5 mins read
This chapter sets out what impact bonds are, the key stakeholders involved and how they have developed over time.
In simple terms, an impact bond (IB) is a partnership aimed at improving social outcomes for service users. The service will only be paid for if and when outcomes are achieved.
A more nuanced definition as set by the GO Lab is as follows: 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.
Impact bonds are different from traditional contracts, such as fee-for-service, or grant-based contracts as they are focused on the outcomes rather than the inputs and activities. For example, an impact bond that is seeking to support young people at school would be more interested in improvements in grades (outcomes) rather than the fact that the children were going to after school classes or seeing a mentor (activities). This is a rather simple premise, but in practice it can be complex as designing a service around outcomes brings new challenges.
As with any contract there is a process of putting the idea into practice. For an impact bond this involves developing the business case, managing relationships, designing the services, planning for delivery. You can view our interactive impact bond lifecycle to see the process in more detail.
Impact bonds bring 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 as shown below.
Outcome payers identify the unmet needs and express a ‘willingness to pay’ for specific social outcomes. Often times the outcomes payer will initiate the impact bond. In high-income countries these are often government departments who are responsible for the specific thematic issue being tackled. In low- and middle-income countries these may still be government departments, but are more likely to be donors who are pursuing positive social outcomes in specific thematic areas. For example:
Service providers offer a service or intervention intended to meet the needs of those beneficiaries and to achieve the outcomes desired. As in other forms of outcome-based contracting, the payment to the provider (wholly or partly) depends on whether outcomes are achieved. They have sometimes been the initiator of the impact bond, but this is less common. The service provider can be a non-profit, and NGO or may even be a private company. For example:
Investors provide arrangements to finance the project over its duration, rather than expecting the provider to finance from their own services or from loans with set payment schedules. Repayment to investors is based (wholly or partly) on whether the outcomes are achieved. This protects the service provider from (all or part of) the financial risk. The explicit involvement of one or more investors differentiates IBs from other forms of outcome-based contracting. They may be from foundations, corporates, banks or other private investors. For example:
Whilst these are the three main partners, there are often other actors involved. They are Intermediaries and Evaluators:
IBs sometimes use experts to provide specific services, often referred to as intermediaries. They encompass at least four quite different roles.
In many cases there will need to be an independent evaluation to determine whether a project has delivered according to the objectives set out by the contractor. The scale and form of the evaluation required for an IB will need to be decided early. This includes whether the evaluation should be commissioned externally or conducted in-house, either partially or wholly. Read the technical guide on evaluating outcomes-based contracts to give you an understanding of what you are trying to answer in your evaluation and some practical considerations to make.
Having explained the definition and key stakeholders of impact bonds, it is important to explain that there are different types and terms used to describe them.
Whilst there are differences between the way these countries design and develop these programmes, they are referring to the same programme. This guide will speak of ‘social impact bond’ when referring to these programmes as not to confuse the language.
In low- and middle-income countries impact bonds are referred to as ‘development impact bonds’ (DIBs). There is a distinction to be made here that is more than the terminology we use. The difference between SIBs and DIBs is who pays for the outcomes. In a SIB, the outcome payer is the government, whilst in a DIB the outcome payer may be a donor, such as a government or multilateral aid agency, or philanthropic funding. You can see this distinction in the examples provided above.
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An overview of why and how impact bonds emerged in the UK and then across the globe.
In 2009, UK Prime Minister Gordon Brown, committed the Government to piloting social impact bonds as a new way to fund the delivery of public services. They were proposed as a tool that would be used to tackle the most complex social problems in society, such as homelessness, long term unemployment or children on the edge of the care system. They would do this through bringing together multiple stakeholders and the government would only pay if outcomes were achieved. The idea was that new ideas could be trialled to tackle problems that had no easy solution.
The first impact bond was implemented in Peterborough prison in 2010 to reduce reoffending rates, known as the One Service. This has grown rapidly over the last decade (see Projects database to see the latest). They are working across a range of sectors, such as supporting children on the edge of the social care system, helping homeless people find sustainable housing, and helping integrate refugees into society.
The video below explores how impact bonds have developed since they began in 2010. Dr Chih Hoong Sin is Director at Traverse and has been closely involved with many impact bonds during design and development stages.
As impact bonds began to build momentum across the UK the international community became interested. In 2012, the Center for Global Development (CGD), in partnership with Social Finance, formed a development impact bond working group to explore the feasibility of implementing impact bonds in low- and middle-income countries. This work shifted the potential pool of investors and outcome funders from domestic institutions to international organisations.
In 2013, the CGD/Social Finance working group reported on challenges and benefits of the development IB model. The final report included six case studies to describe potential application scenarios. One of these case studies was the template for the Educate Girls impact bond launched in India in September 2015. In Peru, a few months earlier, the Asháninka Impact Bond launched in February 2015 as the first development impact bond.
The total number of impact bonds around the world is increasing. You can see our Projects Database for the latest data on impact bonds that have been launched around the world, and an interactive map to explore the data. You can also see the Case Studies for a more in depth look at projects around the world.
Here is a timeline for how impact bonds have developed across the world. This offers a quick snapshot of activities, rather than a comprehensive list. Exact dates are debatable but the timeline reflects consensus where possible.
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This chapter will look at some of the potential benefits and limitations of impact bonds, and provide an overview of the emerging evidence around them
Proponents see impact bonds as an innovative model that can help tackle complex social problems. From this perspective, outcome payers can try new approaches without fearing they have to pay if it is unsuccessful. Investors can help bring new ideas into practice, and providers can improve their practice by focusing on achieving real outcomes. Here is a more in-depth look at the potential benefits. This is not comprehensive, but gives a flavour of the main benefits cited:
Detractors may see impact bonds as contributing to the financialisaton of services for the most vulnerable populations. From this perspective, outcome payers may see them as complex and expensive option, service providers may feel it is against their ethos, and investors may see them as bespoke and not possible to scale. Here is a more in depth look at the potential limitations, again, this is not comprehensive:
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This chapter gives an overview of the evidence around impact bonds, from a UK perspective and then looking to evidence around the world.
As impact bonds began in the UK, a lot of the research has emerged from there. After looking at the state of play of all the social impact bonds to date, the GO Lab produced a report collating all the evidence. This is useful starting point.
The report was published in July 2018, it is entitled, Building the tools for public services to secure better outcomes: Collaboration, Prevention, Innovation. This report found that impact bonds have the potential to overcome perennial challenges in government which are: the fragmentation of public services, a short term political and financial focus, and difficulty creating change.
The report found that impact bonds may help to reform the public sector through facilitating collaboration, prevention and innovation. The figure below sets out a theory of change which illustrates how IBs may do this and also explains the three factors of collaboration, prevention and innovation.
Collaboration – IBs may encourage collaboration as outcome payers and service providers can work together and ‘wrap around’ citizens to meet their needs.
Prevention – IBs may encourage earlier intervention to prevent a crisis which saves money in the longer term and tackles the root causes of the problem.
Innovation – IBs may encourage innovation as risk is transferred to the investor so there is room to try new interventions or new forms of delivery and performance management.
Understanding the 'impact bond effect'
Rather than asking the question around whether impact bonds work, it is important to consider whether impact bonds are better than other ways of delivering and funding services. Currently, there is no conclusive evidence that impact bonds are better than other ways of delivering public services, such as grants or a fee for service contract. The figure below looks at the challenge of understanding how the impact bond works in the context of how it is contracted, not just whether impact bonds work. Many evaluations do not cover this important consideration.
There is a small and increasing evidence based on impact bonds in low- and middle- income countries. Several reports have mapped and analysed this innovative financing structure. Qualitative analyses focus on interviews to examine the structuring processes, such as this report by the Center for Global Development and this report by Save the Children. However, currently available studies suffer from a common problem – a lack of (quantifiable) evidence about implementation.
As of November 2018, 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. The Asháninka Impact Bond project ended in late 2015 and Educate Girls released results of their impact bond in July 2018. No further evidence will be available until 2020, with the (planned) completion of the Utkrisht Impact Bond and Village Enterprise DIB.
In July 2019, DFID published an evaluation report of the four pilot DIBs – the ICRC Humanitarian Impact Bond for Physical Rehabilitation, Village Enterprise DIB, Quality Education India DIB, and Cameroon Cataract DIB. This report shed some light on how the DIB mechanism affects the set up and design of development projects. Future reports will examine how the DIB mechanism affects project delivery (in 2020) and performance and sustainability (in 2022).
For many outcome payers, value for money is an over-riding priority. Good value for money is the optimal use of resources to achieve the intended outcomes. In the UK, the National Audit Office (NAO) uses three criteria to assess value for money of government spending: economy, efficiency and efficiency.
While IBs can be costly to develop, there are a few ways that a well-designed IB might help to ensure value for money:
Unlocking this value for money depends on a combination of sound design of the contract terms, and good quality relationships between the different sets of stakeholders. Forthcoming GO Lab research suggests three aspects of a contract that should be tightly specified in order to have assurance a contract will deliver value: the cohort, the outcomes, and the price of the outcomes (see "Designing a robust framework" below). However, the degree of technical know-how and stakeholder negotiation required to define this ‘outcomes specification’ in detail needs to be balanced with the time and resource available to develop and launch the contract (the so-called ‘transaction costs’).
You can read more about these considerations in our technical guides on Setting and Measuring Outcomes and Pricing Outcomes. You can also understand more about the different terms used in our glossary.
There are many different publications that look at impact bonds and the evidence to date. There are many more in our Publications Library, but here are our top five to read:
1. Building the tools for public services to secure better outcomes: Collaboration, Prevention, Innovation, the GO Lab’s first publication, looking at the state of play in UK social impact bonds. Government Outcomes Lab, 2018.
2. The potential and limitations of impact bonds by Brookings Institute. Emily Gustafsson-Wright. 2015.
3. Center for Global Development and Social Finance (2013). Investing in Social Outcomes: Development Impact Bonds. The Report of the Development Impact Bond Working Group.
4. Gustafsson-Wright, E. et al. (2017). Impact bonds in developing countries: Early learnings from the field. Brookings Institute.
5. Oroxom, R., Glassman, A. and McDonald, L. (2018). Structuring and Funding Development Impact Bonds for Health - Nine Lessons from Cameroon and Beyond. Center for Global Development.
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Now you understand what an impact bond is and whether it sounds like something you would like to pursue, it is important to consider whether it is actually feasible. You will need to consider both the technical processes involved and the relationships that need to be built and nurtured. Knowing whether your impact bond is feasible can be a challenge, but is crucial to avoid extra challenges further down the line. Here is a checklist of things you need to consider:
Outcome payers may seek to explore:
Contractors may seek to explore:
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Impact bonds relatively new, complex and it may be hard to find impartial advice. If you are interested in impact bonds and want to see what else has been done across the world you can look to our knowledge bank:
If you are interested in designing and developing an impact bond you may need more technical support. We have a range of online guidance available in our toolkit:
If you are interested in speaking with one of our team about impact bonds you can book an advice surgery. You may have a specific question, something about the technical process, or a challenge you have come up against.
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The GO Lab has put together this guide with help from many members of the team. We are also grateful to MAZE who reviewed the document and provided useful comments.
We have designated this and other guides as ‘beta’ documents and we warmly welcome any comments or suggestions. We will regularly review and update our material in response. Please email your feedback to firstname.lastname@example.org.