IMPACT BONDS IN DEVELOPING COUNTRIES: Early Learnings from the Field 2 | IMPACT BONDS IN DEVELOPING COUNTRIES IMPACT BONDS IN DEVELOPING COUNTRIES: Early Learnings from the Field SEPTEMBER 2017 Emily Gustafsson-Wright is a fellow at the Center for Universal Education at Brookings Izzy Boggild-Jones is a research analyst at the Center for Universal Education at Brookings Dean Segell is a manager at Convergence Justice Durland is a knowledge associate at Convergence ACKNOWLEDGEMENTS The authors would like to thank Brookings gratefully acknowledges many people for their contributions the program support provided to the to this study. First, Alison Bukhari, Center for Universal Education by the Toby Eccles, Safeena Husain, Jane Government of Norway. Newman, Peter Vanderwal and Maya Ziswiler for their helpful comments, Brookings recognizes that feedback and insight on earlier drafts the value it provides is in its of the report. In addition, we would absolute commitment to quality, like to thank all those who supported independence, and impact. Activities with data collection for the Deal Book, and provided real time updates on the supported by its donors reflect this factsheets for each deal. We would commitment. also like to acknowledge those who participated in the impact bonds workshop in London in November 2016, whose valuable insights have Convergence is an institution that formed the core of this report. We connects, educates, and supports are particularly grateful for the investors to execute blended finance contributions of stakeholders involved transactions that increase private in the contracted impact bonds with sector investment in emerging whom we have had more in-depth markets. Convergence features three conversations over the last several offerings: (1) Investment Network: years. An online platform where investors can connect with deals in emerging The Brookings Institution is a and frontier markets. (2) Market nonprofit organization devoted to Building Tools: Knowledge resources independent research and policy to help investors improve their solutions. Its mission is to conduct blended finance understanding and high-quality, independent research capabilities. (3) Design Funding: Grant and, based on that research, to funding for practitioners to design provide innovative, practical innovative financial instruments that recommendations for policymakers would otherwise be too risky or and the public. The conclusions and complex to pursue. recommendations of any Brookings publication are solely those of its author(s), and do not reflect the views of the Institution, its management, or its other scholars. 4 | IMPACT BONDS IN DEVELOPING COUNTRIES TABLE OF CONTENTS 06 INTRODUCTION 08 IMPACT BOND PRIMER 14 GLOBAL LANDSCAPE AND DEAL BOOK ANALYSIS 24 IDENTIFYING APPROPRIATE INTERVENTIONS AND SERVICE PROVIDERS 29 MANAGING RELATIONSHIPS WITH GOVERNMENT AND DONOR OUTCOME FUNDERS 35 IDENTIFYING METRICS AND STRUCTURING PAYMENTS 42 DEVELOPING THE OPERATING MODEL, STRUCTURING THE VEHICLE, AND RAISING CAPITAL 49 IMPLEMENTING THE IMPACT BOND AND MEASURING IMPACT 54 CONCLUSIONS AND NEXT STEPS 58 REFERENCES 61 ANNEX A: CASE STUDIES OF CONTRACTED IMPACT BONDS IN DEVELOPING COUNTRIES 66 ANNEX B: GLOSSARY OF ACTORS 74 ANNEX C: POTENTIAL EVALUATION METHODOLOGY BY OUTCOME FUNDER GOALS 76 ANNEX D: DEAL BOOK 5 | EARLY LEARNINGS FROM THE FIELD INTRODUCTION While remarkable progress has that achieve desired results has been made in human development the potential to better target social indicators in recent decades, services and to hold funders and significant global challenges remain. service providers accountable Over 800 million people are living on for what they deliver. Social and less than $1.25 a day (United Nations development impact bonds, one Development Programme, 2017; form of results-based financing, World Bank, 2017), and 263 million have the potential to shift the children and young people are out focus of participants to outcomes, of school (Education Commission, encourage performance management 2016). The United Nations’ sustainable and adaptability, promote learning development goals (SDGs) outline through evaluation, and create a clear an ambitious global agenda for case for investing in what works. ending poverty and hunger, ensuring good health and quality education, In 2015, the Brookings Institution and promoting jobs and reduced published a report on the potential inequalities. However, governments and limitations of impact bonds, and multilateral organizations will face which chronicled the development considerable challenges achieving of the first 38 impact bonds in high- these aims. In education alone, the income countries and analyzed Education Commission in 2016 the landscape (Gustafsson-Wright estimated a funding gap of $1.8 trillion et al., 2015). This report takes the per year to ensure quality education field further forward, exploring the for all children. lessons learned in the development of impact bonds in low- and middle- Achieving the SDGs will require income countries, bringing together governments and multilaterals the findings from interviews with to develop and apply innovative stakeholders and research into the financing tools to make the best impact bond space conducted by use of existing funds. Results-based the authors over the course of a financing represents one tool that year. In addition, the report draws governments and multilaterals can on discussions from an intensive use to ensure that funds are directed daylong workshop held in London most effectively toward populations in November 2016, in which impact in need. Ensuring that resources bond practitioners from developing are spent only on interventions countries shared their experiences 6 | IMPACT BONDS IN DEVELOPING COUNTRIES and early lessons learned. The report design and implementation of impact includes a Deal Book with detailed bonds, which the following sections fact sheets for all impact bonds in will explore. developing countries, featuring both the four contracted and 24 in design 1. Identifying appropriate phases, as of August 1, 2017. interventions and service providers. The following analysis indicates the 2. Managing relationships with wide range of deals in design phases government and donor outcome in developing countries, ranging funders. in terms of country, sector, size of 3. Identifying metrics and structuring returns, and evaluation methodology. payments. Emerging from the analysis, the 4. Developing the operating model, recorded discussions in a one-day structuring the vehicle, and raising workshop with practitioners, and in- capital. depth interviews with stakeholders from the contracted deals, we have 5. Implementing the impact bond and identified five key issue areas in the measuring impact. 7 | EARLY LEARNINGS FROM THE FIELD IMPACT BOND PRIMER Impact bonds blend impact investing, entity. In the case of a development results-based financing, and public- impact bond (DIB), “development” private partnerships (see Figure 1). referring to their primary application In an impact bond, private investors to low- or middle-income countries, provide up-front capital for social this is usually a third party such as services and are repaid by an a donor or foundation (Center for outcome funder contingent on the Global Development and Social achievement of agreed-upon results. Finance, 2013). Since there are In the case of a social impact bond only three DIBs with operational (SIB), also called pay-for-success experience, much of the analysis of (PFS) in the United States and social this report focuses on the design and benefit bonds (SBB) in Australia, the negotiation phases of the impact outcome funder is a government bond contracting process. FIGURE 1 Impact Bonds: A Confluence of Trends IMPACT INVESTING IMPACT BONDS PUBLIC PRIVATE PAYMENT PARTNERSHIP BY RESULTS Source: Authors’ elaboration 8 | IMPACT BONDS IN DEVELOPING COUNTRIES IMPACT BOND STRUCTURE AND MECHANICS While impact bonds are structured in assistance in, for example, selection multiple ways, the basic mechanics of outcome metrics and repayment can be described as in Figure 2. terms. Legal support from lawyers Most impact bonds involve three who are knowledgeable in this form main types of actors: the investors, of contracting is almost always who provide up-front capital to the required. service providers to deliver social services to the population in need. While the basic structure of impact Contingent on the achievement bonds in developing countries of results, the outcome funder has tended to follow the same repays the investors their principal patterns observed in high-income plus an agreed-upon return on countries, a key difference is the investment. Impact bonds often also greater need for a risk management involve several other key players. element. Implementing impact These include an evaluator, usually bonds in low- and middle-income external to the service provider, countries involves the development who verifies or evaluates whether of contextual understanding about agreed-upon outcomes have been the needs of outcome payers and achieved. Other evaluations of the investors in a riskier environment intervention itself may also take than the one faced by participants place in parallel, and performance in high-income countries. For SIBs management of the service provider in high-income countries, one of is also typical, but the role of the the driving forces has been the idea evaluator is to assess whether that the payment by government is impact