IMPACT INVESTING AND SOCIAL IMPACT BONDS
IMPACT INVESTING AND SOCIAL IMPACT BONDS

Summary/Abstract: Impact investing is growing at a fast pace as the world are being more aware of the tremendous social and environmental challenges. Impact investing are investments that are made on a market-structure approach, to generate a measurable social or environmental impact as well as a financial return. Among the different instruments used for impact investment, Social Impact Bonds appeared in 2010 to catalyse private funds to much needed social interventions. To address complex social problems like poverty, inequality and unemployment, the governments’ budgets are clearly insufficient and in the aftermaths of the 2008 financial crisis, these problems escalated. This innovative financing instrument become very popular because governments were very enthusiastic with the opportunity provided by SIBs to deliver better social services to the public without compromising public accounts and with this solution, overcoming overstretched budgets. Typical areas of SIBs application are education, social care, unemployment, criminal justice, health and homelessness. A SIB is a result of a public-private partnership. Public entities contract on a pay-for-success basis with a private sector intermediary. A relevant group of investors provides the upfront funding for the project. After raising the funds from private investors, a service provider contracts with the operator and is provided with the required capital and technical assistance in return. The interesting feature is the shift of responsibility from government to a service provider and the risk of failure to private investors. Only if the intervention has been successful, the government will pay for the outcome. Otherwise, if the program fails to meet agreed outcomes, investors will take the loss. However, SIBs must be seen as a complement rather than a substitute for public service delivery and funding, because SIBs entail significant transaction costs. Policy makers should evaluate carefully what is the value added for implementing a SIB for a policy intervention compared to a more traditional approach. The expected benefits obtained from SIBs are far from consensual and the results are mixed. Additionally, the majority of SIBs are in the early phase of implementation with limited evidence regarding their results. Further analysis is needed in order to develop a robust evidence base. Are SIBs an effective tool for long-term development? So far, SIBs have been implemented particularly in developed countries but its potential in emerging and developing countries is more promising. This paper discusses the promises and results of SIBs, the role of similar and more recent instruments such as Development Impact Bonds (DIBs) and Environmental Impact Bonds (EIBs) and its potential to contribute to the attainment of the Sustainable Development Goals.

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