More than 10 years into the impact bond experiment, pandemic conditions have tested the financial tool’s effectiveness and sustainability. In the course of these trials, the market managed to expand and produce new case studies. It is no longer just the developed world experimenting with impact bonds.
“Ambiguous” Impact Bonds
Impact bonds, also known as social impact bonds, development impact bonds or pay-for-success projects, are a relatively recent financing tool for implementing public works, introduced in 2010 in the U.K. The basic premise is that private investors (for-profit or philanthropic) front the costs for public programs, receiving returns on investments from their government partners if programs meet performance targets.
These bonds are at times lauded as a “win-win” solution for policymakers and investors; a government protects itself from the cost of failed programs while private entities have the opportunity to profit from investments. Supporters also hold that impact bonds foster innovation and cooperation in tackling pervasive social issues. There can be a great deal of experimenting with impact bonds.
Detractors raise concerns about technical complexities posing a barrier to implementing these bonds and the associated programs. It can be difficult to find trustworthy investors with aligned interests. There also are more general concerns about ethics, accountability and transparency in these programs. These concerns apply both to government institutions and investors. Inviting private enterprises into public works might mean giving investors more control of public policy.
Impact bonds remain “ambiguous” with neither side being proved right or wrong. It is difficult to disprove either side and, because of a lack of control studies, it remains undetermined whether impact bonds themselves contribute to a program’s success. Impact bonds and research around them are relatively young, with only a small market to examine.
The Developing Market
The existing market still offers valuable insight. The Brookings Institution reported that there were 214 active impact bonds in 35 countries as of June 2021. These bonds became concentrated in developed countries like the U.S. and U.K. However, developing countries such as India and South Africa began experimenting with impact bonds as well.
Of 49 completed bonds globally as of July 2020, Brookings found that only two failed to meet performance targets and did not lead to repayment to investors. Of those that yielded returns in addition to repayment, the average return was $2.5 million. On the surface, this indicates that impact bonds are successful, but further study is still necessary.
In addition to the Brookings report, a study identified the number of impact bonds launched in different areas of intervention as of August 2020. Fifty-one bonds, the greatest number in any area, were launched in the employment and training sector. There were comparatively fewer bonds launched in the family welfare, health and homelessness sectors — around 30 to 33 each.
Twenty-seven bonds were due to be launched in the education and early childhood development sectors in 2020. These new programs all deferred start dates due to the pandemic. However, pre-existing bonds in both these areas were active throughout the pandemic.
Impact in the Developing World
The Quality Education India Development Impact Bond fared well in 2020, meeting targets and improving literacy and numeracy outcomes for more than 200,000 primary school students halfway through its contracted duration. The program was initiated in 2018 to meet the needs of marginalized students. As of 2018, only 74.4% of Indians were literate and most of them were men from urban areas. Girls in rural areas were the most disadvantaged in accessing education.
Two South African bonds ended in 2020. Bonds4Jobs was initiated in 2018 with the aim of helping unemployed youth find positions via training and more effective “job-matching” services. The unemployment rate in South Africa is staggeringly high, sitting at more than 30% at the end of 2020. Though the program ended early due to the pandemic’s negative economic impact, it successfully met its targets in its first year and nearly met its 2020 targets before shutdowns began. The bond delivered 7-11% returns to investors in addition to full repayment.
The other South African investment, the Impact Bond Innovation Fund, ended its program in November 2020 as planned. The program “provided home-based early learning services to preschool-aged children in two impoverished communities in the Cape Metro area: Delft and Atlantis.” Only one in three South African children attend preschool or Early Childhood Development (ECD) centers. In three years, the program recruited and retained more than 2,000 children in its early education programs. It struggled to reach its other targets, but experimenting with impact bonds provided South Africa with a useful test model for home-based early education, among other strategies.
Experimenting with impact bonds holds advantages. Studies posit that impact bonds would be a particularly useful tool in the education sector of a post-COVID-19 world. Within this sector, targets are more readily set and evaluated and there is strong appeal for potential investors. Furthermore, partnerships around impact bonds could help foster growth and development in student skills.
This hypothesis will be tested as the market continues to develop alongside new bonds and associated programs. With further experimentation, especially in terms of evaluating program success, impact bonds will continue to shift and change until there is an accurate picture of their titular impact.
– Mckenzie Howell