12 Feb 2021, 11:09 a.m.
This blog is part of our Engaging with Evidence series, an interactive online convenings hosted by the Government Outcomes Lab and designed to encourage a greater understanding of the latest evidence on the use of cross-sector partnerships focused on outcomes. Tanyah Hameed reflects on key takeaways from the first session of the series on impact bonds in Latin America.
Impact bonds are charting new waters. In recent years, these innovative instruments for improving social outcomes have reached the shores of Latin America. Two impact bonds have been completed in Peru and Colombia, three projects are currently in implementation in Colombia, Argentina and Chile, and countries around the region are exploring their potential use. Based on recent research by Ecorys and the first Engaging with Evidence session, here is how five countries across the continent have approached the development of impact bonds.
Colombia has the most developed impact bond market in the region. It has launched two social impact bonds (SIBs), the first of which was completed in 2019. These SIBs launched under the SIBS.CO programme, set up by the IDB Lab (the innovation laboratory of the Inter-American Development Bank). The aim of this programme was to pilot three sequential SIBs focused on employment and training, that could build evidence and develop the market.
Stakeholders initially wondered how they could try this new approach while aligning it with existing challenges in Colombia. They identified inequality as one of the most significant issues in the country, and began working with the Department for Social Prosperity, as part of their mandate on poverty alleviation. SIBs and inclusive employment were seen as a new way of thinking which could contribute to countering inequality. Involvement of the Swiss Secretariat of Economic Affairs (SECO) and IDB Lab helped build government buy-in, as this was perceived to de-risk the initiative.
These early SIBs have provided an opportunity to actively learn and generate new data that can be used to design future impact bonds. Focusing on one policy area further expedited this evidence-building exercise. Demonstration of positive effects has ‘moved the needle’ and led to the establishment of an outcomes fund, with stakeholders now also exploring new policy areas. It is recognised by stakeholders that the objective is not just to create SIBs but to change the mindset within public services.
Colombia provides helpful lessons on how taking a programmatic approach by launching multiple, sequential SIBs can help build crucial evidence and buy-in for IBs. The combination of influential bilateral organisations, foundations and government proved powerful, more so than government alone. Involvement of foundations in paying for outcomes countered some of the financial disincentives for investors. Moreover, having all of these stakeholders around the table from the beginning was advantageous. Going forward, the government has embedded the concept of SIBs and the development of an outcomes fund in the National Development Plan for 2018-2022, which is expected to be instrumental in promoting interest.
Stakeholders began to design a SIB in Argentina in 2017. The project focused on employment and was launched successfully in 2018, with outcome payments committed from the Government of Buenos Aires.
In Argentina, government demand was driven by the potential for increased effectiveness of limited resources. It was also appealing to pay only for success, with actual payments due much further in the future. Meanwhile, investors were interested in the potential to help government use resources more efficiently, and influence public policy. New service providers entered the Payment by Results (PbR) space in Argentina due to the upfront funding that the SIB provides, as well as the shared risk between service providers, investors and outcome funders.
Despite gaining government buy-in, stakeholders found it integral to have a champion for the project, who could successfully navigate all the different layers of decisionmakers. Public procurement was used instead of direct procurement, though this brings its own challenges. Despite being ‘public,’ very few bids might be received due to limited options in a nascent SIB market.
The biggest challenge was navigating high inflation rates, which made it tough to agree on prices for outcomes. Inflation risks were integrated by adjusting the price of outcome payments according to a specific index. This made it possible for the SIB to launch, despite coinciding with a financial recession.
IDB Lab first explored a SIB focussing on recidivism in Chile with the Ministry of Finance in 2015, but this was dropped following political disruption. In 2018, central government in Chile and IDB Lab began working together again on designing three IBs. IBs and PbR were included in the national plan for Chile, “Compromiso Pais.” The first of these impact bonds launched in 2019, without government involvement, and focused on education.
Stakeholders wanted to use SIBs in Chile to improve outcomes and innovation. Yet, they faced the significant challenge that most Chilean government departments are not legally set up to pay for outcomes. As with some other countries, high turnover impeded sustained engagement with government and hampered political commitment.
Efforts to build buy-in benefited from the examples of Colombia and Argentina, which made it easier to explain the concept of impact bonds. These examples showed that IBs could be adapted to different regions and systems, and that they were not just a ‘US/UK model.’ While incentives for social investors are lacking in Latin America, Chile hosts multiple foundations which have been able to contribute funding.
Brazil and Mexico have both explored social impact bonds, but have yet to launch one. Initial conversations started in 2016 for both cases but changes in state government led to projects falling through in these countries.
In Mexico, stakeholders started working on a project promoting female economic empowerment with the Government of Jalisco. The project experienced significant delays in design and contracting, which were exacerbated by staff turnover in key partner organisations. Funding a new type of service (such as the one in Mexico) instead of using an existing intervention already paid by the government to the private sector might have also contributed to the challenge. The SIB was cancelled in September 2017 due to considerations over upcoming elections the following year. However, in 2019, stakeholders started developing an employment SIB with the state of Nuevo Leon.
Meanwhile in Brazil, work began on developing two SIBs in education and health. The education SIB ran into challenges when its design took longer than expected. Miscommunication also emerged, and there were changes in government. Change in government officials also affected the health SIB, with the new Health Secretary less interested in progressing it. As a result, both SIBs in Brazil were cancelled in 2019. However, more SIBs might be in the pipeline.
Overall, stakeholders contend that lessons on developing IBs in Latin America can be applied to other middle-income contexts. Stakeholders must have a clear rationale and exit strategy when developing IBs. Is the purpose to launch more IBs, or to initiate outcomes-based commissioning and scale it up in more mainstream ways? Having this clarity and working collaboratively is essential for building demand for impact bonds, developing projects in new regions, and enhancing market capacity over time. However, a copy-paste approach cannot be used. Impact bonds need to be adapted to fit in to the particular economic, regulatory and political context of each country to improve social outcomes.