4 minutes reading time (725 words)

There are risks in doing something new, but there might be even more risks in doing the old!

Impact bonds, one of the pay-for-success financial mechanisms bringing impact investors, private, public and third sector organizations together to solve social and development issues, have recently faced some criticism about their complex nature, which can lead to a long design phase and high related transaction costs.

We, at UNDP Istanbul Hub and Finnish Innovation Fund Sitra, put our heads together and thought about the challenges around impact bonds. There was a mutual understanding that what comes to preventing and solving wicked societal problems, the impact is achieved together – the core idea and benefit of impact bonds. Sitra has been using co-creation as a mechanism to boost the design of social impact bonds (SIB) in Finland and we decided to create an impact bond design programme together around the same approach to support more straightforward design of the impact bonds in the region of Europe and CIS countries.

The idea of moving from simple cooperation of different actors to co-creation lies in understanding the societal challenges in broader way and jointly set and produce mutually valued impact. Impact bond can be one part of the buzzle in realization of the targeted change. 

We also acknowledged that both public sector and development sectors are facing similar challenges in their service delivery where the focus is still on procuring activities. Impact bond modality is being used in both sectors: In social impact bond (SIB) the outcome funder is the host government and in development impact bond (DIB) it is a third party, such as a donor government or philanthropy organization. Or like in Colombia employment SIB, the outcome payment is divided between the national government and SECO.

The change from procurement of activities to procurement of outcomes means two radical changes in both sectors, and the relationship between the outcome payors and the service providers should be taken to a new level: 1) Outcome payor becomes an owner instead of determinant and 2) service provider acts as an innovative impact actor instead of mechanical operator. This, however, requires real co-creation between different stakeholders aiming to achieve mutually determined goal and public sector can act there as an enabling platform. We think it is very important to understand that impact bonds are not the goal itself, but a tool for strategic leadership and more effective use of tax payers' money to achieve sustainable well-being and development.

To help the transition from activity-based procurement into outcome-based procurement by using impact bond mechanism, we launched our Impact Bond Design Programme late January 2018. Five teams of UNDP-government collaborations were selected from the region of Europe and CIS countries. After an introductory into impact bonds, the teams started mapping the social issues to tackle and considering initiatives where an impact bond mechanism might create some change. After mapping and brainstorming, the teams decided to focus on the following themes: road safety in Montenegro, dairy production in Armenia, air pollution in Macedonia, cattle production in Moldova and youth activity in Georgia.

With these topics in mind, we organized a four-days hands-on design workshop in Helsinki early April to create more targeted impact bonds with clear goals and target groups and tools to determine suitable intervention strategy, metrics and indicators for measuring the impact. We brought together different SIB actors, such as investors, service providers and fund managers to highlight their experiences and learnings. We gathered experts and mentors from Sitra and UNDP, sector-specific institutions from Finland, international organizations specialized on impact bonds, such as Strat!gos and Social Finance UK and IFIs, such EIB and EIF to help the teams to refine the details of their impact bonds. The week's work culminated to a final pitching session.

The work is now continuing in these five countries with stakeholder discussions, data collection and legal analyses. We are looking forward in having more news about the design of these impact bonds early autumn.

Our findings from the first phases of the process are: more work need to be done to make the utilization of the mechanism easier for a bigger number of countries and the support more systematic. Further plans of UNDP for this year include: designing of an online curriculum for impact bonds, an outcome fund to support the outcome payments in the countries and more research on outcome-based budgeting to enable the outcome payments of the host governments. Stay tuned!


Elina Järvelä, UNDP Istanbul Hub 

Mika Pyykkö, Sitra

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Wednesday, 26 January 2022