7 Jul 2021, 1:23 p.m.
Not unlike other social services, impact bonds have faced significant disruption due to the COVID-19 pandemic. As the world now begins to think about building back better, impact bonds can act as important tools in strengthening systems, offering flexibility and supporting vulnerable groups. Drawing on a recent Engaging with Evidence session, and using examples from four key policy areas, this blog discusses practical considerations around using impact bonds for rebuilding and recovery.
By forcing schools to close, lockdowns have impeded education and learning for millions of children around the world. Simultaneously, they have raised safeguarding concerns, with the usual scrutiny offered by schools suspended. The consequences for particular groups are especially worrying. In India, school dropout rates for girls are expected to increase, raising concerns over widening gender inequality. In this context, outcomes-based commissioning can help services focus on marginalised groups and create the necessary incentives for services to prioritise them. Fellow of Practice Abha Thorat-Shah, based at the British Asian Trust, suggested that such programmes could draw on blended finance, by effectively combining grants with social investment.
Although impact bonds continue to largely focus on adults and young people, there is potential to use them for improving outcomes for young children. The preventative lens of impact bonds can be channelled to invest more on children and improve their life chances. This could produce long-term social benefits such as better health, employment opportunities, lower crime rates, and lower dropout rates. Coordination among existing services can be poor, but Emily Gustafsson-Wright from Brookings proposed that impact bonds can harmonise these service gaps. Using the strong collaborative and relational elements that underpin them, impact bonds can create resilient partnerships which bring together multiple service providers around agreed outcomes and provide a holistic service to users.
While training programmes can be a key element in addressing skill gaps and helping young people into employment, they are not always the only answer. Different groups might face varying barriers to entry, which require a more individualised approach. For example, to assist women into employment, services must move away from traditional ‘copy-paste’ interventions and instead build on a nuanced understanding of user needs. Jalil Hazboun from F4J Consulting Services spoke about the added value of impact bonds within the Finance for Jobs development impact bond. Using an impact bond model has helped stakeholders employ customised interventions that cater to marginalised youth, particularly those who are furthest from the labour market. It has allowed close working with multiple employers to identify their requirements and match them to suitable target groups.
In addition, using a mix of outputs and outcomes proved key in successfully launching the project amidst the pandemic. The outcomes focus enabled adoption of hybrid delivery models, as well as adaptation of services using bottom-up approaches. Going forward, impact bonds can enable stakeholders to play an active role in identifying and implementing customised solutions that are most useful for service user groups and focused on long-term impact.
Examples from beyond the world of outcomes-based commissioning can also offer transferable learnings for sustaining impact bond services through crises. In January 2019, basic health services in Afghanistan shifted from budget-based to activity-based contracts. Payment was tied to 11 key health interventions with defined unit prices. GO Lab Fellow of Practice Richard Johnson, based at The Global Fund and World Bank, explained that this led to dramatic increases in performance and data quality across these 11 interventions, and beyond. After the onset of COVID-19, maintaining cash flows within the system became key and helped maintain service delivery. Through their focus on providing additional resources and focusing on outcomes, impact bonds could introduce the flexibility that is required to facilitate these cash flows.
Commissioners and outcome payers must ensure that payment systems are managed efficiently and effectively so that businesses (both for-profit and non-profit) have the cash they need to continue service delivery through a crisis. Force majeure processes should be clearly defined so that they can be brought into force when a crisis strikes and then suspended accordingly. In the event that services need to pause, processes must support financial stability to ensure that the services can resume quickly. This can be further facilitated through a loan facility, which can allow projects to present business cases and access funds. Outcomes-based commissioning and impact bonds can create an enabling environment by offering flexibility, building business capacity, and strengthening performance management systems.
Although impact bonds primarily cater to social issues, COVID-19 has led to increasing consideration around applying them to new sectors such as water, sanitation, and solid waste management. However, identifying meaningful, measurable, and attributable outcomes within new policy areas can be a daunting task. Maitreyi Das from the World Bank shared examples from ongoing scoping work in Kenya and Yemen and recommended taking an incremental approach. This can involve using a mix of outputs and outcomes initially, before transitioning to a full outcomes-based payment framework. Building on existing entry points can also be key in identifying outcomes. For example, in Yemen, existing projects in women’s employment, solid waste management and the informal sector served as starting points for conversations and facilitated identification of outcomes. It is also crucial to identify communities who are interested in working in new ways, and co-operating with champions who are keen to invest in a true partnership.
Impact bonds have the potential to play a significant role in improving resilience and outcomes as the world begins to recover from the pandemic, though challenges may still arise. By paying for outcomes, they allow programmes the flexibility they need to adapt to changing contexts and maintain long-term focus on impact. Measuring this impact in multiple ways, such as by using a mix of outputs and outcomes and investing in remote measurement, balances risk not only with other partners, but also exogenous forces. However, if outcomes are too rigid or if there is insufficient digitalisation, adaptation to hybrid forms may prove difficult.
Consortiums of service providers can galvanise a holistic, collaborative approach that is customised to service user needs. Coordinating among several stakeholders during a crisis can be time-intensive, but high trust and relational working can be valuable. Meanwhile, aiding liquidity for constrained government budgets and flexibility in resourcing provides much-needed stability.
It is too early to say how impact bonds will compare to other forms of commissioning in the recovery phase. Nonetheless, collaborative working and distributed decision-making across partnerships will prove key in scenario planning and designing contracts that can respond to future challenges.