The focus on social development has grown in recent years as policymakers realize that it is critical for achieving sustainable economic growth. For developing countries, creating social impact is a huge challenge because of budgetary constraints. Moreover, the limited capital is mostly taken up by projects that offer higher economic returns.
Financial institutions, governments, and donors have been exploring innovative options that would allow them to contribute towards a sustainable future. In Western countries, the aftermath of the 2008 financial crisis paved the way for Impact Bonds to deliver social outcomes.
According to Social Finance, a Social Impact Bond (SIB) is a financing mechanism in which governments enter into an agreement with social service providers and investors to finance the delivery of pre-defined social outcomes. The investors are repaid by the government when public value is generated by those projects.
In a successful scenario, the savings from involving private actors to deliver social services are large enough to pay back the investors along with investment returns. On the other hand, Development Impact Bonds (DIBs) are funded by a third party such as a donor agency and are primarily administered in developing countries.
Impact Bonds have generated plenty of interest from investors and donors in recent years. However, there is still a long way to go before these instruments are widely accepted and integrated into development planning.
Compared to traditional financing, Impact Bonds involve more stakeholders making the process complex and costly. They also require regular interventions and close monitoring. The credit risk of these bonds is also tricky to assess as it largely depends on the ability of the service provider to deliver the outcomes. Thus, improvement in their evaluation is required to help their expansion and adoption.
Growth of Impact Bonds
In Saskatchewan, Canada, the local government and Ministry of Social Services entered into an agreement with an investor and a social service provider to offer single mothers with children under the age of eight affordable housing and other benefits to improve their educational and professional standing. In other developed countries, SIBs have also been launched to limit crimes by initiating outreach and targeted skill development programs.
Realizing the potential of SIBs to positively impact societies, many developing countries have witnessed their gradual rise in recent years. Early childhood development, education, and maternal health are some of the key areas target by these bonds in developing countries. Moreover, their implementation is enhancing data availability and inclusivity which are considered vital for long-term progress.
India became one of the first developing countries where an impact bond was launched back in 2015. On its completion, the Educate Girls DIB funded by UBS Optimus Foundation enrolled more than 760 girls and also surpassed its performance targets. Building on its success, the largest education fund worth $11 million was launched in India in 2018. It will run till 2022 and aims to improve learning outcomes for school kids across 600 schools in India.
In 2015, a DIB was also launched in Peru called the Peru Sustainable Cocoa and Coffee Production DIB. It targeted the indigenous Asháninka families living near the Ene River in Amazon who rely on coffee and cocoa production. The fund aimed at improving their production and marketing techniques along with restoring their plots which would ensure reliable production in the future.
The first SIB in a developing country was launched in March 2017 in Colombia and was called the Colombia Workforce Social Impact Bond. The bond focused on creating sustained employment opportunities for young individuals displaced by internal conflicts.
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Improving social outcomes in Pakistan
In June 2021, U Microfinance Bank announced Pakistan’s first SIB aimed at financing renewable energy projects and creating socioeconomic opportunities. The bond will help tackle some of the most pressing challenges faced by the people of Pakistan especially those living in rural areas. If successful, more impact investors could be attracted in the future.
To make these instruments sustainable, the government needs to be more engaged and facilitate their delivery. In developing countries, the focus has traditionally been on physical inputs for the delivery of social services like increasing the number of toilets, classrooms, hospital beds, and so on. This has proven to be an inefficient approach as the availability of extra beds does not guarantee improvement in healthcare services.
Without targeting pre-determined outcomes, there is little incentive to monitor these services which ultimately leads to wastage of public resources. In contrast, impact bonds generate strong partnerships amongst stakeholders and reward efficiency.
It is still early to determine the efficacy of impact bonds but they have highlighted considerable flaws in traditional service delivery methods. If the governments are serious about creating positive social impacts then they have to be more flexible towards such innovative approaches.
Ali Haider Saleem has worked with the Institute of Strategic Studies Islamabad (ISSI) and National Defense University (NDU). His research interests lie in sustainable development, regional integration, and security cooperation. He has studied public policy at Queen Mary University of London and economics at NUST, Islamabad. The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.