Impact Bonds: Considerations for Investment Returns and Pricing of Outcomes

Impact bonds represent a relatively new type of financing modality that holds great promise for crowding in private capital and sharing performance risks in projects in developing countries, as part of the World Bank Group’s maximizing finance for development approach. These instruments involve a performance-based contract that employs private finance to cover the upfront cost of project delivery. Upon successful delivery of pre-specified outcomes, the party issuing the contract, typically a domestic government or international development funding agency, reimburses the investors for the cost of the service, plus a return. The nascence of impact bonds presents outcome payers with a number of challenges when seeking to balance appropriate returns and commercial viability. This paper offers an initial framing of this challenge, so that outcome payer organizations can begin to address questions regarding how to approach pricing outcomes in impact bonds.