In the year 2012, “Instiglio” (a non-profit advisory firm specialized in Results-Based-Financing for- low-and-middle-income countries) became the first specialized intermediary founded to adopt Development Impact Bonds (DIBs) and Social Impact Bonds (SIBs) to the unique challenges of low and middle-income countries.

In June 2014, Instiglio Children’s Investment Fund (CIFF) tied up with Educate Girls, Dinsight, and UBS Optimus Foundation and launched the first DIB to reduce the gender gap in education in rural India by getting girls to attend school to study. The required investment was provided by UBS to an Indian NGO called ‘Educate Girls’ to facilitate the implementation of the project.

After three years, CIFF (the outcome payer) paid the investor based on enrollment and learning outcomes that Dinsight evaluated at years 1, 2, and 3. UBS Optimus Foundation received their initial investment back plus a return on investment based on the performance of the program. In 2018 a review showed that the program resulted in a 52% return on investment because of the high achievement of the targets.

In 2016 Palladium International (formerly the G R M Futures Group), an international development sector advisory, management, and implementation firm launched the ‘Rajesthan Maternal and Newborn Health Impact Bond’, with two international outcome funders and a lead investor committed to the Impact Bond.

H2O Venture Partners applied a DIB supported by UBS Optimus and another to develop case studies for the control of sleeping sickness and rabies. The International Committee for the Red Cross with other partners is also in the process of launching a Humanitarian Impact Bond designed to finance aid to areas affected by conflict.

The Center for Global Development (a non-profit think tank based in Washington DC and London that focuses on international development) hosts a working group and has several publications on DIBs.

As Sri Lanka is on its way to recovery from one of the worst economic crises that hit the country in the recent past; ensuring social safety nets for the poor and the vulnerable segments of the population is a top priority for the Sri Lankan Government. This translates into having to allocate adequate funds for the Government’s social impact programs and the sustainable development goals in the future. Is this burden going to rest on the shoulders of the taxpayers or is the Government poised to find alternate funding? In addition, what about the outcome of these initiatives? Is success guaranteed? These are some of the questions the Sri Lankan Government will have to find answers to. In this scenario can DIBs and SIBs play a significant role in easing the burden of the government by helping it to reposition the allocation of funds to successful social and development programs? If so, what are the pros and cons?

Pierre Schlosser and Matilde Joao Motu in an article titled “Are SIBs the Panacea for ESG? (2023)” have noted as follows: “In grappling with the twin challenges of pressing social issues and scarce or very limited government resources, SIBs and DIBs may offer a new approach to address impact finance and public financing.” “Whilst SIBs and DIBs may provide a politically viable policy tool for the government to address complex social issues, there is still limited conclusive empirical evidence of its success mostly due to immature outcome metrics that need better operationalization and evaluation methods”.

SIBs - Social Impact Bonds

A SIB also known as pay-for success financing, Pay-for Success Bond (USA), Social Benefit Bond (Australia), Social Outcome Contract (UK), and Social Impact Partnership in Europe is a type of outcomes-based contract, whereby a contractor attempts to effect a policy of government, but does not get paid by the government, unless specified goals are achieved.

SIBs are a type of bond instrument where the proceeds will be exclusively applied to finance or re-finance (in part or in full) new and or existing eligible social projects which are aligned with the four (4) core components of the Social Bond Principles (SBP) of the International Capital Market Association (ICMA).

These bonds are the outcome of a process involving various stakeholders. The process begins with the identification of a pressing social issue which is followed by designing an adequate intervention. The proceeds to finance the intervention are provided mainly by private investors through intermediaries directing capital to a service provider. According to Pierre Schlosser Deputy Director of the Florence School of Banking and Finance and Former Research Associate Matilde Joao Motu, the success of the process hinges on well-defined measurable outcomes that ultimately determines the returns for investors. If the pre-determined outcomes are achieved, the government or a government agency repays the investors their initial capital along with a return on the investment, contingent on the level of success.

The credit for inventing the term ‘Social Impact Bond” is given to Geoff Mulgan, CEO of Young Foundation. The first SIB was originated by Social Finance Ltd., UK in 2010, supported by the Rockefeller Foundation which was structured to reduce recidivism among inmates from Peterborough Prison.

Issuances have now spread around the world. A report (2023) from Socialfinance.org.UK indicates that there are currently over 251 Impact Bonds in over 35 countries mobilizing more than USD 700 million.

Generally, SIBs operate during a fixed period of time, and they do not offer a fixed rate of return. Repayment to investors is contingent upon specified social outcomes being achieved. Therefore, in terms of investment risk, they are more similar to structured products or to equity investments. SIBs bring together government service providers and investors/donors to implement programs designed to accomplish clearly defined social outcomes. Investors provide the initial capital support, and the government agrees to make payments to the program only when outcomes are achieved. This essentially means that the government pays only for successful social programs.

The Young Foundation describes SIBs as “a range of financial assets that entail raising money from third parties and making repayments according to the social impacts achieved. “The Non-Profit Finance Fund describes SIBs as “a mechanism by which to shift financial risk from service providers to investors, with investors underwriting service providers based on their ability to deliver on positive social outcomes”.

The Government Outcomes Lab of the UK identifies four main dimensions along which SIBs may vary; they are

(i)     the nature and outcome of payment;

(ii)    the nature of capital used to fund services;

(iii)  the strength of performance management, and

(iv)  the social intent of service providers.

According to the Government Outcomes Lab, “a core SIB is therefore defined by 100% payment -on-outcomes, independent and at-risk capital, a high degree of performance management and a strong social intent or will of service providers”.

However, it must be noted that the hypothetical benefits predicted by its advocates have not been measured or verified yet. The advocates claim that SIBs encourage innovation and tackle difficult social problems asserting their potential for success, but often have trouble securing government funding because it can be difficult to prove their effectiveness rigorously.

This type of financing allows the government to partner with private service providers and if necessary private foundations or other investors willing to cover the initial costs and assume performance risk to expand promising programs, whilst assuring that taxpayers will not pay for the programs unless they demonstrate success in achieving the desired results or outcomes. The expected public sector savings are used as a basis for raising investment for prevention and early intervention services that improve social outcomes. Advocates also believe that SIB programs can achieve positive social outcomes, may create fiscal savings for government, but also involve changes to funding arrangements that bring risks to service agencies. An OECD report from 2016 notes that “By aligning interests in a results-oriented approach, public authorities can avoid up front capital requirements and the risks associated with program failure.” Nevertheless, the challenge of accurately measuring results remains significant and investors lack substantial experience in understanding the risks and returns involved in this emerging asset class”.

DIBs - Development Impact Bonds

DIBs are performance-based investment instruments intended to finance development programs in low resource countries and are derived from the model of SIBs.

The model operates as follows: an investor provides upfront funding to the implementer of a social or development program. An independent evaluator assesses the outcomes of the program after its implementation. If the program achieves pre-determined targets, an "outcome payer", typically a government or government agency, agrees to reimburse investors with a return on their capital. This structure ensures that investors are not merely engaging in concessionary lending but are incentivized based on measurable results.

A DIB creates a contract between private investors and donors or governments who have agreed upon a shared development goal. Investors advance funds to development/social programs with financial returns linked to the verified achievement of the said goals.

The Benefits of SIBs and DIBs

Although not measured or verified yet the benefits of SIBs are believed to be as follows:

·       Prevention: more funds are available for prevention and early intervention services.

·       Risk transfer: the public sector only has to pay for effective services; the third-party investor bears all the risk of services being potentially ineffective.

·       Innovation: risk transfer enables innovation, since investors and service providers have an incentive to be as effective as possible because the larger effect they have on the outcome, the larger the repayment they will receive.

·       Performance management: the SIB method includes continuous evaluation of program effects, increasing the rate of learning about which methods work, and which do not. Governments will therefore fund what ‘works’ thus repositioning government spending to cost-effective preventive programs.

·       Independent evaluation: creates transparency for all parties.

·       Better collaboration: enables collaboration across multiple entities and within service provider networks and attracts new capital to the social, educational, and healthcare sectors.

Criticisms Against SIBs and DIBs

Critics point out that because the outcome-based payments are dependent on government funds which must be budgeted, SIBs do not actually raise additional capital for social programs, but instead displace funding for other programs. Given the need to budget for a return on investment, a program evaluation, middle managers and the expenses of designing the complex financial and contractual mechanisms, SIBs may be an expensive method of implementing social programs.

Additional Criticisms Levelled Against SIBs and DIBs

Criteria for Success - Donors will seek to fund outcomes that can be observed and measured. This could leave certain agencies engaged in addressing problems in societies without access to these funds. This will be particularly true for advocacy, arts, and alternative organizations. The terms of funding may be set to pay for more readily achievable goals, which could increase long term government spending and divorce such spending from direct deliverables.

Increase in Donor Influence - Donors who are investors will want to make sure their money is being used according to contract and will therefore want to be more involved in the delivery of social services. This may turn out to be either a good thing or a bad thing for Sri Lanka. They may want NGOs to adopt a style of delivery used in for-profit businesses.

Unfair Competition - Competition amongst NGOs can emerge. Agencies or service providers that secure funds will be likely to operate in areas where other NGOs operate. But they will have more narrowly defined goals and will set the standards for the government funded agencies and their actions.

Reduces Public Responsibility of the State - DIBs and SIBs can reduce government’s responsibilities and accountability as they devolve social services to business risks when other tax and program options can be made available.

Non-Tradability - New Zealand Economist, Ronnie Horesh has pointed out that because SIBs are not tradable, that they favour existing institutions, are inherently narrow and short-term in scope, in addition to imposing relatively high monitoring costs. However, Sri Lanka should explore the possibility of making such bonds tradable and transferable by making use of the facilities available at the Colombo Stock Exchange and the Listing Rules relating to Sustainable Bonds.

Change of Priorities of the Social Programs - Critics claim that social programs targeted to be transferred to SIBs are done because they are compatible with the SIB structure and not because of the merits of the program or the need.

Financialization of Public Services - As SIBs require a clear measurement of the costs and outcomes of the programs, SIB projects are compelled to focus on financial targets rather than eliminating the underlying causes of the social problem at hand.

Despite the abovementioned criticisms that have been levelled, governments across the world including the First World countries have adopted SIBs with regard to several social and welfare projects.

The Social Bond Principles of ICMA (SBP)

SBPs are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the Social Bond Market by clarifying the approach for issuance of SIBs. SBP provide issuers with guidance on the key components involved in launching a credible SIB, and aid investors by promoting availability of information necessary to evaluate the positive impact of their social bond investment. They assist underwriters by moving the market towards expected disclosures that will facilitate transactions. SBP recommends a clear process and disclosure for issuers, which investors, banks, underwriters, placement agents, and others may use to understand the characteristics of any given Social Bond. SBP emphasize the required transparency, accuracy, and integrity of information that will be disclosed and reported by issuers to stakeholders. Also see Rules relating to Sustainable Bonds in the Listing Rules of the Colombo Stock Exchange.

According to the Voluntary Process Guidelines for issuing Social Bonds of the ICMA, social project categories include, but are not limited to, initiatives aimed at providing or promoting the following:

·        Affordable basic infrastructure (e.g., clean drinking water, sewers, sanitation, transport, and energy)

·        Access to essential services (e.g., healthcare, education, vocational training, financing, and financial services)

·        Affordable housing

·        Employment generation and programs designed to prevent and/ or alleviate unemployment stemming from socio economic crises, including through the potential effect of SME financing and micro finance.

·        Food security and sustainable food systems (e.g., physical, social and economic access to safe nutritious and sufficient food that meets dietary needs and requirements; resilient agricultural practices, reduction of food loss and waste; and improved productivity of small-scale producers)

·        Socioeconomic advancement and empowerment (e.g., equitable access to and control over assets, services, resources and opportunities, equitable participation and integration into the market and society, including reduction of income inequality).

Examples of target populations include but are not limited to those that are

·       Living below the poverty line.

·       Excluded and or marginalized populations and/or communities.

·       People with disabilities.

·       Migrants and/or displaced persons.

·       Undereducated.

·       Underserved owing to a lack of quality access to essential goods and services.

·       Unemployed.

·       Women and/or sexual and gender minorities.

·       Aging populations and vulnerable youth.

·       Other vulnerable groups, including victims of natural disasters.

Conclusion: Social Bonds – A Path to ESG-Driven Transformation in Sri Lanka

Social bonds, including DIBs and SIBs, offer a promising avenue for Sri Lanka to address its pressing social challenges while fostering innovation and accountability in public service delivery.

For Sri Lankan bodies corporate, embracing social bonds as a core component of their ESG strategies could unlock new opportunities to tackle issues such as education, healthcare, and poverty alleviation, while enhancing stakeholder trust and brand equity. However, achieving this requires the establishment of supportive regulatory frameworks, robust impact measurement systems, and a culture of collaboration between the public and private sectors.

SIBs and DIBs have the potential to become important tools for corporates with which to enhance Public Private Partnership (PPP) with the Sri Lankan Government. This is very specially so for listed companies where they can tie up with service providers to upfront fund identified and shared social and development goals with the Government, as part of their Environmental Social and Governance Practice (ESG) initiatives (which is also a mandatory requirement under the Listing Rules of the Colombo Stock Exchange on which they are listed), provided the outcomes are verifiable and measurable. These financing mechanisms align seamlessly with the ESG priorities of corporate entities, enabling them to create measurable social impact alongside financial returns.

As Sri Lanka navigates its path toward sustainable development, social bonds could emerge as a transformative tool to channel private capital into public good. By demonstrating leadership in this space, corporate entities in Sri Lanka have the potential to set a precedent for socially responsible investing in the region, paving the way for inclusive growth and long-term resilience.