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Add to Preferred SourcesThe potential of social impact bonds (SIBs) to contribute to an estimated US$2.5 – 3 trillion in annual investment for the UN’s Sustainable Development Goals (SDGs) has attracted increased attention over recent years.
A social impact bond is a contract with the public sector in which a commitment is made to pay for social services which result in public sector savings. It originated in the UK to address the high socio-economic costs of prison recidivism. Governments reimburse investors in the case of social impact bonds, while third parties, such as donor agencies or foundations, are the outcome funders in the case of development impact bonds (DIBs). Under the model, risks are shifted from the public to the private sector.
In 2019 there were 135 impact bonds in 28 countries, in areas such as employment, social welfare, health, education and criminal justice. With only 10 in developing countries, such as India and Peru, there may be a major growth market for approaches that draw on elements of impact investing or blended finance, as well as public-private partnerships.
Yet, despite the hype, impact bonds are fewer and smaller than momentum would suggest.
UNDP, like the World Bank and the UK’s Department for International Development (UKAid) and USAID, is entering this territory. The tool is still relatively new in developing countries and is often poorly understood. UNDP has tended to focus on early stage exploration and financing for impact bond feasibility studies. These include an impact bond to reduce rhino poaching in Southern Africa, one to support tobacco farmers in Zambia transition to alternative farm and other livelihoods, and another to help dairy farmers in rural Armenia improve productivity. The UN is also developing an impact bond to halt cholera in Haiti. Many are still in the design phase, and only some will come to fruition.
UNDP is identifying greater opportunities to design and structure impact bond deals, as well as to share experiences, tools and models within its organization.
But it’s not easy; there are many moving parts. From feasibility, design, and due diligence it takes considerable time to originate and close an impact bond deal. This can be a significant investment, especially where it is not certain the project will ultimately materialize.
As the market grows, especially in developing countries, it will be critical to observe progress closely, so that valuable lessons can be learned on where, and in what circumstances, these financing tools can be most useful.
Original source: UNDP
Published on 04 April 2019