Perspectives on impact bonds: The next five years for international development

Editor’s Note: This blog post is one in a series of posts in which guest bloggers respond to the Brookings paper, “

The potential and limitations of impact bonds: Lessons from the first five years of experience worldwide.”

Reading Brookings’ outstanding report charting the trajectory and lessons from the first five years of Impact Bonds made me reflect on my own journey into impact bonds. It was early 2011 and the first social impact bond in the U.K. had just been launched. As I saw what were then novel ideas start to percolate into the U.S., I couldn’t help but think how this instrument might be used to address some of the unique challenges to delivering services in low- and middle-income countries. The time was ripe for this approach as results-based initiatives were gaining traction in international development. Governments, particularly in Latin America where I was working, had a long history of public-private partnerships. This particular instrument was new, but there was a strong foundation upon which to build.

At the same time, the $135 billion aid industry was confronting some big questions. How should aid agencies disburse hundreds of millions of dollars while ensuring that they were achieving their intended results? How could the private sector be engaged in partnerships centered on clear lines of responsibility, accountability, and results? An increasing amount of rigorous evidence was being generated about what works, but how could an environment be created to scale that evidence into policy? Impact bonds provided a potential response to each of these questions.

It’s what’s inside that matters

While impact bonds spoke to some of these higher-level questions in international development, for them to be more than just the latest development fad, they would need to deliver lasting value. Some of the bells and whistles of impact bonds that draw the most attention (for example, mobilizing private investment capital for social good) matter only if they lead to meaningful change on the ground—a new way of delivering services.

Five years into the use of this tool in the developed world, I see that the application of impact bonds to international development is not so much about the financial innovation, but rather what that financial innovation can unlock. Impact bonds, when designed appropriately, can move from a top-down aid planner’s mentality, to a bottom-up searcher’s mentality. The challenges of poverty, health, and education are rarely simple or straightforward. The solutions are unlikely to be either. Impact bonds can incentivize the discovery and scale of locally appropriate, adaptable solutions to meet the needs of the very poor.

We’re at the early stages of seeing that now in India, in the Educate Girls Development Impact Bond—a unique partnership between Children’s Investment Fund Foundation, UBS Optimus Foundation, Educate Girls, Instiglio and the evaluator, IDinsight. This new funding model is enabling Educate Girls, a nonprofit provider, to change the way they deliver their services—accelerating learning and continually improving program effectiveness over time. Field staff enter data into mobile devices, which are then uploaded into a performance dashboard, enabling staff across the organization to analyze that data on a near real-time basis. Educate Girls’ staff, who are brimming with new ideas to improve their program, can now test out their ideas in a structured, data-driven way. Villages that are struggling to improve girls’ education will now have the data to be able to turn to other nearby villages that have been successful and learn how they do it.

This is not the donor-driven model of reporting common in many development programs. Instead, it’s data being used by those who are producing it, in near-real time, for better decision-making. It’s a structured system for feedback and learning-by-doing embedded in a managerial and funding environment that rewards its use. Unfortunately, this is far too rare in international development.

The devil is in the details

As the report points out in challenging the 10 common claims, impact bonds vary in the degree to which they use performance management to achieve better outcomes.

This is ultimately why a thoughtful approach to designing impact bonds is so critical to getting them right. One thing that the report showed was the sheer diversity of different approaches to impact bonds. The Educate Girls Development Impact Bond was designed to maximize learning-by-doing through program flexibility, while other impact bonds maintain a rigid program model (Ian Galloway, in his excellent response to the report, notes how the Rikers SIB was explicitly designed to maintain fidelity to a pre-defined program model—perhaps to its own detriment). From the choice of how to measure and evaluate outcomes, to the structure of payouts, to whether providers stand to be rewarded financially for successfully achieving outcomes, the variations on impact bonds are endless.

Each of these design features is an explicit choice. Developing a theory of change of how it is that a particular impact bond in a particular place will lead to better outcomes is fundamental to making an informed choice about the most appropriate design. In the Educate Girls Impact Bond, a hypothesis around the complexity of changing social norms around girls’ education and the widely varying contexts in which Educate Girls implements its program (even within the same state of rural India) led to an explicit design that enabled the program to adapt to incorporate new learning. Different theories in different settings will reasonably lead to different design choices.  There is no one-size-fits-all option.

Which leads to my last comment. An impact bond is just an instrument. The nature of public debate tends toward polarizing opinions—those that think impact bonds are universally good, and those that think they are universally bad. Like any instrument, but particularly one with such diversity, the true answer is likely to be somewhere in the middle. Impact bonds need to be applied in the right places and designed in the right ways in order to ultimately achieve their intended goals. Not all impact bonds may be successful in achieving outcomes, but as we look towards the next five years of impact bonds, we need to be thinking explicitly about how we develop a learning agenda to help understand when, how, and why impact bonds drive more cost-effective service delivery.

Michael Eddy is a partner and co-founder at


, a nonprofit advisory services firm that works in low- and middle-income countries in the market development, design, and implementation of impact bonds and other types of results-based financing instruments.

Disclosure: The Children’s Investment Fund Foundation provides support to the Center for Universal Education at Brookings. The Foundation was not involved in the underlying analysis, drafting or production of this post or the related study.