Overview: Palladium was awarded a proof of concept design grant in 2016 Q1. Palladium will use the Convergence Design Funding to complete the design of a USD 35M, five-year impact bond that will fund a number of maternal and newborn health (MNH) interventions in the state of Rajasthan, India, where maternal and newborn mortality is a critical challenge. When fully implemented, the Rajasthan MNH impact bond is expected to be one of the largest impact bonds in an emerging market, and its successful rollout will play a crucial role in establishing the viability of impact bonds in development finance. At the time of grant award, two international outcome funders and a lead investor were committed to the impact bond. All actors, including the Government of Rajasthan, agreed from the outset to move from an initial-phase three-year impact bond where the outcomes are paid for by international agencies, to a second-phase two-year impact bond for which a second tranche of funding will be raised and government will purchase the outcomes.
Design question and learning potential for the market: How can an impact bond be structured and easily implemented, aiming for scale as well as sustainability over the long-term?
As few impact bonds have been implemented in developing country contexts, Palladium’s design activities will help develop a better understanding of best practices on all aspects of instrument design, which other practitioners will be able to leverage as well (e.g., structuring payment metrics, fundraising from outcome funders and investors, coordinating and monitoring service provider activity, structuring and determining the governance of the legal entity). The Rajasthan MNH impact bond includes a hybrid structure with outcomes initially paid for by international agencies and then by the state government. This approach is novel and could address many of the challenges of other impact bond designs – especially the challenge of securing a government outcome funder from the outset. This approach uses funding from international agencies with an aligned development mandate to prove the approach achieves results, while working in parallel with government to develop internal capacity and determine the appropriate authorities to commision outcomes. As governments will likely be one of the largest outcome funders of impact bonds in emerging markets, it will be critical to develop a reliable approach to securing their participation. Further, the Rajasthan MNH impact bond intends to be one of the largest impact bonds in a developing context. If borne out, the Rajasthan MNH impact bond could demonstrate the pre-conditions and ideal structure for the approach to achieve scale. Overall, the final design will be an important template for practitioners considering similarly sustainable and ambitious impact bond structures.