All cash-strapped governments should be using this tool

LONDON: Around the world, in rich and poor countries alike, public budget constraints are limiting efforts to address social ills and fueling political polarization. Desperate for fiscal headroom, outcomes-based partnerships (OPs) that can attract private “impact investment” have become a compelling option. OPs also align with the growing demand for full transparency in terms of businesses’ environmental and social impact that has been gradually changing how markets value companies, rewarding those that produce positive social and environmental outcomes, and punishing those that do not.

In this context, the arrival of “impact accounting” marks a watershed, because it has made measurable social and environmental outcomes comparable with profits. As the trend toward full transparency continues, it will bring about disruptive changes to investment portfolios and companies. Consumer and investor preferences for products and services that deliver positive social and environmental outcomes are making it financially rewarding for companies to optimize for not only risk and returns, but also for impact.

Increasingly rigorous methods of measuring impact can also benefit governments. By engaging in OPs, governments can deliver social improvement at half the cost, while paying only when the targeted outcome has been achieved. In addition to freeing up public spending and generating savings, OPs provide an opportunity for socially minded investors.

The British government has already recognized this potential. Nearly 100 OPs are in operation in the United Kingdom, and this past July, the government launched the Better Futures Fund, which aims to improve the lives of 200,000 vulnerable children. With a capitalization target of £1 billion ($1.33 billion), the BFF will be the world’s largest “outcome payer” (the party that issues payments for outcomes achieved under a social outcomes contract or impact bond). It will bring together government ministries, local communities, investors, charities, philanthropists, and social enterprises to break down opportunity barriers for children, boost student achievement, and fund programs in care, employment support, and mental health – all without requiring upfront government spending.

The UK government also recently announced a new Office for the Impact Economy, which will serve as a “single front door” for impact investors, philanthropists, and purpose-driven businesses seeking to partner with the government. The goal is to unlock OPs’ massive potential to make headway against major social challenges.

This potential is not confined to developed countries. That is why former UK Prime Minister Gordon Brown and I helped establish the Education Outcomes Fund (EOF), which creates incentives for OPs in emerging markets by paying out for measurable improvements in education. The EOF’s project in Sierra Leone offers an inspiring example of how OPs can make a difference. After just two years, there is already evidence that student achievement has improved as much as one would expect from an extra year of schooling in Sub-Saharan Africa’s best-performing education systems.

OPs’ strong record of success reflects several factors. They are uniquely positioned to unite key stakeholders behind a shared social objective; they submit to independent verification of outcomes; and their public funding ensures that their work can be integrated into broader policy strategies.

The evidence to date shows that OPs deliver impressive socioeconomic returns. A 2024 independent UK analysis found that they generated direct public savings and economic benefits of £9 for every £1 of public spending, by delivering superior outcomes at half the cost of traditional fee-for-service procurement. Moreover, the proven investor appetite for outcomes-linked investment makes it feasible to establish multi-billion-dollar programs to tackle homelessness, recidivism, youth employment, workforce upskilling, chronic disease, and unemployment among the disabled. Additional support cannot come soon enough, given that many of these challenges will grow as AI displaces jobs.

The problem with most government programs is that they measure output (courses delivered, certificates awarded) rather than outcomes (such as employment) that matter to individuals and the economy. As a result, governments cannot clearly see the socioeconomic returns from their spending, nor can they easily distinguish effective programs from others. By contrast, the OP model focuses service providers on achieving measurable outcomes, ultimately revealing what works. It mobilizes private capital to cover upfront program costs, and it transfers financial and delivery risk to investors who are better positioned to carry it.

For investors and businesses, impact accounting (which expresses social and environmental outcomes in monetary terms) makes it possible to compare outcomes with other standard variables such as investments, sales, and profits, revealing the opportunities that lie in optimizing risk, return, and impact. For example, when companies can demonstrate positive impacts by satisfying a consumer preference for healthier and environmentally conscious products, they can gain competitive advantage, accelerate their own growth, and benefit from access to cheaper capital.

For governments, meanwhile, impact accounting enables comparison of expenditures and their social outcomes, while generating the data needed to optimize outlays. As policy tools, OPs and impact accounting therefore make possible, for example, a sliding-scale tax credit that increases as worker training leads to higher wages. Companies that invest in their workforce would then benefit from tax breaks, while those running low-wage operations would pay more.

Eventually, we can expect guidelines from the International Sustainability Standards Board will provide a framework for impact accounting that is similar to financial accounting. By the end of the next decade, investors and companies are likely to be disclosing impact statements that show sales, costs, and outcomes in monetary terms.

But to achieve success on a global scale, governments need to get three fundamentals right. The first is robust digital infrastructure that allows companies to submit impact reports with minimal effort and compliance costs. Second, they must shift procurement policies to outcomes-based contracting and multiyear budgeting to accommodate long-term spending. Lastly, they must establish guardrails to prevent manipulation of the system, and to ensure ongoing participation by the small and medium-size enterprises that drive innovation.

New challenges require new tools. Governments around the world should grasp the opportunity that OPs offer: superior social outcomes for less money, paid later. There are few better ways to raise private capital in support of cash-strapped governments’ social priorities. Several hundred successful OPs are already operating globally. Policymakers should be bold in scaling up a proven method for improving lives.

Ronald Cohen, Chairman of The Portland Trust, is President of GSG Impact and Vice-Chair of Capitals Coalition.

Copyright: Project Syndicate, 2025.
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