Learning About Innovative Financing through Impact Bonds

Giving Compass’ Take:

• Innovative financing is necessary in order to accomplish the Sustainable Development Goals. The three types of impact bonds discussed in the article rely on blended finance mechanisms involving both public and private sectors working together to obtain funding.

• What are the potential difficulties or speed bumps with these financing bonds? 

• Read about how philanthropists are involved with innovative financing for global health problems. 

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While remarkable progress has been made in human development indicators in recent decades, significant global challenges remain. Over 800 million people are living on less than $1.25 a day and 263 million children and young people are out of school.

The United Nations’ sustainable development goals (SDGs) outline an ambitious global agenda for ending poverty and hunger, ensuring good health and quality education, and promoting jobs and reduced inequalities. However, governments and multilateral organizations will face considerable challenges achieving these aims. In education alone, the Education Commission in 2016 estimated a funding gap of $1.8 trillion per year to ensure quality education for all children.

Achieving the SDGs will require governments and multilaterals to develop and apply innovative financing tools to make the best use of existing funds. Results-based financing represents one tool that governments and multilaterals can use to ensure that funds are directed most effectively toward populations in need.

Social and development impact bonds, one form of results-based financing, have the potential to shift the focus of participants to outcomes, encourage performance management and adaptability, promote learning through evaluation, and create a clear case for investing in what works.

• Impact bonds blend impact investing, results-based financing, and public-private partnerships: In an impact bond, private investors provide up-front capital for social services and are repaid by an outcome funder contingent on the achievement of agreed-upon results.
  •  Social impact bonds (SIB), also called pay-for-success (PFS) in the United States and social benefit bonds (SBB) in Australia, the outcome funder is a government entity.
  • Development impact bonds (DIB), “development” referring to their primary application to low- or middle-income countries, this is usually a third party such as a donor or foundation

Since there are only three DIBs with operational experience, much of the analysis of this report focuses on the design and negotiation phases of the impact bond contracting process.

Read the full article about innovative financing by Emily Gustafsson-Wright, Izzy Boggild-Jones, Dean Segell, and Justice Durland at Brookings

Achieving the SDGs will require governments and multilaterals to develop and apply innovative financing tools to make the best use of existing funds. Results-based financing represents one tool that governments and multilateral can use to ensure that funds are directed most effectively toward populations in need. Ensuring that resources are spent only on interventions that achieve desired results has the potential to better target social services and to hold funders and service providers accountable for what they deliver. Social and development impact bonds, one form of results-based financing, have the potential to shift the focus of participants to outcomes, encourage performance management and adaptability, promote learning through evaluation, and create a clear case for investing in what works.

Read the source article at Brookings