IMPACT BONDS: WHERE NEXT? - IRP-HSG
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IMPACT BONDS: WHERE NEXT?
EVALUATING IMPACT FOR EFFECTIVE PHILANTHROPY –
WORKSHOP SUSTAINABLE FINANCE & IMPACT INVESTING
HSG CENTER FOR EVALUATION AND DEVELOPMENT – 15 JANUARY 2020
Dr Maximilian Martin, Global Head of Philanthropy, Lombard Odier Group
2017: The world’s first “Humanitarian Impact Bond” launched
to transform financing of aid in conflict-hit countries
Please see important information at the end of the document
2 · Philanthropy Services· January 2020
For illustrative purposes only.
Sources: ICRC
Context: Impact bonds – the first decade State of the market: lots of innovation, limited scale Please see important information at the end of the document 3 · Philanthropy Services· January 2020
Addressing key impact bond challenges
Action items to move from pilots to a fully functioning market
Social Impact Bonds vs Green Bonds Key challenges of impact bond market
• Low volume – Small-scale projects face several obstacles when
Impact bonds Green bonds searching for financing. As this market is still in its infancy with a limited
proven track record, many governments are cautious about engaging in
the market. On a broader level, questions have been raised about the
176 launched 4,343 green bonds availability of monetizable and easily measurable socially desirable
since 2010 in 2018 used for outcomes that would be suitable for SIB projects.
buildings, transport
• High transaction costs - Within the SIB market, transaction costs are
& energy alone dominated by the costs incurred for intermediary services and technical
assistance, evaluation, and legal fees. Further, deal development
USD 418 USD 168 ranged from six months to three years. Given the nascent and relatively
ad-hoc nature of the SIB market, these transaction costs are
million raised billion in 2018 considered to be extremely high and prohibitive for further scaling.
only (USD 521
bn since 2007) • Availability of capital - The availability of private entities willing to
invest capital in SIBs remains limited. The reasons include: 1) lack of
investment vehicles and credible financial intermediaries that can be
738’671* na trusted to direct capital flows, 2) minimizing the uncertainty of future
lives touched payments is difficult, 3) pay-outs can occur over extended time periods,
4) few entities are willing to play the role of market maker.
Sources: Climate Bond Initiative, “Green Bonds – the state of the market 2018”, https://www.climatebonds.net/files/reports/cbi_gbm_final_032019_web.pdf; Statista
;*: Estimate from Social Finance 2017
Please see important information at the end of the document
4 · Philanthropy Services· January 2020The Program for Humanitarian Impact Investment
Mechanics & learnings
• PHII Investment Agreement between the ICRC
and the social investors
• Payment by results agreements between
outcome funders and the ICRC
• Verification agreement between Philanthropy
Advisors and the ICRC
• Escrow agreement between UBS, the ICRC, and
the social investors
• ICRC will play the role of the social provider
delivering the social intervention
• Outcome metric: Staff Efficiency Ratios (SER) of
PRP centres versus SER of baseline centres, in
addition to number of beneficiaries reached
1. Conflict-affected countries and other situations of violence.
*Schematic representation based on publicly available information.
Please see important information at the end of the document
5 · Philanthropy Services· January 2020
For illustrative purposes only.Key investment features
Creating a compelling proposition
Programme outline CHF 18.6 million equivalent at the commencement date, supported by outcome funders’ pledges in 5 years,
will be used to finance an increase in the capacity of (by construction) and the efficiency of (by process re-
engineering) the delivery of prostheses, orthoses, and wheelchairs (mobility devices), and related
physiotherapy, to improve the socio-economic circumstances of people with physical disabilities in:
• Mali
• Nigeria, and
• the DRC
Outcome funders Governments of Belgium, Switzerland, Italy, and the UK, as well as the “La Caixa” Banking Foundation
Cornerstone investor An institutional investor from the insurance industry, New Reinsurance Company
Operation duration The full 5 years from the commencement date
Investor total return • 2% coupon for the first 4 years, in addition to
• A return payment based on the success of the programme operations at the end of year 5, net of coupon
already paid
Return payment The return payment is based on the impact the programme has had on the efficiency of delivery of mobility
devices to beneficiaries. It is calculated and verified by a verification provider, and compared to an average
historical SER of comparable ICRC centres. If the ICRC is more efficient, a return of up to 7% IRR is due on
completion of programme operations at the end of 5 years. If the ICRC is less efficient, then investors could
lose up to 40% of principal.
Escrow bank UBS AG Zurich
Verification provider Philanthropy Advisors
Please see important information at the end of the document
6 · Philanthropy Services· January 2020
For illustrative purposes only.Value proposition
A strategic approach to solving important bottlenecks
• It is the first time an established aid organisation in the humanitarian space
with a large budget (>CHF 1.5 billion) has looked to impact investors to
help fund its work on such a scale;
• Government funding often has a time horizon of 1-2 years. It rarely reaches • Channel additional resources – EUR 22m of five-
beyond the electoral cycle. Providing financing certainty for a longer year funding to provide much needed humanitarian
period of time, in this case five years, not only allows the construction of services to people in conflict affected countries
new centres, but also permits actors to take a strategic perspective, aiming construction and operation of three centres in Africa;
for much higher expectations of efficiency;
• Test and implement new efficiency initiatives –
• The project funds three new centres. However, the ICRC has been social impact expected to reach far beyond the three
operating 139 rehabilitation projects in 34 countries since 1979, helping centres;
almost 330,000 people. The ultimate impact therefore reaches much further.
• Successful co-operation of different European
The three centres will be piloting the next generation of physical
parties (governments, humanitarian actors and
rehabilitation service delivery. Next to the immediate impact on the
private investors) to bring about potentially game-
thousands of beneficiaries served, the PHII is financing the innovation of a
changing improvement of services and a new
core programme, to take it to the next level;
financing model in the humanitarian space, inspired
by social impact bonds.
• While this private loan belongs to the family of social impact bonds because
it links a social outcome (physical rehabilitation) to a financial return, it is the
scale, effectiveness and potential impact of this project that makes it
stand out, in addition to the different financial structure.
Please see important information at the end of the document
7 · Philanthropy Services· January 2020
For illustrative purposes only.The Staff Efficiency Ratio (SER)
Measuring impact
Number of mobility devices delivered (adjusted)
SER =
Number of staff involved in mobility device delivery (adjusted)
SER calculation methodology
(# of Prostheses x 1 ) + (# of Orthoses x 0.74 ) + (# of Wheelchairs x 0.90 )
((# of trained P&Os x 1 ) + (# of P&Os without training x 0.75 ) + (# of bench workers x 0.50 )) x working hours ratio
The formula is designed to make physical rehabilitation centres comparable to each other and to prevent
perverse incentives.
Each type of mobility device is given a different weight to account for the different labour time requirements to
manufacture them. As a result, there is no incentive to produce the least time-intensive device to improve the SER in a way
detrimental to the beneficiaries’ best interest.
Different categories of rehabilitation professionals are given different weights according to their level of education
(assuming that better trained professionals work more efficiently). This avoids penalising centres that are staffed with less
qualified supporting staff (i.e., bench workers), because of an exogenous lack of trained prosthetists and orthotists in the region
where a centre operates.
The working hours ratio adjusts for differences in centres’ working hours (as if they all worked a 40-hour week). This
avoids creating distortions among centres which have quite different modus operandi depending on the country/region.
Please see important information at the end of the document
8 · Philanthropy Services· January 2020
For illustrative purposes only.Feasibility and implementation
Key factors for consideration derived from other impact fund projects
Focus - Identify a programme of strategic importance to your organisation that has the potential
to be taken to the next level.
Participation - Launch an ambitious internal brainstorming and readiness assessment effort to
consider how alternative funding mechanisms could provide the capital needed for a future
iteration of that core programme.
Impact measurement - Develop a set of metrics that can track the programme’s results at a
reasonable cost and establish a base of empirical evidence.
Senior engagement - Make sure senior leaders are willing and able to devote the attention
required for this effort to succeed.
External support - Enlist funders close to the organisation and make them part of a joint
“moonshot” innovation effort.
Timeline - Recognise that innovative financing efforts may take time—and give yourself the time
needed, and the budget.
Source: Martin (2017), “The Next Phase of Innovative Financing,” Stanford Social Innovation Review
Please see important information at the end of the document
9 · Philanthropy Services· January 2020
For illustrative purposes only.Looking back to look ahead: A preliminary evaluation
Praise vs. criticism
Praise Criticism
By making private investment available to social programmes, Х Too early to have definitive evidence SIBs are delivering on
SIBs were expected to bring innovation, more money, and their promise.2
better outcomes for society’s most disadvantaged people. Х Most SIBs are low risk and high return - instead of funding
De-risking programs for governments should allow a bigger innovative programmes, private capital is backing social
variety of social programmes. programmes with a proven track record.2
Provides a way to generate more funding for social policy Х SIBs require direct attribution of outcomes, their focus is
while also proving attractive to investors. 1 narrowed to a single programme when we should be thinking
Relatively new financial solution, yet high level of interest and more holistically about how to address complex social
latent demand. problems. 2
To evolve, improve reporting, outcome measurement and Х The need to return profits in a timely fashion to investors can
structuring in the years to come. deter a comprehensive program evaluation that leads to
At its core, pay for success includes a number of possible program improvement. 2
fundamentally value creating elements, including data- Х Privately negotiated, customised arrangements are not easily
informed decision-making, adaptive governance structures, amenable to standardisation, transparency, or liquidity, which
and active performance management. curbs their potential to scale. 3
Sources: 1: Financial Times, “Table: the top global social impact bonds”, 4 Dec. 2018. https://www.ft.com/content/99b49376-eea6-11e8-89c8-d36339d835c0
2:Stanford Social Innovation Review, “The Downside of Social Impact Bonds”, 31 May 2019. https://ssir.org/articles/entry/the_downside_of_social_impact_bonds
3:Stanford Social Innovation Review, “Social Impact Bonds: What’s in a Name?”, 12 Oct. 2016. https://ssir.org/articles/entry/social_impact_bonds_whats_in_a_name
Please see important information at the end of the document
10 · Philanthropy Services· January 2020Backup impact bonds risk distribution Table summarising SIB stakeholder risks Sources: OECD, Social Impact Bonds: State of Play and Lessons Learnt, 2016. https://www.oecd.org/cfe/leed/SIBs-State-Play-Lessons-Final.pdf Please see important information at the end of the document 11 · Philanthropy Services· January 2020
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