Impact bonds could offer a paradigm shift towards more effective public services


Social and Development Impact Bonds require enormous effort for the partners involved, but they have a potential to transform the financing and delivery of social services across the globe.

In winter 2015, Courtney arrived at Frontline Services, a not-for-profit US organisation that helps citizens in Cleveland, Ohio. She was 28, living in a shelter for homeless women, struggling with mental health and substance abuse issues and parenting three young children who were in the custody of the county.

Courtney had just about given up hope that she would ever be able to care for her children on her own. Until that point, the county caseworker assigned to her family had little incentive to reunite Courtney and her children because the caseworker’s primary job was to protect the children.

Living with a birth parent is almost always better for a child’s development than foster care, provided the home environment is safe and healthy. Nevertheless, before entering Frontline Services, Courtney had few ways to change the trajectory of her children’s lives. Fortunately for her children, she was walking that day into a social services experiment, one of only seven similar experiments in the US at the time. In this experiment, a social impact bond (SIB) – designed to “pay for success” – the county’s government had pledged to repay private investors for successful reductions in out-of-home placements for children whose primary caregivers were homeless.

This incentive meant that Courtney was assigned a caseworker dedicated to her – someone who would look at her particular circumstances and tailor a plan to help her turn her life around and unite her with her children. Courtney’s caseworker could work across county service providers to identify the right mix of services for her.

The SIB meant that a dedicated group of stakeholders was meeting regularly across government and non-government entities to focus on one thing – reuniting Courtney with her children, and doing the same for other families in similar circumstances.

SIB contracts focus on outcomes, so service providers tailor their services to what works for the target population. They helped Courtney to address her debts with classes in financial management and offered family counselling.

As a result, Courtney was able to reunite with her children, enrol them in supportive school environments and stop the cycle of dependency on the foster care system. The result was not only a better family outcome, but also a reduction in the enormous costs to the county, had Courtney’s children remained in the county’s care.

Impact bonds are changing developing countries
Meanwhile, nearly 12,000 km away, in a village in rural Rajasthan, India, lives a 13-year-old girl, named Punam. She comes from a poor family – her parents are labourers. Although Punam started school at age seven, she became one of India’s three million out-of-school girls, when she was forced to drop out to tend to her family’s goats.

In the same year as Courtney arrived at Frontline Services in Cleveland, Ohio, a field co-ordinator, working for an organisation called “Educate Girls”, arrived in Punam’s home in Rajasthan. He spoke with her parents, explained the benefits of educating Punam and tried to convince them to send her back to school.

Even after multiple attempts, the parents didn’t agree to send Punam back to school. The Educate Girls caseworker returned some weeks later with a volunteer from the community but again failed to persuade the parents. “What benefit will it give her or us?” they asked. “She will eventually marry and her responsibilities will revolve around doing household chores, assisting in farming life, raising children and taking care of her family.”

Nevertheless, Educate Girls made a further attempt to encourage her parents to let Punam attend school. This time, they asked the school’s principal to join them in a final visit to her home. With this added influence, Punam’s parents agreed finally to sending their daughter to school.

Why was an impact bond so important in this case? Because the contract was based on the achievement of outputs and outcomes, Educate Girls field-staff were empowered to innovate at the field level, trying to find solutions for getting Punam into school. Now, two years later, Punam, and many girls like her, are enrolled in and enjoying school thanks to Educate Girls and this Development Impact Bond (DIB), based on the same principle as a SIB, but with a third-party outcome funder, instead of the government.

These two stories capture the real human benefit that can emerge from outcome-based contracts such as SIBs or DIBs.

How impact bonds work
Let’s just re-cap for a moment how impact bonds actually work. In an impact bond, private investors supply upfront capital to service providers to deliver an intervention or program to a population in need. Upon the achievement of a set of agreed-upon results, the investors are then repaid by an outcome funder. With a SIB, this outcome funder is the government. With a DIB, outcomes are financed by a third-party organisation, such as a foundation or donor.

Since the launch of the first SIB in the UK in 2010, the impact bond market has grown exponentially. Last year, some 32 new contracts were signed. As of January, 2018, there were 108 contracted impact bonds (103 of them SIBs, 5 of them DIBs) across 25 countries, along with many more in design. All but one of the 103 SIBs were in high income countries: last year marked the contracting of the first SIB in a low- or middle-income country, the Workforce Development SIB in Colombia.

Most (42) SIBs are in the UK, the country that pioneered the impact bond model with the Peterborough SIB in 2010. The results of that SIB – aimed at rehabilitating ex-offenders – were released last year: reoffending of short-sentenced offenders dropped by 9 percent and the investors were repaid in full. The US has also established itself as a player in the field, coming in second with 19 impact bonds.

The five DIBs include Educate Girls in India, one for coffee and cocoa production in Peru, as well as one for physical rehabilitation across three countries in West Africa, a poverty graduation program in Kenya and Uganda, and the recently launched Utkrisht impact bond for Maternal and Newborn Health in Rajasthan, India.

Characteristics of SIBs
Most SIBs contracted globally are in the employment field, followed by the social welfare sector, which includes programmes to reduce homeless – “rough” – sleeping, or reduce out-of-home placements as in the case of Courtney and her children. Other areas for SIBs are health, criminal justice, education, the environment and agriculture.

Probably about 30 or 40 impact bonds are in design in high-income countries while more than 20 are being designed in low and middle-income countries. We see some difference comparing high income and low or middle-income countries. The majority of impact bonds in the latter are in the health sector, followed by employment and, then, agriculture.

What do these impact bonds look like in terms of size? The smallest one, in terms of beneficiaries, reaches 22 individuals – that’s in Canada. The largest one reaches 650,000 individuals in Washington DC, which is an environmental impact bond focusing on developing infrastructure. It is perhaps a little bit unfair to compare that one in terms of size with the rest of them because it’s a city-wide programme. The next largest in size is the Maternal and Newborn Health DIB in Rajasthan, India, with 600,000 potential beneficiaries.
However, the median impact bonds are reaching about 565 individuals, so they are quite small. Capital commitment of bonds ranges from $80,000 to $25 million. Again, that $25 million is the one in DC. The average is about $4 million and the total upfront capital invested across the impact bonds is over $300 million.

Who is benefiting?
The bonds mostly target marginalised populations, including women affected by violence, young migrants, single mothers, with a few for ex-convicts, vulnerable and young people, people diagnosed with mental health conditions, refugees and individuals with physical disabilities.
What do we know, eight years in about their performance? There have been some outcomes achieved and payments made, such as in the case of the Peterborough SIB, mentioned earlier. In an Australian SIB, 203 children were reunited with their families and the return to investors was nearly 16.5 per cent over the four years of the scheme.

Shifts in public programme behaviour
However, perhaps the more interesting observation is a real shift seen in government and service providers to thinking about outcomes as opposed to paying for inputs. Impact bonds are also driving performance management so service providers are introducing or improving systems of performance management in their programmes.

Impact bonds are incentivising collaboration, between the public and private sectors, but also across government, vertically and horizontally. They are building a culture of evaluation because outcomes must be measured and monitored. Most impact bonds so far have been focused on investment in preventive interventions. There has also been some reduction in risk for governments, which have not paid for outcomes that weren’t achieved.

What are we not seeing so far? It had been hoped that impact bonds would lead to an influx of additional private funding. However, given that government or outcome funders ultimately repay the investors, then that’s not really more money for a particular social service. Impact bonds have also yet to achieve change at scale: the majority are reaching very few individuals and are fairly small in terms of investment.

Many thought that impact bonds would focus on experimental interventions. So far, we haven’t seen that: investors have been unwilling to take that risk. We’re seeing SIBs used in the middle phase of development of interventions, rather than at the “seed” or “at scale” ends of the process. However, the flexibility that service providers are allowed in terms of their service delivery has the potential to encourage innovation. It’s also probably too soon to say whether or not impact bonds can achieve sustainable outcomes in the long run through the systematic change that’s happening but it does appear that the partners currently involved have indeed shifted their thinking.

Challenges of impact bonds
What are the challenges? This is a new form of government contracting, a new way to do business. Co-ordination of all of the stakeholders is difficult: sometimes they don’t understand each other well; just getting all those people around the table can be really difficult. There can be some political constraints and legal barriers.

Key questions remain. Can impact bonds be used at scale? Are they more effective than input-based based financing or traditional payment-by-results? Do the actors in social service provision have the capacity to adapt to the demands of financing tied to results? Can they manage the rigorous focus on performance management that this is likely to entail?

Next steps
It is worth considering what would be needed to expand the use of impact bonds or, more generally, payment by results. The evidence base needs to grow and there is a need to collect more information on services that work and on their costs. Also, potential outcome funders and investors need to be educated in not only the potential of an impact bond approach but also the challenges. There needs to be supporting legislation and regulations to facilitate paying for outcomes both at a country and local level but also within organisations.

To achieve scale, countries could establish outcome funds for particular sectors. The UK government has launched seven outcomes funds and efforts are underway in the US to develop outcomes rate cards. There are several outcome funds being developed to tackle tough social issues in the developing world as well. These would allow the outcome funder to set prices for desired social outcomes and then to contract with service providers to deliver interventions to achieve those results. Global investment funds would also benefit from contributing to this new financing mode.

In the US, $800 billion are spent annually on social services. Only one per cent of that spending is evaluated for effectiveness. In the UK, £220bn was spent on social and health services (2015/2016), yet we know very little about the effectiveness of that expenditure. Thus we need more empirical research which asks: “What do impact bonds achieve, compared with input based financing?” It is also important to know how well impact bonds perform compared with traditional results-based financing. These are both hard questions to answer rigorously and will take some time.

Impact bonds and global problems
The social and environmental problems that we face at a global level are enormous. It’s estimated that $1.4 trillion will be needed annually to achieve the Sustainable Development Goals by 2030. There is little evidence that such complex problems can be solved by continuing the same old failed approaches.

Investing in preventive measures can avoid higher costs down the road and make the public and civil society sectors more efficient. By paying for outputs and outcomes rather than paying for inputs that have unknown outcomes, spending should be more effective.

Impact bonds may not be the right solution to every problem. However, they do represent a long-overdue, paradigm shift. They’re a means to an end, an opportunity to think about, and hopefully produce, systematic change. At the very least, they may be the stepping stone to establishing the monitoring and evaluation performance standards and output planning that can ensure every individual receives the services that they need to live safe, healthy and productive lives.

Dr Emily Gustafsson-Wright is a Fellow in the Global Economy and Development Program at the Center for Universal Education, Brookings Institution, Washington DC.

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