Impact bonds arrived in the U.K. around 2010 as an innovative financing tool to address pressing social service delivery challenges. In an impact bond, a form of results-based financing, an investor provides upfront capital for social services programs, and this investment is repaid—often with interest—based on the program’s achievement of predetermined outcomes. In a social impact bond, the repayment is made by government, while in a development impact bond, the repayment is made by a third party, usually a donor organization or a foundation.
Given the social services financing gaps in many countries today, governments and other funders are increasingly looking toward impact bonds to use limited resources more effectively. This tool has attracted attention due in large part to the role of private capital investment in providing public or social services, but despite this attention, many key questions remain. After six years of Brookings research on the global impact bonds market, one of the key gaps in the evidence base is how to judge whether the tool is a success. To begin to answer this question, Brookings has published a series of five policy briefs evaluating evidence across five dimensions of success, ranging from impact bond growth trajectory to considering the costs and benefits of impact bonds.
Findings are based on research by Brookings since 2014 that includes review and analysis of reports, studies and academic papers, hundreds of structured and unstructured interviews with impact bonds stakeholders, and participation in and convening of discussions in private and public high-level fora. The briefs are also informed by the Brookings Global Impact Bonds database, which systematically collects data on each active and completed impact bond. The research has benefited enormously from the transparency of the stakeholders involved in impact bonds and their willingness to share their experiences, challenges, and successes. Brookings is grateful for their contribution to the research.
The first brief explores impact bonds’ growth trajectory since the launch of the first one in 2010, the current size of the market, and their geographic and sectoral spread. It also analyzes drivers of growth and barriers to scale and posits the potential for the future of impact bonds and outcome-based financing more broadly.
The second brief sheds light on the beneficiaries, or those individuals who receive the services and interventions financed by impact bonds. It highlights the beneficiary voice and considers some of the challenges and strategies to ensure that interventions reach those individuals most in need of the services.
The third brief examines available data on outcome achievement and investor returns on completed impact bond projects across the globe. It also examines the critical processes in an impact bond of defining and determining outcomes, payment thresholds, and the methods for verification of outcome achievement.
The fourth brief examines the evidence for how impact bonds affect the larger ecosystem of social service delivery and financing. The influence of impact bonds as a mechanism is considered, independent of the targeted outcomes achieved by the impact bond interventions themselves.
The fifth brief considers perhaps the most critical question to evaluate the success of impact bonds: whether, given costs and benefits, impact bonds are an efficient and cost-effective way to contract and finance the delivery of social services. It explores a set of theoretical assumptions and a thorough analysis of potential costs and benefits to provide a nuanced analysis of impact bonds compared to alternative financing mechanisms, as well as identifies ways to potentially lower the design and implementation costs of impact bonds.