Social and Impact
Impact Bonds: Harnessing private capital for service delivery to enable COVID relief & recovery
10 May 2021

Skill development and employment impact bonds are gaining traction in India as a vehicle to attract private capital for development considerations, with a clearly defined line of sight on return on investment from the outcome payer investments.

Over the past 10 years, developing countries, especially India, have started making concerted efforts on improving social outcomes and boosting investor confidence, achieving sustainable governance, and improving citizen-centric delivery. 

India’s three impact bonds/development impact bonds (DIBs) cover 907k beneficiaries with committed capital of US$ 7.78 million.

Globally around 211 impact bonds across 35 countries, with committed upfront capital of $437.27 million have been financed in the majority of sectors covering social welfare, employment, education. The average contract duration for the contracts has been 51 months. Impact bond issuance grew 60% in 2020. Development impact bonds have become more valuable in guiding tool to meet the SDG goals.

Data suggest that more investors have achieved ROI before the intended duration of such project /initiatives and are successfully transitioning towards self-sustaining models without compromising on governance and project outcomes. It has been observed that such initiatives are often part of a long-term investment strategy in a developing market where the social objectives are yet to be realized fully. Fostering innovation delivery, building a culture of monitoring and evaluation, reduce governance, achieve scale and sustain impact and focus on outcomes are core to impact bond structure. Significant investments are likely to be made in sectors such as social welfare, employment/income generation, health projects. India has reached a stage where sectoral performance across public programs can be addressed through the expansion of such financial models and investments from private capital businesses which are socially inclined towards improvements in respective sectors. 

Due to variations in implementations and governance applied, results are different across regions. Service providers also target implementations where the results are closer to achieving the outcomes. So whether the bonds are reaching the beneficiary personas? Few instances also indicate that in completed impact bonds, services may not always reach to the most vulnerable. This brings a deeper focus on qualitative impact assessment and the need for intense monitoring, accurate reporting on evaluation of impact. Thus, rigorous due diligence is vital.

With the COVID-19 pandemic disrupting lives and livelihoods, especially in the case of low-income and vulnerable sections of the society, impact bonds can prove to be tools of innovation and guard towards the investments. The current pandemic situation exacerbates the annual investment gap of US $2.5 trillion in low-income countries and Government finances are already stretched due to pandemic-induced spending on healthcare infrastructure and capacity building. This brings into perspective the importance of innovative means of attracting private capital, impact bonds being a clear case in point. Investors are keen to pool in capital and resources to innovate, act swiftly and accelerate towards social objective trajectories. 

As few Government programs might lose focus and funding considerations, this might be a better opportunity for investors to commission few social services more effectively through DIBs. However, investment vs funding social objectives have different use cases, differ in actions, outcomes. Some of the key considerations for the recovery from COVID that will pave the way for impact investments are:

  • Cost-effective, innovative service delivery
  • Cross-sector perspectives and partnerships, process scalability, and data transparency
  • institutionalized capacity building and delivery resilience
  • Mitigating any program objective risks, losses and plugging gaps to align and bring issue focus
  • Sustain impact and incentivize participants
  • A qualitative approach with a clear roadmap

After developed economies such as the USA which recently saw US$36 million raised for ‘career impact bonds’, India seems to be an ideal market for attracting private capital to invest in outcome-linked payment structures via impact bonds.

Authored by:

Lokesh Bohra, Sr. Vice President, Social and Impact Advisory

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