BY IRENE RIVERA CALDERON, GRACE CHAO, ROCHANA COORAY, AND KARINA ASBJORNSEN
Irene Rivera Calderon, Grace Chao, Rochana Cooray, and Karina Asbjornsen are second-year International Development students who recently traveled to Hyderabad and Lucknow, India, to develop Social Impact Bonds for financial inclusion and education projects as part of the IDEV Practicum with Athena Infonomics, a consultancy firm based in Chennai.
The IDEV Practicum allows students to work directly with public, private and non-governmental organizations as a capstone to their graduate studies. The IDEV Practicum Blog is a six-part series that chronicles the travels of IDEV students who take on client projects over winter break.
“A Social Impact – what?” If only we had a rupee for every time we heard that. Working with innovative financing tools like Social Impact Bonds (SIBs) bring with it the thrill and excitement of breaking new ground, but also the increased complexity that comes with employing a tool few have before.
During our two weeks in Hyderabad and Lucknow, our Practicum team witnessed both great enthusiasm for and understandable confusion about SIBs. We were working with Athena Infonomics, a Chennai-based consulting firm, to develop SIBs for financial inclusion and education. The success of these bonds will depend on a wide range of stakeholders coming together and creating a common understanding of how to deploy impact bonds.
What are the challenges of using impact bonds to finance development objectives? First, the name itself can be misleading. An SIB is a results-based financing mechanism that mobilizes private capital for a specific pay-for-success project. It is not what we normally call a bond, i.e. a publicly-traded debt security. Instead, an SIB is a tailor-made contract through which private investors provide upfront capital to finance a project, and an outcome funder (the government in an SIB, or a philanthropic partner or development agency in a Development Impact Bond) repays the investor with interest only if the project accomplishes its goals.
In all our meetings with representatives from the government, academia, industry, and communities in Hyderabad and Lucknow, the name created confusion about how SIBs really work. Thus, clarifying what SIBs are – and what they are not – is critical when approaching new stakeholders.
A related challenge is that regulators have not necessarily heard of SIBs and are unsure of how to approach them. For example, our SIB in Hyderabad will be implemented by an insurance broker to expand agricultural micro insurance to more vulnerable farmers. When meeting with the relevant insurance regulators, we quickly understood that there are diverging opinions on how SIBs should be regulated.
Foreign Direct Investment (FDI) rules can also be a challenge. Fortunately, two impact bonds have already been contracted in India, thus setting regulatory precedent. Favorable market conditions and mandatory CSR spending in the private sector also make this the right time, and India the right place, to bring SIBs to scale.
Our fieldwork also revealed that impact bonds can be demanding of the service providers implementing them. Because private investors are repaid depending on whether service providers meet predetermined social impact targets, impact bonds must be designed with simple and clear results frameworks that accommodate concerns from all stakeholders. For instance, for commercial firms, measuring social impact may be an abstract and unfamiliar idea, while for NGOs, the rigor and inflexibility applied by the private sector rigor in determining project success might be problematic.
However, if we can overcome these challenges, impact bonds are one of the most promising new tools to be added to the development management toolkit in years. In both cities we found great enthusiasm for how SIBs can mobilize more private capital for social returns. Compared to other pay-for-success mechanisms, SIBs solve the problem of providing working capital to service providers upfront. It also allows for greater flexibility in implementation, as long as the predetermined impact targets are met. Furthermore, it allows for transferring the risk of project failure to private investors willing to take that risk for an adequate return.
Going forward, we hope all stakeholders commit to raising awareness and educating governments, investors, development partners, and other relevant actors on the potential benefits and challenges of working with SIBs. We will certainly do our part.