The global impact bond market in 2019: A year in review

Girls attend a class at "Shishu Bhavan", a home for orphans run by the Global Missionaries of Charity order of nuns, in the eastern Indian city of Kolkata September 4, 2007. REUTERS/Jayanta Shaw (INDIA) - GM1DWBSTPEAA

2019 marked another eventful year for the impact bond market, with 18 new deals contracted. After nearly a decade since the first social impact bond (SIB) launched in the U.K., there is still much to learn about this innovative financing tool—particularly in identifying the circumstances when impact bonds add the most value. Since the vast majority of impact bonds have thus far been contracted in high-income countries, there is a wide knowledge gap in their application in developing countries, which is where our focus lies. Over the past year at Brookings, we have continued to maintain and analyze our global impact bonds database, and to use this—along with many conversations with actors in the field to monitor and identify key trends.

Below we review the impact bond landscape and our related learnings over the past year, and highlight where we will focus attention in the year to come.

Impact bond landscape

The impact bond market has continued to grow around the globe, with new deals in ten countries. The most new deals were contracted in France (3), Portugal (3), and the United Kingdom (3 ), while Palestine, Russia, and Cambodia all contracted their very first impact bonds. Globally, as of January 1, 2020, 176 impact bonds have been contracted, with the majority of these financing projects in the social welfare and employment sectors. As outlined in our recent blog, growth in developing countries has been slow. Just four of the new projects in 2019 were contracted in low- and middle-income countries. These included two in Palestine: a development impact bond (DIB) for type II diabetes in refugee camps in the West Bank, and another DIB for employment in the West Bank and Gaza. Colombia’s second employment SIB launched in Cali, while a DIB for improving access to sanitation was contracted in Cambodia (see below map).

Map of impact bonds in developing countriesIn total, 47 impact bonds have now completed service delivery according to available data, representing less than a third of the total contracted to date. Since outcome funders only repay investors if impact metrics are achieved, the status of investor repayment is one way to judge the success of the market. Throughout the first half of 2020, we will publish a series of briefs that investigate the several dimensions of “success” in impact bonds. As Table 1 below indicates, the majority of completed impact bonds have repaid investors their principal plus positive returns, while just two projects have made no repayment to investors. We are waiting for information to become public on more than a quarter of completed deals.

Table 1: Investor repayment in completed* impact bonds

Investor repayment Number of impact bonds
Principal + positive returns 24
Principal repaid 1
Some repayment 5
No repayment 2
Not yet public 10
Evaluation ongoing 5
Total 47

Source: Brookings Impact Bond Global Database, January 2020

*Completed means service delivery has ended.

What did we learn in 2019?

In 2019 we published two reports on impact bonds, for a total of seven reports on the subject. The first, in partnership with colleagues at Brookings India, focuses on the promise of impact investing in India. Impact bonds are just one potential use of impact investment, and India has contracted the most impact bonds in any developing country to date, with two in education and one in health. Our second, most recent publication explores the potential for outcome-based financing in education in India. In this report we outline three key factors for the growth of impact bonds in the education sector: ready and able education service providers; technology for data collection, analysis, and action; and willingness of government to engage. As the learning partner in the Quality Education India DIB, one of the two education impact bonds featured in this second report, we are examining how paying for outcomes can improve service delivery, promote collaboration, and strengthen systems. As arguably the most ambitious education impact bond to date, both in terms of scale and the number of stakeholders, the project is an important test case for the potential of the instrument.

What’s next in 2020?

Tying payments to outcomes is one way to ensure that funding is focused on results. Outcome-based financing has the potential to drive collaboration toward the achievement of results, to improve data systems, and to direct funding toward service providers and interventions generating measurable impact. Our research in 2020 will explore the experiences of different stakeholders engaging in impact bonds, the facilitating factors for success, and the barriers and challenges—with a particular interest in education and developing countries. We will continue to build knowledge by engaging broadly with stakeholders across the sector and look forward to learning from the many exciting ongoing projects.

One of our key learnings over the past five years has been the central role of data in outcome-based financing. Earlier this year we outlined the four types of data necessary for outcome-based financing: cost, cost of inaction, real-time performance, and results data. We are investigating how technology can help collect and analyze performance data in real-time and inform decisions. We are also updating our Standardized Early Childhood Development (ECD) Costing Tool to allow for the costing of both ECD and education programs, in a user-friendly online version.

Finally, we have been thinking a great deal about how impact bonds are changing the lives of individuals benefitting from them. Behind the numbers are human beings whose welfare and even survival depend on the services received. In the coming year, we will explore some of the stories of the individuals behind the education impact bonds in developing countries through visual media. Through these stories we hope to provide a more nuanced, human interest perspective on this nearly decade-old financing mechanism.