This glossary provides working definitions for some of the key terms used across this Knowledge Platform. For many of the concepts included, there are no universally-agreed definitions. In compiling this glossary we consulted a wide range of practitioners and experts in the field, but always welcome further feedback and suggestions. Get in touch
6 mins read
Something (e.g. outcomes) that would have not happened otherwise, i.e. without a specific intervention, policy or investment
The extent to which changes in the relevant outcomes can be attributed to an intervention or investment
The drop out (rate) of participants during the intervention
Attrition is relevant for impact bonds because often interventions are based on voluntary participation but measured on a fixed number of participants.
Example: An impact bond whose target is to integrate at least 50% of a pre-determined cohort of 100 vulnerable individuals into the labour market. In case participation in the intervention is voluntary and the 50% target outcome is based on a fixed number of 100 individuals, an attrition rate of 20% would mean that the adjusted target outcome is 62,5% (50% x 100 / 100 x (1-20%)).
The state before the intervention, against which progress can be assessed or comparisons made
Baseline data is collected before a programme or policy is implemented to assess the before state. The availability of baseline data is important to document balance in pre-programme characteristics between treatment and comparison groups.Baseline data is required for some quasi-experimental designs.
Example: Baseline data for an educational intervention might encompass attendance rates or grades of a specific cohort before the intervention takes place.
A binary outcome is a type of outcome that has only two states; either an outcome is achieved, or it is not. For outcomes-based contracts, they are used where it is deemed unacceptable for the public sector to pay for outcomes that include negative events (e.g. outcomes not being achieved).
Example: An example of a binary outcome in the health sector could be seen in the area of diabetes. Based on the blood glucose level, a person is or is not considered pre-diabetic or diabetic. An example of a non-binary outcome would be the % reduction in the risk of someone becoming pre-diabetic pre and post intervention
According to OECD, blended finance is the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries.
A bond is a fixed income instrument that represents a loan made by an investor to a borrower. A bond has an end date (when the principal of the loan is due to be paid to the bond owner) and it usually includes the terms for variable or fixed interest payments that will be made by the borrower. Owners of bonds are debtholders, or creditors, of the issuer.
Despite the name, impact bonds are not typically this type of bond instrument because they are not fixed income instruments and payments are dependent on the achievement of outcomes (and are not made regardless of impact performance).
It evaluates the benefit, cost and risk of alternative options and provides a rationale for the preferred solution. The business case entails five domains:
A situation whereby investors provide upfront funding and in case of periodic outcome payments, they can recycle those payments as investment capital. Capital recycling allows the size of the investment capital needed upfront to be only a fraction of the total investment needed to fund the impact bond.
The extent to which a change in an outcome or output will result in a reduction in spending, such that the expenditure released from that change can be reallocated elsewhere
Example: An example of a cashable saving is often observed in the area of employment. If a person is receiving unemployment subsidy previous to an intervention and as a result of that intervention enters the labour market, government spending related to that unemployment subsidy is reduced and is available to be spent elsewhere elsewhere. An example of a non-cashable saving could be observed in the health sector, where an intervention leads to, for example, less emergency visits or use of hospital services. In this case, while the intervention may result in less demand, it may not lead to cashable savings unless services become surplus to requirements and are terminated or surplus facilities are closed.
This is a perverse incentive whereby providers, investors or intermediaries select beneficiaries that are more likely to achieve the expected outcomes and leave outside the cohort the most challenging cases
The process of designing an impact bond and defining the target population, outcome evaluation methods and targets should consider potential perverse incentives and include mechanisms to avoid it. Cherry picking is also known as creaming.
Example: An intervention that promotes employment deliberately selects participants that are more likely to achieve employment outcomes.
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'.
An organisation responsible for commissioning (contracting) services. In impact bonds, commissioners are typically the outcome payer and are typically (1) a central or local government organisation or (2) a multilateral agency. Sometimes private or philanthropic sources act as co-payors.
Example: In the Belgian Social Impact Bond “Duo for a Job”, the commissioner (or outcome payer) is Actiris, the Brussels-Capital Region Employment Office. In the Indian Development Impact Bond “Educate Girls”, the outcome payer is the Children’s Investment Fund Foundation.
A method to estimate the total expected benefits of a programme, compared with its total expected costs
It seeks to quantify all the costs and benefits of a programme in monetary terms and assesses whether benefits outweigh costs.
A counterfactual is an estimate of what outcomes would have occurred without the intervention. In the impact bond context, a counterfactual enables a comparison with what would have happened without the impact bond. The counterfactual is an important element in assessing the additionality of an intervention or investment.
This is a perverse incentive whereby providers, investors or intermediaries select beneficiaries that are more likely to achieve the expected outcomes and leave outside the cohort the most challenging cases. The process of designing an impact bond and defining the target population, outcome evaluation methods and targets must consider potential perverse incentives and include mechanisms to avoid it.
Creaming is also known as cherry picking.
Example: An intervention that promotes employment deliberately selects participants that are more likely to achieve employment outcomes
Outcomes which would have happened anyway, regardless of an intervention, policy or investment
To understand the additionality of a certain intervention it is important to have an estimation of the deadweight.
This is a term used for an impact bond that is implemented in low- and middle-income countries where a donor agency, multilateral institution, multilateral or a foundation pays for the desired outcomes as opposed to the government (although some combination of government with third party is also possible).
The process whereby an organisation’s financial, organisational, operational and programmatic strengths and weaknesses are assessed in detail by a potential investor with a view to investment or an outcome payer with a view to commission an intervention
A periodic, objective assessment of a planned, ongoing, or completed project, programme, or policy
Evaluations are used to answer specific questions, often related to design, implementation, or results. Evaluation is the application of systematic methods to address questions about programme operations and results. Evaluation can include ongoing monitoring or one-shot studies. Evaluation often relies on social science methodologies and professional standards.
In terms of impact bonds, one type of evaluation is the determination of whether and to what degree the intervention in an impact bond project has had an impact on the measured outcome variables over time. Another type of evaluation is related to determining whether the way a project is financed has had an impact on the measured outcomes variables.
Exchange rate risk, also known as currency risk, arises from the change in price of one currency in relation to another.
Investors or companies that have assets or business operations across national borders are exposed to currency risk that may create unpredictable profits and losses. In impact bonds, exchange rates risk can lead to changes in the business and financial case of the intervention.
An evaluation method in which participants are randomly allocated to a treatment group or a control group
Experimental evaluation methods lead to the highest confidence that observed effects are attributed to the intervention. Randomised Controlled Trials (RCTs) are a common experimental evaluation method.
A legal or ethical relationship of trust, specifically in relation to taking care of someone else’s money
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Hard outcomes can be objectively and independently measured
Example: A child being in or out of care, an adult being in employment
Occurs when the mere fact that units are being observed makes them behave differently
The Hawthorne effect can happen among the beneficiaries of a certain intervention, but it can also happen among control groups, which are sometimes used to as the basis of measurement in an impact bond.
Example: Consider an intervention where support is given to families with youngsters with high school absenteeism. If there is someone from the evaluation team at school who is tracking absenteeism, the students might become less likely to skip class for the simple fact that they are being observed, and not necessarily as a result of the support to the family.
This is a variation of a development impact bond, through which private investors finance a social benefit/development program and receive a return according to the programme’s results from a donor. The difference is that a HIB is used in a conflict or post-conflict setting.
In the context of impact evaluations, an impact is a change in outcomes that is directly attributable to a programme; also known as causal effect
Impact bonds are outcome-based contracts that incorporate the use of private funding from investors to cover the upfront capital required for a provider to set up and deliver a service. The service is set out to achieve measurable outcomes established by the commissioning authority (or outcome payer) and the investor is repaid only if these outcomes are achieved. Impact bonds encompass both social impact bonds and development impact bonds.
An evaluation that makes a causal link between a programme or intervention and a set of outcomes
An impact evaluation answers the question: what is the impact (or causal effect) of a programme on a desired outcome?
Impact investments 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.
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
Also known as service providers or service delivery organisations, implementers are the entities responsible for delivering an intervention or service to participants. Implementers work in collaboration with the outcome payer(s) and the investor(s) to make the impact bond work. An implementer can be a private sector organisation, social enterprise, charity, NGO or any other legal form.
The financial, human, and material resources used for a specific intervention or service
Impact bonds are often supported by experts that provide specific advice. These are typically all referred to as “intermediaries” but encompass at least four quite different roles:
Lead or progression outcomes show movement towards a primary (later) outcome. This may be necessary if the primary outcome takes a long time to measure.
Example: For children with highly complex needs, a lead outcome may be better attendance at school that is indicative of progression towards achieving a specific educational achievement (primary outcome).
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A negative externality is a cost that is suffered by a third party as a result of an economic transaction. Externalities commonly occur in situations where property rights over assets or resources have not been allocated, or are uncertain.
The outcome is what changes for an individual as the result of a service or intervention.
Example: Improved learning in school, better mental health, sustained employment
Outcomes-based contracting is a mechanism whereby service providers are contracted based on the achievement of outcomes. This can entail tying outcomes into the contract and/or linking payments to the achievement of outcomes.
In international development these approaches are more commonly referred to as results-based financing.
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.
An outcome measure is the specific way the commissioner chooses to determine whether that outcome can be achieved. Often this encompasses a single dimension of an outcome.
Example: The outcome measure for educational attainment can be a test score; the outcome measure for employment may be a job contract.
The organisation that pays for the outcomes in an impact bond
Outcome payers are often referred to as commissioners.Example: In the Belgian Social Impact Bond “Duo for a Job”, the outcome payer (or commissioner) is Actiris, the Brussels-Capital Region Employment Office. In the Indian Development Impact Bond “Educate Girls”, the outcome payer is the Children’s Investment Fund Foundation.
An outcome target is the specific value attached to the measure of for the purposes of determining whether satisfactory performance has been achieved. In an impact bond, these targets will usually determine whether a payment is made to the provider of investor.
Example: A test score of 95 out of 100 or improvement of 30 points in a test score over a 5 month period.
The tangible goods and services that are produced (supplied) directly by an intervention. The use of outputs by participants contributes to changes which lead to outcomes.
This is a perverse incentive whereby providers, investors or intermediaries neglect beneficiaries that are less likely to achieve the expected outcomes and leave them outside the cohort. The process of designing an impact bond and defining the target population, outcome evaluation methods and targets must consider potential perverse incentives and include mechanisms to avoid it.
Example: An intervention that promotes employment deliberately excludes participants that are less likely to achieve employment outcomes.
Pay-for-success is the term used in some countries (in particular the US) for impact bonds.
The practice of paying providers for delivering public services based wholly or partly on the results that are achieved
These include both monetary and non-monetary incentives to encourage the achievement of performance targets
These are transfers of money or other material rewards usually between governments, that are provided contingent on improved performance or a particular type of behaviour change
An incentive to act in manner that goes against the desired outcome or aims of a service or programme
A positive externality is a benefit that is enjoyed by a third-party as a result of an economic transaction. Generally these are positive effects that beneficiaries do not pay for.
In an impact bond the primary outcome is the most important outcome in the contract, the one that the outcome payer most wants to see positively impacted.
Acquisition of goods and services from third party suppliers under legally binding contractual terms
Public sector procurement is normally achieved through competition and is conducted in line with each government’s policy and regulation. In impact bonds, the procurement process identifies the partners, namely the services provider(s) to deliver the selected intervention.
Procurement by government or public institutions is an important part of strategic governance and services delivery for governments. Public procurement is often a high portion of a government’s budget and may be a significant portion of national GDP, so is often highly regulated. Public procurement is often used strategically to help achieve policy goals such as environmental protection, job creation and the development of small and medium enterprises. Public procurement is often subject to transparency, accountability, and integrity requirements.
In impact bonds where the government is the outcome payer, procurement processes may play a role shaping the market, in defining the outcome specifications, the terms of the outcomes contract, pricing the outcomes, and selecting the parties. The award of a public contract as part of the public procurement process may in an impact bond may limit the ability to make subsequent changes and be subject to monitoring or auditing by government agencies.
Lead or progression outcomes show movement towards a primary (later) outcome. This may be necessary if the primary outcome takes a long time to measure.
Example: For children with highly complex needs, a lead outcome may be better attendance at school that will eventually lead to achieving a specific educational level (primary outcome).
Also known as a service provider or service delivery organisation, providers are the entity(ies) responsible for delivering the intervention to participants. Providers work in collaboration with the outcome payer(s) and the investor(s) to make the impact bond work. A provider can be a private sector organisation, social enterprise, charity, NGO or any other legal form.
These are indirect measures of the desired outcome which is itself strongly correlated to that outcome used when direct measures of the outcome are unobservable and/or unavailable.
Example: A proxy outcome for managing long term health conditions could be decreased hospital admissions.
Quasi-experimental methods share similarities with experimental design, but they lack the element of random assignment to treatment or control.In quasi-experimental design evaluation, different strategies are used to try to mimic the experimental design principles. Quasi-experimental evaluation presents lower levels of confidence that observed effects may be attributed to the intervention, in comparison with experimental design evaluation.
In the context of payment-by-results, a rate card is a schedule of payments for specific outcomes a commissioner (outcome payer) is willing to make for each participant, cohort or specified improvement that verifiably achieves each outcome.
Example: The UK's Department of Work and Pensions has used rate cards to commission impact bonds.
The profit on an investment, normally expressed as an annual percentage
This is typically the ratio of the income from the investment over the cost of the investment
A payment-by-results scheme between a donor (who pays for the outcomes) and a national government in a developing country (who implements the programme)
A term used in some countries, in particular in the USA, that refers to payment-by-results schemes
After the primary outcomes (the most important) the secondary outcomes are the other important outcomes that the commissioner wishes to see improved. They may capture different dimension of the programme or reinforce the primary outcome.
A type of outcome based contract that incorporates the use of private funding from social investors to cover the upfront capital required for a provider to set up and deliver a service
The service is set out to achieve measurable outcomes established by the commissioning authority and the investor is repaid only if these outcomes are achieved. In the United States, social impact bonds are often referred to as pay-for-success projects, while in Australia they are called social benefit bonds. In Europe they are often referred to as social outcomes contracts.
There is no singular, standard definition of what constitutes a social impact bond. In practice, social impact bond approaches vary across a number of aspects, including: the nature and amount of payment on outcomes; the nature of capital used to fund services; strength of performance management; and social intent of service provider(s). As more projects are being developed across the world, the model is likely to continue to evolve and be adapted to specific local circumstances.
This refers to an assessment of the effectiveness of commissioning services using an impact bond structure compared to other available structures.
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.
An investor seeking social impact in addition to financial return. Social investors can be individuals, institutional investors, dedicated social investment funds and philanthropic foundations, who invest through their endowment.
Soft outcomes depend on measurement which is more subjective and less quantifiable.
Example: An individual's self assessment; a change in behaviour or attitude
A legal entity (usually a limited company) that is created solely for a financial transaction or to fulfil a specific contractual objective
Special purpose vehicles have been sometimes used in the structuring of impact bonds.
Example: The outcomes funder(s) might prefer to contract with a SPV set up specifically to deliver the IB programme. Investor(s) might also prefer this structure since the company that is set up as the SPV is the entity into which they invest. SPV are commonly used because they provide contractual ease and flexibility.
Stretch targets go beyond the targets that are expected and can act as an incentive.
Example: A primary outcome target may be someone being in employment for 13 weeks and a stretch target may be that the person is in employment for 26 weeks.
An outcome that is sustained beyond the duration of the intervention
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Explains the channels through which programmes can influence final outcomes
It describes the causal logic of how and why an intervention will reach its intended outcomes. A theory of change is a key underpinning of any impact evaluation, given the cause-and-effect focus of the research.
Good value for money is the optimal use of resources to achieve the intended outcomes. Optimal means the most desirable possible given expressed or implied restrictions or constraints.
In the UK, the National Audit Office (NAO) uses three criteria to assess the value for money of government spending (i.e. the optimal use of resources to achieve the intended outcomes):
Venture philanthropy (VP) takes concepts and techniques from venture capital and applies them to achieving a social, rather than a financial, return. VP takes a high-engagement approach and is characterised by the investee receiving management support and specialist expertise, as well as financial resources