Many governments around the world are experiencing major fiscal problems with global debt reaching an all-time high of USD247 trillion (IIF, 2018). With US interest rates starting to rise and global growth losing momentum, worries over credit risk are on the increase even in relation to developed countries. This trend makes it much harder for countries to pay off debts or respond to any upcoming recessions or financial crises. It also makes it difficult for governments to address socio-economic challenges, which are also on the rise.
What this means, therefore, is that now more than ever, any expenditure from the public purse has to be thoroughly justified, administered efficiently, and evaluated effectively to ensure an efficient return on investment while addressing social challenges. For many cash-strapped states and local governments, the competition for funding is intensifying as costs associated with social interventions are escalating as budgets are diminishing.
It was in this context that social impact investing (SII) first began to emerge in the early 2000s as an alternative model for the financing of projects aimed at resolving social problems in the UK and North America. What SII does is provide innovative new methods that efficiently allocate public and private capital to address social needs of communities and nations with the explicit expectation of measurable social benefits and private financial return (OECD, 2015).
One model for implementing SII is through Social Impact Bonds (SIBs) (Ragin & Palandjan, 2013) which enables governments (or other payers) to shift the risk to private investors while promoting increased accountability with payment ultimately going to investors based on the achievement of predefined outcomes.
The purpose of this paper is to explore and examine how governments in developing countries could play a more effective role in driving SIBs forward to help bridge the funding gap for vital social programs. The paper does not suggest that SIBs could replace the conventional model of government expenditure, but argues that with the right management – specifically in relation to the measurement and auditing of social outcomes – private capital will be attracted to these types of investment options, particularly if the SIBs are aligned with the UN Sustainable Development Goals (SDGs) and where international agencies can provide some third-party endorsement.
The paper concludes that SIBs provide opportunities to tackle a huge diversity of issues from increasing the number of educated girls in a village in Rajasthan, to managing adaptation to climate change at a national level. The challenge is that, despite the great potential of SIBs to address these issues, governments in the developing world are sometimes more of a hindrance than help. Thus, the role of the government is considered a critical success factor if SIBs are to become more widely used in the developing world. Sometimes this might mean staying out of the way altogether which can be a politically sensitive issue especially if experience of international agencies in the past (e.g. IMF structural adjustment programs) had negative consequences. However, with the right partners, and the right metrics to measure and evaluate social impact, the benefit to societal welfare is potentially enormous, especially if the narrative around SIBs becomes more positive because, typically, success will breed further success.
The research is exploratory and uses secondary data analysis in order to achieve its objectives. A mixed method of qualitative and quantitative is used where several numerical data are analyzed in addition to content analysis of peer reviewed journal articles focusing on social impact bonds. The main limitation of the research lies in the paucity of available data on SIBs in developing countries and in aligning SIBs with SDGs. This, of course, creates an opportunity for future research to be conducted in both fields.
- Institute of International Finance (IIF). (2018, July 9). Global Debt Monitor. Retrieved from https://www.iif.com/Research/Capital-Flows-and-Debt/Global-Debt-Monitor
- OECD. (2015). Social Impact Investment: Building the Evidence Base. OECD, Paris.
- Ragin. L.M. & Palandjan,T. (2013). Social Impact Bonds: Using impact investment to expand effective social programs, Community Development Investment Review, 1, 63-67, (Federal Reserve Bank of San Francisco).