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Impact Bonds - Bridging Funding Gaps for SDGs

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April 29, 2019

What is the issue?

  • According to a study, the estimated financing gap for achieving the Sustainable Development Goals (SDGs) stands at Rs. 533 trillion.
  • It highlights the dire demand for financing to achieve the SDGs, wherein Impact Bonds could help.

How can the private sector contribute?

  • Besides government, the private sector could potentially be of aid in bridging the financing gap in achieving the SDGs.
  • Many companies are also leading efforts in provision of clean water, sanitation and healthcare.
  • The Corporate Social Responsibility (CSR) spending requirements stipulated in the Companies Act of 2013 is helping significantly.
  • In the 2015-16 financial year, a total of around Rs 9,800 crores was spent for CSR.
  • However, these efforts remain at a small scale and are often fragmented.
  • Government agencies are hesitant to scale up these innovative and new projects.

What are the limitations?

  • Governments de-prioritise such projects and hesitate to spend taxpayers’ money.
  • It's because there is a potential risk of failure in these projects.
  • The financial and political ramifications of failure could be devastating.
  • Besides, many successful projects that have been scaled up often lack a proper system of checks and balances.
  • It is simple to ensure the effectiveness and efficiency of small-scale projects through close monitoring.
  • But such monitoring is not feasible for national or state level projects.
  • This often leads to leakages and an overall deterioration in quality of output.
  • To address this, many funders (government and foreign agencies) have implemented homogenous and rigid practices across the board.
  • But again this causes the third problem of excessive rigidity.
  • Resultantly, local project implementers are unable to make changes and adjustments to a project based on local circumstances.
  • This often leads to a drop in the overall efficiency and effectiveness.

How can Impact Bonds (IBs) help here?

  • Essentially, IBs are non-marketable bonds where repayment is contingent on the outcomes of the project they fund.
  • E.g. Impact Bond in education - an NGO that has perfected an intervention to improve reading and math skills of rural children in Bihar
  • With Impact Bond, governments can raise capital for scaling up these interventions, without incurring huge risks.
  • The government can issue Impact Bonds to private impact investors to raise upfront capital for the NGO to scale their project.
  • Unlike normal bonds, for IBs, repayment by the government is only triggered if certain pre-determined targets are achieved.
  • The targets would generally be measurable by quantitative metrics such as average reading scores in standardised tests.
  • The targets are generally evaluated by an independent evaluation agency.
  • If the targets are met, the government pays back the principal along with a return to the private investors.

Why are IBs a better option?

  • Through IBs, NGOs get the capital they need to scale up their innovative solutions.
  • Likewise, private investors get an opportunity to make profits from projects that do social good.
  • On the other hand, the government transfers the risk of failure onto private investors and only pays for successful projects.
  • Given that investors lose all their money if the project fails to deliver, they prefer keeping themselves updated, and scrutinise the progress.
  • This would automatically both improve transparency and add a layer of checks to ensure success of the projects.
  • Being outcome-based, Impact Bonds promote innovation by giving a substantial degree of freedom to the service providers.
  • No other existing funding contracts provide this mix of benefits in funding for large scale innovative social projects.

What is the way forward?

  • Impact Bonds provide an incredible opportunity for local, state and central government agencies.
  • It can be used to leverage India’s private sector to source funding for the implementation of innovative solutions to reach SDG targets.
  • But there is a need for mature engagement from both the government and private investors for successful use of IBs.
  • The bond should be transparent and enlist all relevant details for stakeholders to understand the risks involved and their severity.
  • Ensuring such high requirements of transparency and cooperation from Indian private and public sectors is a challenge.

 

Source: Business Standard

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