Social and development impact bonds (or SIBs) are a form of results based financing (RBF). Effectively, the private sector takes the upfront financial and delivery risk, and is rewarded by either governments or philanthropic organization on a pre -greed scale of delivered and verified outcomes.
SIBs came much heralded to the scene of impact investing world in 2010, but practitioners are divided about their pros and cons.
Here are my 10 learnings from the practitioners on the positives and negatives.
Understanding these will help investors and outcome payers pick the right structures and topics for these novel instruments.
3 pros of impact bonds
#1: SIBs bring private sector capital to solve social problems that otherwise would not have come.
#2: They encourage innovation and risk taking by the private sector which Governments often cannot, leading to tested projects that are ideally scalable.
#3: No results, not payments, no wasted public or philanthropic resources.
#4: They strengthen public sector, civil society and private sector partnerships.
#5: Private sector involvement pushes for more cost-effective use of resources
3 cons of impact bonds
#1: Those risks taken? They are actually about peoples’ lives and the environment. Talk to them, too.
#2: Known programs are presented as innovative when they are not, leading to undue rewarding of non-existent risks, and corrupt use of public resources.
#3: Private sector’s push for cost effectiveness may mean short term visioned cost-cutting on critical programs.
#4: Structures may be administratively expensive, shifting resources from where they are needed.
#5: The bond periods and the outcomes measured during that period may lead to ignoring of systemic issues.
There is an undeniable fact. We need more innovation and resources to address social and environmental problems.
If we design SIBs based on over 10 years of lessons learned, they are a great vehicle to mobilize private sector resource, innovation and drive. Here is a resource to start learning some of those lessons.
Read this post and more on my Typeshare Social Blog
