Raising finance for projects which are socially important but have little appeal to hard-nosed investors has been a major challenge for governments and donor agencies in the past. But now a new instrument has been developed which offers a fresh way forward—Social Impact Bonds.
These bonds provide a mechanism for fund raising to meet social objectives, while still providing a return attractive enough to entice investors. It also has appeal to investors who want their investment to have a social impact.
The mechanics work like this. A bond issuing institution, typically backed by governments and other donors, enters into a contract with an agency providing social services. Performance targets for the services are agreed on and the institution then issues the bonds. The money raised from the bonds is used to fund the provision of the social services. If performance targets are met, donors will make payments, part of which can then be used to repay the bond investors. There can also be a provision to make additional incentive payments to both the service provider and investors if the targets are exceeded.
The first Social Impact Bond was launched in the United Kingdom in 2010 with the goal of reducing reoffending among a group of prisoners who were being released. The initial result from the project was positive with a reduction in reoffending of 8.4%, exceeding the target of 7.5%. Investors as a result got back both their principal and a return from the better than expected outcome. Another example was a successful development impact bond launched by private donors to educate girls in Rajasthan, India.
The excitement these bonds have generated in the development world is that they provide an innovative way of funding and delivering social services. They also provide an incentive for service providers to focus on outcomes which are efficient and cost effective, rather than simply relying on blanket government funding. As a result, social services which have traditionally been neglected might now get more support.Social Impact Bonds also provide an opportunity to tap private investor funding at a time when governments face significant fiscal constraints on financing social services.
It needs to be noted at this point, however, that while these bonds have great promise they are unlikely to be appropriate for all types of social services. Given the focus on meeting performance targets and outcomes, they are better suited for activities which can show results in a relatively short period and where improvements can be easily measured.
Could Social Impact Bonds take off in Asia? While these instruments have grown in popularity, they remain largely concentrated in the United Kingdom and United States. In Asia, most countries still have limited social services and fiscal capacity, undermining their ability to support these bonds.
However positive steps forward are being made which could benefit Asia and encourage greater government involvement in future. The United Kingdom’s Department for International Development has announced it will issue a development impact bond
to fight sleeping sickness in Uganda and the Inter-American Development Bank has set up a fund
to promote the development of a social impact bond market.
If these efforts succeed, we might see more of these bonds being issued in Asia. This will have substantial benefits, including more public-private partnerships and an increase in private fund flows, helping to make up for limited available official aid.
Still there are number of challenges to be overcome before Social Impact Bonds can be widely accepted in Asia. There will need to be a standardization of the types of impact investments to be made, and how they will be measured and evaluated. In Asia, where not much development data is available, it might be difficult and costly to verify that performance targets have been achieved. An enabling framework to encourage development of a market will be needed, and governments will need to boost their capacity to implement and evaluate Social Impact Bonds.
Finally there is also a need for a platform to share experiences about Social Impact Bonds across the region to encourage best practices.