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What are Impact Bonds ?

# What are Impact Bonds 


This comprehensive publication on Impact Bonds is a derivative of many research papers and works and is based on the outline of the educational tutorial on this subject at The middle Road. The purpose of the report is to share a brief on the evolution of Impact Bonds and outline recent findings especially both the positives and negative aspects of these instruments.


Impact Bonds are recent social innovation instruments enabling private capital within the development sector. Structured as a participative public-private partnership model, involving multiple sets of actors, Impact Bonds started as Social Impact Bonds. Impact Bonds bridge the gap of funding between the public and private sectors and transfer the investment risk to non-governmental players. Built around the public-private partnership model, today globally there are 194 impact bonds contracted with $441M capital paid upfront for implementing the projects or  interventions which target specific preventive social outcomes for a financial return. The tool is used to outsource public funding for deterrent social outcomes which public entities might not pursue. Impact Bonds can be divided into two parts i.e. social impact bonds and development impact bonds. Development Impact Bonds are primarily implemented in low- and medium-income countries and the outcome payer is a third party example a donor unlike a government entity for a social development bond. Over a decade various thematic bonds focused on education and healthcare have been contracted. (M: million, T:Trillions). 


Social Impact, first implemented by Social Finance is to pay for success or results-based financing payout structure to reward successful interventions within the global social ecosystem

The middle Road classifies Impact Bonds as part of Sustainable Finance or Sustainable Investing class of social financial quasi derivative instruments focused towards generating social and environmental good along with a monetary return. Its s part of alternative investment class. The bond word is a misnomer with payout designed like an exotic European call option with an all or nothing payout (major structures are designed this way). The product is designed to reward outcome-based performance linked to interventions designed to correct market failures. The key aspects of impact bonds include its public-private partnership model, ability to combine social good with a financial return, an exotic call option with a payout liked to a threshold outcome for investors. Many impact bonds include concessional finance that work as grants to cushion first loss of capital.

# The concept of Blending Capital 

Payment structuring is a form of blending capital for investors. In order to attract private capital, foundations and charities provide grants which act as cushion at times to take the first loss of capital from interventions. Big Lottery Fund and Bloomberg Philanthropies are two examples of guarantee of loss to investors in the first and second social impact bonds contracted. Senior debt is superior to subordinated debt in terms of receiving cash flows from the project.

Example, Pritzker Foundation provided $2.4 million & Goldman Sachs provided $4.6 million of subordinate debt  for high quality preschool programme

The return for investors is usually determined through a predetermined IRR (Internal Rate of Return), percentage or cap of principal amount. To meet the United Nations Seventeen Sustainable Development Goals by 2030, three critical components are required. First, a radical way of attracting private capital within the social and development sector. Based on recent reports, ~ $2 to 3T of capital per year is required to meet the UN SDGs by 2030. The onset of the pandemic has accelerated the need for private wealth with capital markets size value at ~$200.9T globally in 2019. Second, enhancing innovation significantly financial innovation within the gamut of products available. Finally, incorporating evidence-based methodology to drive accountability, transparency, and private investor buy-in. As social scientists started deploying increased use of research methodologies to unfold the social impact of philanthropy and charity, the evidence turned out to be less tenable as previously thought. The figure above depicts key attributes describing an impact bond.

# Actors in Impact Bond 

SIB  works through a collaborative set of actors i.e. public (government as the outcome payer), private (service providers/intermediary/impact evaluators), and technical assistance group (lawyers, academicians, consultants, etc.).  The technical assistance group overlaps with the private sector but is kept here as a separate group. The divisions within different types of SIBs blurs as in many cases the intermediary is also the service provider. Investors are a broad set of actors. Many impact bonds employ quasi-experimental designs, randomized control trials that need specialized skill sets and these actors are known as Impact Evaluators. Service Providers/intermediaries play a key part in modelling the impact bonds depending on the type of SIB. They usually interact with investors to structure interventions, interact with technical assistance providers like lawyers, think tanks/ academicians with regards to stitching the contracts between a diverse set of actors, pre-survey work, etc. The gamut of actors range from sophisticated multilateral institutions to non-profits, specialized consulting organizations, academic institutions/ think tanks, social entrepreneurs to impact investors, foundations, charities, and philanthropists

In depth educational module on Impact Bonds | The middle Road | Tutorials


# Impact Bond- The Journey  

Social Impact Bonds are tools used to transfer the risk of a project to a non-government entity. Investors provide upfront capital to service providers to implement the project. If the outcomes are actively meeting the key performance indicators, the government pays out the desired amount to the intermediary/service providers or directly to the investors. 

Addis Ababa Action Agenda was a significant step in driving innovation and close cooperation within the multilateral, it laid focus on strong technical systems and buy-in from private capital through structuring innovative blended finance deals using equity and debt. Concessional finance helped in promoting private capital into ventures and projects which otherwise would have been nonviable for private funding. Ease of funding helped such enterprises become sustainable mushrooming social entrepreneurs within the global ecosystem.

Fig above: Selected key milestones for Impact Bonds | The middle Road | Middle Road OPC Pvt Ltd 

The first impact bond, the social impact bond was implemented by Social Finance at Peterborough prison in 2010 in the UK to reduce reoffending rates among prisoners serving sentences less than a year. The social innovation tool is designed to fund interventions that might be cumbersome to the time and partnerships involved along with fund budget deficits. As only successful outcomes get funded, the government transfers the risk of the project to investors who are foundations and charities. Most of the SIBs are implemented in developing countries although there are SIBs even in low-income or developing countries. Over the years, another form of impact bond evolved termed Development Impact Bond. The key difference with SIB is that the outcome payer in a DIB is a nongovernment entity example foundation as compared to a government entity in SIB.

flowchart detailing Cameroon Cataract Bond | The middle Road | Middle Road OPC Pvt Ltd 


Development Impact Bonds are prominently contracted and executed in low and emerging markets. The first Development Impact Bond was contracted in India by Educate Girls in 2015 and successfully implemented while the largest DIB is the ongoing World Quality Education India with an upfront investment capital of $11M. The largest environmental bond was contacted in 2016.  (There was a development impact bond which was contracted before Educate Girls but it did not get implemented). 

Humanitarian Impact Bond 

International Committee of the Red Cross (ICRC) launched the first Humanitarian Impact Bond to target people with disabilities in Mali (Mopti), Nigeria (Maiduguri), and the Democratic Republic of Congo (Kinshasa). A type of development impact bond, its funded by La Caixa Foundation and governments of Belgium, Italy, the United Kingdom, and Switzerland are funding outcomes. The Government of Netherlands provided upfront grant finance for design and structuring, the upfront capital would be used by the service provider International Committee of the Red Cross (Physical Rehabilitation Programme) to increase the efficiency of Physical Rehabilitation Program Centers and support at least 3600 disabled people to regain mobility. Also known as Programme for Humanitarian Impact Investment (PHII), ICRC wants to address a global systemic problem among the 90 million disabled people worldwide. Only 10% of these disabled people have access to physical rehabilitation support.  ICRC has pooled in capital from private investors for five years to provide interventions that would help disabled people in post-conflict countries Mali, Nigeria, and Congo improve mobility. The $26.2 (exchange rate 1.00525 11/10/2019) bond is structured to improve the efficiency of 107 physical rehabilitation centers using enhanced data management through an ICT Digital Centre Management System tool.

In recent times, the biggest thrust for impact bonds has come from the alliance between BNP Paribas and the European Investment Fund. Part of the Junker PlanEuropean Investment Fund (EIF) launched the BNP Paribas European Social Impact Bond Fund, a co-investment fund for funding social programs across the EU. BNP Paribas has deep expertise in impact assessment with assets under management of €2.3bn at the end of 2019. 

“The Social Impact Bond concept under the Investment Plan for Europe brings tangible benefits to some of the most vulnerable groups in our society. Already we have witnessed refugees in Finland being re-skilled and matched into jobs; and former military personnel being reintegrated into the workforce in the Netherlands. With this new SIB fund set up by BNP Paribas and the European Investment Fund, children and young people are already being protected, nurtured and encouraged to strive for more,” said Paolo Gentiloni, European Commissioner for the Economy.

The Impact Bond sector journey through time has been slow but steady.  As per Brookings data, Impact Bonds in numbers contracted have risen by 108.6% from 1 Aug, 2017 (93) to July, 2020 (194).  Majority of the impact bonds contracted are in Workforce Development followed by housing/homelessness and health. 

As a major tool, impact bonds are still a long way from being mainstream solution from enabling social change and impact within the global ecosystem. Only $441M capital is deployed which is less than the 1% of capital within the Impact Investing sector based on GIIN report. The bonds duration ranges from 10 months to 5 years with average duration of 42 months. 1

The DIB market is very small with 11 of these bonds contracted based on the data provided by Social Finance. Out of there, India has 3 with South Africa, Cameroon and Columbia with 2 each with Health, Education and Employment as major themes . According to SIFMA, the size of Global Capital Markets in 2019 stood at $200.9T with global debt markets at $105.9T and global equity markets at $95T.

# Types of Social Impact Bonds



Three different types of SIBs are given above.  Intermediated and Managed SIB are very similar in structure except in Intermediated SIB, the intermediary is not invested in the project. DIBs are also structured like SIBs with intermediary i.e. the project implementers having the most power. Example, in Educate Girls Development Impact Bond, Instiglio is the project implementer.  Educate Girls was the service provider, IDinsight served as an impact evaluator and UBS Optimus Foundation as an investor. Children’s Investment Fund Foundation (CIFF) was the outcome payer.                     

Nishant Malhotra, Founder & CEO of  Middle Road OPC Pvt Ltd | The middle Road interviewed Ronald Abraham founding partner and India Director of IDinsight. Read and listen to the fireside conversation here

Left: A flowchart detailing Social Impact Bond

# Impact Bonds : Binary Call Options 

Impact Bonds have a outcome driven payout structure. The options can be binary options although at times there are rewards for multiple outcomes. The prime reasoning of these results based financing is to structure payout only if you have reached predetermined targets.  The underlying principal of these bonds is that the payout is not fixed and is linked to an outcome which is not guaranteed. Although most of the impact bonds achieve success in their interventions, herein also lies one of the biggest pitfalls of this instrument.  Outcomes can be designed to be achieved rather than aiming for the improbable.

Since impact bonds are outcome driven with no certainty of payment they work as a European Exotic Call Option like a Exotic Binary Call Option. Each periodic payment structured as a separate exotic call option dependent on strike price. Strike price equated to K which is the outcome.


Call options are contracts in which the holder the right but not an obligation to buy an underlying asset at a pre-determined price. European call options are a type of option which can only be exercised at maturity. For example, you are bullish on Tesla Inc. stock and think it’s going to rise. The stock trades at 555.38. You can buy a one month option for a strike price of 560. If the stock goes higher than 560 you can make a profit minus the premium you pay for the option. Each lot of option has a fixed number of shares underlying the option. Call options are plain vanilla options, are standardized and traded on stock exchanges. Options on Tesla can be bought on Nasdaq stock exchange.

Exotic call options like binary options have a discontinuous payoff of all or nothing. Exotics are non-standardized options and are designed for specific needs. Usually, SIBs/DIBs are structured to reward only for meeting benchmark outcomes. These outcomes can be subdivided i.e. sets of the outcome. Target 1 achieve payout 1, Target 2 achieved, payout 2. To know more look for the upcoming feature under Tutorials on The middle Road. The key reason for classifying Impact Bonds under derivatives classification is due to its contingent outcome payment.

# What do we know so far ? 

Impact bonds have the following features:

  • Government only pays for successful outcomes or interventions (SIB)
  • Service providers receive upfront payment for the project
  • Evidence based metrics gives a boost to accountability
  • Transfers risk from the government to private players
  • Enables a public private partnership model for solving social and  development problems

# Challenges

Yet the story is a bit blurry. There are multiple complexities involved in setting up bonds with high legal and consulting costs. According to an OECD report titled Social Impact Bonds: State of Play & Lessons Learnt, a quote from Goldman Sachs “Massachusetts Juvenile Justice SIB, one of the largest in the world took 1100 hours of consulting time”. Based on an article published in Stanford Social Innovation Review, SIBs have shown limited social innovation.  The article argues that among the many pitfalls, the social impact bonds have potential to spread wealth inequality. Further, their reach is limited to only ~2M beneficiaries with an average of 11788 beneficiaries per bond. This figure is more troublesome when the data excludes India that has 40% plus of beneficiaries.


Based on Rand Corporation which analyzed HMP Peterborough Experiment in the report, Lessons learned from the planning and early implementation of the Social Impact Bond, highlighted a few concerns.  The report noted risk of cherry picking locality, area at macro level i.e. national and lack of counterfactual for national run outcomes in case of impact evaluation through randomized control trials. To successfully implement SIBs/DIBs takes time along with multiple set of actors for partnerships. In the process many times the experiment could go way beyond its objective which might be beneficial in the long run but not compliant with the objective of the exercise. Considering the time length of many of these interventions, the programs are exposed to changes in government regulations.

These bonds have a financial incentive attached that might not be in tune with the social outcome. Although the return could vary drastically with the only principal to double-digit return on the principal for successfully meeting the targets, it may incentivize social impact washing and easily achievable outcomes. DIBs are primarily implemented in low and emerging markets where data availability could be limited or organizations might not have the technical know-how to implement the solutions. Peterborough Prison, the first social impact bond was abandoned after the second tranche due to new government programme, Transforming Rehabilitation, which required reduction of reoffending among all prisoners with sentences less than 12 months, thus eliminating control group, a prerequisite to carry out randomized control trials. The project was a success with a 9 per cent reduction in reoffending rates against the benchmark 7.5 per cent. However this reiterates the complexities involved within the impact bond set up on both impact evaluation and regulatory aspects.

Finally, the product is not easily scalable. Since its inception in 2010, the beneficiaries are ~2 million globally with more than 40% of them in India. But standardization example London is one way of making it more global. Impact bonds suffer from a liquidity risk so having a global ecosystem along with an exchange with a market-making mechanism to get all actors on one platform is a futuristic step.

With the onset of the pandemic, an unprecedented amount of capital has flowed into the global development sector to develop vaccines and other ancillary industries within the healthcare sector. Only time will tell the social impact of impact bonds within the global arena.

End with lyrics of Enya’s epic song Only Time

Who can say where the road goes
Where the day flows, only time
And who can say if your love grows
As your heart chose, only time………………………………………..



1. Impact Bonds in Developing Countries
2. Brookings What is the size and scope of the impact bond market

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