Colombian cities are leading on ‘social impact’ bonds

Workers in Bogotá's historic district, La Candelaria. (Posztos/Shutterstock)

Alongside municipal and green bonds, another funding mechanism has emerged that can help cities lift vulnerable populations out of poverty: “social impact” bonds.

Colombia is now a global leader in this niche, write Emily Gustafsson-Wright and Izzy Boggild-Jones of the Brookings Institution. The Colombia Workforce Social Impact Bond, launched March 29, is a first for a developing nation, according to the researchers at the Washington think tank.

The bond’s goal is to reduce unemployment. In Colombia, that figure hovers around 9 percent nationwide but is higher among young and indigent people, who comprise much of the informal economy.

The bond funds will pay for skills training that could help residents of Bogotá, Cali and Pereira find jobs. A key priority is to assist extremely poor high-school graduates 18 to 40 years old — many displaced by armed conflict — enter the job market or secure higher-paying work.

The programme features job-placement efforts and “psychosocial support”, which emphasizes both psychological and social development. An overarching goal is job retention for individuals whose career prospects otherwise would be low.

[See: The SDGs could create 380 million jobs by 2030, analysis finds]

Social-impact bonds are a new example of “payment by results” financing to support social causes, Gustafsson-Wright and another researcher explained in a 2015 blog post.

Under this approach, governments reimburse private investors depending on progress made toward realizing target benchmarks. “If the intervention does not achieve outcomes, the government does not pay investors at all,” they note in the post.

A related socially minded funding mechanism, development-impact bonds, rely on investment and reimbursement from the private sector to fund project goals. These instruments have been used in Peru to finance sustainable cocoa and coffee production, and in India to educate girls in Rajasthan.

There is reportedly significant government support for Colombia’s bonds, with the Colombian government’s Department of Social Prosperity (Prosperidad Social) providing a portion of the reimbursement funds.

“Roughly 30 impact bonds, including with social and development aims, have or will be implemented across Asia, Latin America and Africa.”

A few foundations, some affiliated with the national government, made upfront contributions, according to the Brookings research. They are Fundación Corona, Fundación Bolivar Davivienda and Fundación Mario Santo Domingo.

The Swiss government, meanwhile, is covering the remaining costs through its State Secretariat for Economic Affairs. The Inter-American Development Bank’s Multilateral Investment Fund is assisting with fund distribution and programme design.

[See: Explainer: What are ‘green bonds’ and why are cities so excited about them?]

Roughly 30 impact bonds, including with social and development aims, have or will be implemented across Asia, Latin America and Africa, Gustafsson-Wright has reported.

In South Africa’s Western Cape province, whose capital and largest city is Cape Town, three new social-impact bonds will promote early-childhood development.

In the Mexican state of Jalisco, home to Mexico’s second-largest city of Guadalajara as well as Puerto Vallarta, an impact bond will assist households headed by women.

Details about these and other funding initiatives can be found here.

Brookings has teamed with Convergence, a Toronto-based institution that facilitates private-sector investment in emerging markets, and Grand Challenges Canada, a government-sponsored programme devoted to global health, on an upcoming report about impact bonds. To be published this summer, the report will build on an event that the three groups held in November.

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David Hatch is a correspondent for Citiscope.  Full bio

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