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Commissioning is the cyclical process by which entities assess the needs of people in an area, determine priorities, design and contract appropriate services, and monitor and evaluate their performance. These entities are often national or sub-national public sector bodies but can also include development agencies, multilateral institutions or supranational bodies in the international sphere. This term is used widely in the UK public sector context, but less so elsewhere. It is sometimes used interchangeably with 'contracting'.
Outcome-based contracting refers to a commissioning approach based on the outcomes to be achieved, rather than the activities to be undertaken (inputs) and/or services to be delivered (outputs).
In international development this approach is more commonly referred to as results-based financing.
The term 'outcomes-based contracting' is used to cover a wide range of approaches, but broadly speaking can take three forms:
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Impact investment are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals. Investors can be individuals, institutional investors, dedicated investment funds and philanthropic foundations, who invest through their endowment.
Impact investment is described (and differentiated from other forms of investment) by three guiding principles:
Impact investment is not limited to a specific asset class or sector: it includes, for example, fixed income, venture capital, private equity and social and development impact bonds.
According to OECD, social impact investment is the provision of finance to organisations addressing social needs with the explicit expectation of a measurable social, as well as financial, return.
Impact investors seek blended social and financial returns, and the potential to make a profit on the initial investment is intended to compensate investors for the risks they take on when investing in impact bonds.
Rates of return vary widely, and should be contractually agreed to by all stakeholders. Impact bond outcome payers may put a cap on the maximum finance payment they are willing to make when outcomes are achieved. For example, with the Asháninka Development Impact Bond in Peru outcome payments were capped at $110,000 USD.
As regards available data on the rates of return for impact bonds, there is a growing demand, particularly by governments, for greater transparency.
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An impact bond (IB) is one form of outcome-based contracting. Although there is no single agreed definition of an impact bond, most definitions understand an impact as a partnership aimed at improving the social outcomes for a specific group of citizens.
In financial terms, an impact bond is not technically a bond. Bonds generally have an unconditional and guaranteed rate of return, whereas in an IB the financial return is tied to the outcomes achieved by the provider and will therefore vary. As a financial model, an IB is a way to establish funding for projects, but with the investors carrying some or all of the risk. If outcomes are not achieved, providers can be shielded from losing money (at a rate determined by the contractual agreement between parties).
In conventional public service contracts service providers carry a financial risk, and might struggle to find the up-front capital to deliver a project. In an IB, the impact investor(s) steps in to take on some of the financial risk and will provide the up-front working capital to service providers to set-up and deliver the project. The repayment to investors in an IB is linked (wholly or partly) to whether the pre-identified outcomes are achieved, protecting the service provider from all or part of the financial risk. The impact bond model is thus intended to shift at least some of the financial risk from the outcome payer to the investor, whilst also protecting the service provider from all or part of the financial risk of delivering a project.
The central feature of an impact bond is that it brings together three key partners: an outcome payer, a service provider, and an investor. In practice, there may be multiple organisations that make up each of these partners. Please see our guide to impact bonds that provides a breakdown of the role of each stakeholder.
Impact bonds have been launched in many countries around the world, and typically exist in two forms: social impact bonds (SIBs) and development impact bonds (DIBs). SIBs were established in the UK and are referred to in the US as ‘pay for success’ schemes, while in Australia they are often called ‘social benefit bonds’. Though similar to SIBs, DIBs have been adapted for implementation in low- and middle-income countries (although SIBs can also be found in developing country contexts).
The key difference between a SIB and a DIB is that in a SIB the outcome payer is the government in which the intervention is operating; in a DIB the outcome payer is a donor (who could be a philanthropic foundation, a multilateral donor or bilateral donor).
Whilst the terms are different, they all fall under the same definition as an ‘impact bond’. They are all partnerships that seek to improve social outcomes, with slight distinctions which are outlined below.
Outcome funds pool capital from one or more funders to pay for a set of pre-defined outcomes. Outcome funds allow the commissioning of multiple impact bonds under one structure. Payments from the Outcomes fund only occur if specific criteria agreed ex-ante by the funders are met. The primary goal of the outcomes fund is to grow and strengthen the outcomes-based contracting market, specifically by funding impact bonds and other payment-by-results approaches.
In their broadest sense, outcome funds signal a commitment to pay for measurable outcomes, rather than activities or outputs. The pricing and payment of outcomes may be highly specified, with a maximum price attached to an outcome by the fund administrator (for example, a ‘rate card’ approach - rate card is a schedule of payments for specific outcomes an outcome payer is willing to make for each participant, cohort or specified improvement that verifiably achieves each outcome). Fund administrators may pay the full outcome valuation or they might offer a contribution to ‘top up’ outcomes contracts developed by other outcome funders (thus pooling resources dedicated to paying for outcomes across multiple stakeholders such as central and local government, philanthropy and other donors).
The fund itself could be constituted/launched by one single payer (for instance central government department or a philanthropic organisation) or could include money from different stakeholders (such as several government entities, several private donors, or even a mix between public and private funding).
The decision to contract an impact bond should be drawn from an explicit reason for using an outcome-based contract, possibly tied to flexible investment. In our report, Building the Tools, we outline three reasons why impact bonds may be a useful tool for public service reform. Firstly, a way to overcome fragmented delivery (through collaboration); secondly, a way to reduce demand for high-need intensive services (through prevention); and thirdly, a way to disrupt the usual way things are done (through innovation).
Impact bonds are not suitable for all social policy areas and in many cases more traditional approaches to funding services continue to be more appropriate, and you may wish to determine if an impact bond is feasible as a way of meeting a particular need in the population, or of commissioning the delivery of a particular service.
For further information and guidance, you can review the Impact Bond Readiness Framework. This provides detailed guidance on what you need to consider to develop an IB contract to the point of launch.
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Unlike grants, as a funding mechanism well-designed impact bonds can ensure that the outcome payers only pay for desired outcomes achieved by a service. Impact bonds have the potential to improve collaboration across different sectors, foster innovation and channel investment into preventive services. It is not always feasible or indeed practical to contract services on an outcomes basis; outcome funders should carefully consider all funding options available in determining the suitability of an impact bond approach.
There is a growing appetite for socially-motivated investors to use their capital as a driver of sustainable growth, directed towards investments that have a positive impact on society. Impact bonds enable donor agencies, government at both central and local level to access this growing impact investing market.
DIBs can enable more impact investment in development, by providing a shared platform for governments, donors, investors, firms and civil society to work together, achieving more in partnership. Particularly for attracting investment, DIBs may provide greater incentive for private sector engagement with an interest in development, by reconstructing social problems into opportunities for both impact and returns.
While DIBs are not intended as a tool for all development problems, these partnerships can ensure that funding meets the growing demand for rigorously-defined and measured outcomes. In addition, they can provide scope for innovation, re-adaptation and flexibility to respond to unpredictability of delivery and implementation, including the limitations of government budgeting, contracting and performance management (CGDEV, 2013). For further information see the GO Lab’s introduction to DIBs.
SIBs in the UK started as a Labour project under Gordon Brown, growing under the Conservative-led coalition government and continue to have political support. SIBs seem to enjoy cross party support, as the potential benefits of SIBs appeal to politicians across the political spectrum. A timeline mapping the key government strategies and activities in relation to supporting the development of social impact bonds in the UK is available here.
Over the past few years, there has been growing interest in DIBs from a range of organisations. This can be best evidenced by the work of Impact Bond Working Group, established in May 2018 by the Department for International Development (DFID) in the UK, UBS Optimus Foundation and the Swiss Secretariat for Economic Affairs (SECO). The aim of the Working Group is to design strategies that will help the donor community, developing country governments, investors and delivery partners use impact bonds and related pay-for-success instruments effectively and at scale. The Working Group has been joined by 24 donors, representing bilateral cooperation agencies, multilateral development agencies, and private foundations.
The GO Lab offers advice and support to those interested in exploring impact bond models of service provision. We offer a range of support materials. If you are interested in developing an impact bond here are the first steps you can take:
If you are beginning to develop your impact bond and want more in-depth guidance:
In the coming months we will make available on our knowledge platform a comprehensive directory of impact bond practitioners.
Impact bonds have been used for a broad array of projects, with different thematic focuses between SIBs and DIBs, as a result of the distinct development demands where they have been adopted.
SIBs were pioneered in the UK, and the government remains a leading proponent. Globally, SIBs tend to be launched in high-income countries, although they can also be used in low-and middle-income countries. The first SIB was implemented in Peterborough prison in 2010 to reduce reoffending rates. SIBs are being used to tackle a range of social issues including homelessness, youth unemployment and children in care.
Our global project database covers all the impact bonds that have been launched in the UK, providing key information on different aspects of the impact bond. You can also read detailed information on individual impact bonds in our case studies section.
As DIBs are primarily focused on social impact in low- and middle-income countries, these projects span a diverse scope of development and thematic areas, that largely coincide with the sustainable development goal agenda. As a result, the types of projects funded using DIBs are particularly cross-cutting and address an extensive number of development challenges.
For many governments, donors and service providers, a lack of funding or resource capacity is a significant inhibitor of developing new approaches to services. They might not be able or willing to invest in the first instance due to limited access to finance or the difficulty of accepting the project’s risks. Only paying when outcomes have been achieved means that the working capital required to set up and run the services sits outside the public purse in the first instance, and it is paid back only when outcomes have been achieved. This makes SIBs a more attractive funding mechanism than obtaining loans from mainstream banks and other conventional lenders. Moreover, some social investors work closely with investees, providing performance management support and specialist expertise, as well as financial resources.
For DIBs, these advantages also hold, and are further being substantiated by the demand for greater development finance in many low- and middle-income countries, making a complementary alternative model to traditional development cooperation.
The costs of developing and implementing a SIB or DIB should be carefully considered against the value that the proposed service will create. Outcome payers should consider the overall costs and benefits, seeking guidance from resources offered by the GO Lab and parties outlined in our ‘guidance section’ for more information in order to do so.
The social impact bond landscape has evolved significantly, and evidence is starting to emerge around the use and impact of social impact bonds. A number of qualitative evaluation studies have been conducted so far, but only a few SIB projects have been subject to a robust impact evaluation. Encouragingly, the final evaluation of the Peterborough One Service SIB, published in July 2017, showed that the project reduced reoffending of short-sentenced offenders by 9%, leading to the investors being repaid in full. Importantly, these evaluative results show that the One Service was indeed a successful intervention, but do not provide conclusive insight on the unique contribution of the SIB approach.
Due to the limited evidence, at present, the approach can be seen as promising, but unproven. The GO Lab at the University of Oxford has been set up to critically assess the emerging evidence. Our initial evidence report on impact bonds in the UK can be accessed here.
As of July 2019, no report has synthesised evidence on completed impact bond projects in low- and middle-income countries. This is due, in part, to a small sample size of two completed projects. However, Ecorys has completed an evaluation that focuses on the early set up of 4 DIBs, and they are due to publish further evidence of the DIB mechanism in 2020.
To access existing evaluations of impact bond projects, please visit our Publications Library.