser types of partnerships) to make real progress on some of the daunting challenges that face governments around the world. It is their potential to blend a focus on measurable outcomes with enabling more flexible working across different partners that has given impact bonds their enduring allure. With a looming global recession and strained public finances, the impetus for better cross-sector partnerships and greater accountability for public spending will only grow stronger.