Social Impact Bonds An Introduction CABRI, November 2015

1 All Credit for slides to Social Finance. Slides presented by Social Finance for proposed SIB in Thailand

Illustrative social impact bond structure 2 INVESTORSOUTCOMES FUNDER SERVICE PROVIDERS Provide finance BENEFICIARIES Outcomes Funder repays investors based on achievement of verified outputs and outcomes Pay for Impact Adjust delivery in real-time Investors oversee service provider results Verify impact Impact Bonds are financial mechanisms in which investors pay for services upfront to improve a social outcome that is of social and/or financial interest to the Outcomes Funder. Payments back to investors are triggered if and only if outputs and outcomes are successfully verified – returns are linked to the level of success achieved. Social Impact Bonds (SIBs) – main outcomes payer is the government Development Impact Bonds (DIBs) – main outcomes payer is a third party, e.g. a donor agency, foundation or trust funds.

Impact Bonds focus on improving impact Donor often focuses on financing inputs and processes to control what and how impact is achieved Program may achieve lower than expected impact as cannot adapt to local circumstances and real-time data Donor subject to public accountability, but program implemented by third party Up-front capital from investors to service providers and provision of real-time performance management Impact achieved improves as program is adaptive, client-centred and evidence-based Government / Donor pays for impact achieved, rather than controlling inputs and processes Impact bonds incentivise the achievement of impact through linking funding to results and provide the corresponding implementation flexibility required to achieve impact: TRADITIONAL AID MODELIMPACT BOND MODEL

Impact bonds build on best practice 4 Social Impact Bonds for key and vulnerable populations intend to expand on existing proven approaches, while ensuring that the model upholds human rights of these populations: This can be achieved through: Clear Boundaries: A programme framework that sets clear boundaries for goals and methods Outcome selection: Careful selection of outputs to avoid incentives for undesirable data collection methods or pressures Intervention analysis: Explicit criteria for what interventions and data collection methods are permissible, and which are not Selected Investors: Investors restricted to those with a strong commitment to social goals and human rights Innovative financing mechanisms such as social impact bonds go hand-in-hand with government funding for key populations, and should supplement their efforts in being more effective. The ambition is that impact bonds will pave the way for larger-scale – and more cost-effective and sustainable – Government implementation of proven interventions.

Key characteristics of impact Bonds 5 Incentives for adaptive implementation Linking investor returns to desired outputs and outcomes creates a strong incentive for adaptive implementation of programmes to achieve better services for beneficiaries Impact Bonds aim to improve the efficiency and effectiveness of development programmes through shifting payments - and thus accountability - to outcomes instead of inputs. The focus on outcomes allows and encourages local adaptation according to the specific and changing needs of service users. Enhances transparency and accountability Investors are only compensated when contract outcomes and outputs have been independently verified Outcomes funder only pays for success As with other Results-Based Aid, outcomes funders (government / donors) only pay for if agreed outcomes are met Upfront funding provides working capital to service providers and risk is transferred to private investors Provide access to upfront funding

Objectives and roles of key parties 6

© Social Finance 2015 Principles for a successful Impact Bond 7 For an Impact Bond to be successful it must: Add value: Potential exists to improve outcomes through transfer of risks to investors Be feasible: Improvement in outcomes measurable and stakeholder buy-in PRINCIPLESRATIONALE Need for outcomes focus Demonstrated need for increased focus on outcomes in target geography and coordination of key stakeholders to achieve outcomes Promising interventions Focus on expanding intervention with some evidence-base to ensure attractiveness to investors, but also uncertainties to justify risk transfer Service providers require working capital Service providers do not have sufficient upfront funding to pay for interventions or cannot bear the implementation risk alone Good potential for attribution of outcomes Target population and outcome metrics can be clearly defined and agreed upon Data for outcome metrics and benchmark can be collected in a reliable and cost-effective way and used to disaggregate the impact of the interventions Priority for donors and partner governments Potential donor agency and partner governments have interest in payment-by-results approaches and regard target outcomes as high priority Viable investment proposition Issue area / geography a priority for potential investors Reasonable level of evidence around effective intervention approaches Add value Feasibility

A rapidly growing market 8 US 8 Impact Bonds, including highest value bond of $27m. Issues range from high risk youth to recidivism Harvard Lab providing assistance to 9 states UK 30 Impact Bonds for issues ranging from recidivism, to child services, employing a range of commissioning models Australia 2 Impact Bonds on out- of-home care Northern Europe Impact bonds in the Netherlands (2), Germany, Belgium and Switzerland, for migrant and youth unemployment. Canada One Impact Bond for at-risk single mothers Portugal One Impact Bond for education of primary school children Over 50 Impact Bonds raising $150m have been launched, with at least as many in development. Latin America Social Finance and IDB exploring project in Mexico, Brazil and Chile Impact Bonds also in development in Colombia (education) and Peru (agriculture) N Africa and the Middle East Impact Bonds for youth training and employment and diabetes prevention in development in the West Bank Sub-Saharan Africa Impact Bonds in development for Sleeping Sickness in Uganda, HIV prevention and ECD in South Africa, and maternal and child health in Cameroon Impact Bonds launched Impact Bonds in development Asia and SE Asia Three pilots being developed in Japan Israel One impact bond for prevention of university drop outs in Israel India Impact Bond being piloted in Rajasthan, India, for Girls’ Education

Case study I: East African sleeping sickness in Uganda A Development Impact Bond targeting East African sleeping sickness would deliver significant animal and human health benefits at scale across poor, rural parts of Uganda. OVERVIEW Objective Reduce incidence of East African sleeping sickness by treating cattle – the main parasite reservoir – to improve human health and animal health and productivity Size An 8 year, c. $50m DIB covering 44 at-risk districts in Uganda – intervention area includes central, northern and south-eastern districts Minimum 4m cattle to be treated across the affected area >1m cattle keeping households across the affected area Socioeconomic benefits Impact of African Animal Trypanosomiasis (AAT) on cattle include reduced tractive power, loss in milk production and lower calving rates - estimated benefits of $15 per cattle per year free of tryps and $7.50 per cattle protected by insecticide per year Human health benefits include reduction in number of sleeping sickness cases per year and associated healthcare costs – estimated benefits of 18.8 DALYs / case and $200 healthcare costs per case $150m animal health benefits and $90m human health benefits estimated over 8 years Intervention Mass cattle injection programme - delivery of 5.5 million cattle treatments 1 over 3 years Establishment of prevalence and vector control strategy over 8 years to increase and improve regular farmer spraying of cattle with insecticide so animal and human health gains are sustained Outcomes Successful mass treatment of cattle in years 1-3 Reduction in the parasite prevalence from baseline in years 4, 6 and 8 Data systemsUses tailored app and database to track cattle treatment progress in real time Sustainability Promotion of ongoing insecticide spraying by farmers to maintain parasite prevalence reduction achieved by the mass treatment programme and sustained socioeconomic benefits Impact Bond value- add Improves the effectiveness of delivery through real-time data collection and analysis Investment structure encourages strong management and programme adaptation Provides greater accountability and transparency around impact of donor funding 1. Proposed one round of treatment in southern endemic districts, two rounds in northern epidemic districts, resulting in c. 5.5m cattle treatments to be delivered over 3 years 9

CASE STUDY II: youth training and jobs IN the west bank HIGH-LEVEL DIB DESIGN Objective Increased training and better matching of young people with employment opportunities in the West Bank Target geographyWest Bank Intervention Flexible skills training at both technical and university levels linked to new investments and upcoming employer demand Soft skills training tailored to specific skill requirements identified by employers Outputs and outcomes Training and skills development outputs linked to employer needs Improved employment opportunities for young people Improved work retention for young people Measurement DIB will collect real-time data on job placements and retention, with independent verification to trigger output and outcome payments Impact Bond value-add Strong link between private sector employers and design and roll-out of training programmes Training and skills better aligned to upcoming employer demand Improved tracking of training, work placement and retention Key learnings mainstreamed into government programmes While a large amount of donor funding has been invested in the skills development sector in the West Bank, there are significant mismatches between the training programmes provided and needs of the private sector. The real-time data collection and adaptive management inherent in a DIB model could help bridge these gaps. 1010

Impact development involves three main phases 11 Phase I: High level scoping and stakeholder engagement (typically: 6-8 weeks) Stakeholder engagement e.g. impact bond approach tested with service beneficiaries and providers, government and other key stakeholders for suitability to the issue area and country context Feasibility analysis e.g. early exploration of the ability of government / donors to fund outcomes, contracting environment, capacity of potential partners to implement services via an impact bond and potential to measure and track outcomes Phase II: Detailed design and securing of funding for outcomes (typically: 6 months) Detailed impact bond design work conducted in partnership with key stakeholders – focused around: Outputs and outcomes metrics, measurement and verification Intervention model i.e. service design Outcomes funding, contracting and governance Data collection and performance management Budget, operational and financial modelling Investor soft marketing Phase III: Formal investor marketing, capital raise and service mobilisation (typically: 3-6 months) Once commitment to fund outcomes has been agreed with government / donors, funding is raised from socially motivated private sector investors to fund interventions under an impact bond structure – if and only if outcomes are successfully verified, outcomes payments from government / donors are triggered to repay investors their capital plus a return linked to the level of success and the level of risk taken PHASE 1 High level scoping PHASE II Detailed design PHASE III Capital Raise SIB IMPLEMENTATION

12 Thanks for listening!!