Social impact bond


A social impact bond, also known as pay-for-success financing, pay-for-success bond, social benefit bond, pay-for-benefit bond, social outcomes contract, social impact partnership, social impact contract, or simply a social bond, is a type of outcomes-based contracting, whereby a contractor typically attempts to effect a policy of government but does not get paid by the government unless specified goals are achieved. The term was invented by Geoff Mulgan, chief executive of the Young Foundation. The first SIB was launched by UK-based Social Finance Ltd. in September 2010.
By July 2019, 132 SIBs had been initiated in 25 countries, and they were worth more than $420m., 23 countries use SIBs, with 276 projects in place and capital raised to the value of $745m.

History

The social impact bond is a non-tradeable version of social policy bonds, first conceived by Ronnie Horesh, a New Zealand economist, in 1988. Since then, the idea of the social impact bond has been promoted and developed by a number of agencies and individuals in an attempt to address the paradox that investing in prevention of social and health problems saves the public sector money, but that it is currently difficult for public bodies to find the funds and incentives to do so.
The first social impact bond was announced in the UK on 18 March 2010 by then Justice Secretary Jack Straw, to finance a prisoner rehabilitation program. In the UK, the Prime Minister's Council on Social Action was asked in 2007 to explore alternative models for financing social action. The group began to develop the idea of a social impact bond, and the work is being taken forward by a number of organisations including Social Finance, an organisation committed to increasing investment in the third sector, the Young Foundation, the Center for Social Impact in Australia, and other NGOs and private companies. In the UK, the Government Outcomes Lab was initiated by a partnership between the UK government and the University of Oxford to investigate evidence concerning the use of social impact bonds and outcomes-based contracting approaches more broadly.
The idea of a social impact bond has generated significant interest from government officials in multiple countries, including US, UK, and Australia. Social impact bonds have generated a particularly large amount of interest in the United States. In August, 2012, Massachusetts became the first US state to create a policy which encourages the creation of Social impact bonds, termed "Social innovation financing". The state legislature authorised spending as much as $50 million on the initiatives. In Australia, the intention to trial social impact bonds was announced in New South Wales in November 2010 by Premier Kristina Keneally of the Australian Labor Party. The policy was continued by the Coalition after a change of Government in 2011.
In November 2012, Essex County Council became the first local authority in the UK to commission a social impact bond in Children's Services, with the intent of providing therapeutic support and improving outcomes for adolescents at risk of going into care. Nick Hurd, the minister for civil society, commented: "Social impact bonds are opening up serious resources to tackle social problems in new and innovative ways. This is about communities, businesses and charities all working together to change people's lives, whilst at the same time making savings for the taxpayer."
In February 2013 Allia, a charitable social investment organisation, announced the first public opportunity in the UK to invest in a social impact bond. Although the product was later withdrawn from sale due to lack of investors, the Future for Children Bond combined a relatively low-risk ethical investment into affordable housing to provide the funds to repay capital to investors, with a greater risk investment into a social impact bond with the intent of delivering a greater social effect and providing an additional variable return. It would have invested into the social impact bond for Essex County Council to ‘improve the life outcomes’ of children aged 11–16 at risk of going into care.
In July 2016, the Social Finance Global Network initiated a white paper on the state of the SIB market, "Social Impact Bonds: The Early Years". Social Finance also released a live global database of SIBs. The database can be sorted by country, issue area, investor, payor and service provider, providing a comprehensive overview of SIBs initiated to date and information concerning the many in development.

Definitions

There are a range of interpretations of what the term ‘social impact bond’ means. Generally, social impact bonds are a type of bond, but not the most common type. While they operate during a fixed period of time, they do not offer a fixed rate of return. Repayment to investors is contingent upon specified social outcomes being achieved. Therefore, in terms of investment risk, social impact bonds are more similar to that of a structured product or an equity investment. Third Sector Capital Partners describes social impact bonds as “a potential financing option available to support pay-for-success programs. Social impact bonds bring together government, service providers and investors/funders to implement existing and proven programs designed to accomplish clearly defined outcomes. Investors/funders provide the initial capital support and the government agrees to make payments to the program only when outcomes are achieved. So government pays for success.”
Social Finance UK describes social impact bonds as: “a social impact bond is a public-private partnership which funds effective social services through a performance-based contract.” Social Finance, therefore, specifies that the investment is from non-government bodies.
The Young Foundation describes social impact bonds as: “a range of financial assets that entail raising money from third parties and making repayments according to the social impacts achieved.” The Young Foundation envisages that public bodies could be potential investors.
The Non-Profit Finance Fund describes social impact bonds as: “PFS financing agreements, in which private investors provide upfront capital for the delivery of services and are repaid by a back-end, or outcomes payor, if contractually agreed-upon outcomes are achieved, are often referred to as ‘Social Impact Bonds’... Social Impact Bonds are a mechanism by which to shift financial risk from service providers to investors, with investors underwriting service providers’ based on their ability to deliver on positive social outcomes.”
The Government Outcomes Lab identifies four main dimensions along which SIBs might vary: “the nature and outcome of payment outcomes”, “the nature of capital used to fund services”, “the strength of performance management”, and “the social intent of service providers”. According to the GO Lab, a 'core' SIB is therefore defined by “100% payment on outcomes”, “independent and at-risk capital”, “a high degree of performance management”, and “a strong social intent of service providers”.
In developing countries, a development impact bond is a variation of the SIB model. DIBs are outcomes-based funding structures for the delivery of public services in low- and middle-income countries. As with SIBs, investors would provide external financing and only receive a return if pre-agreed outcomes are achieved. Funds to remunerate investors come from donors, the budget of the host country, or a combination of the two. Financial returns to investors are intended to be commensurate with the level of success. DIBs have the potential to improve aid efficiency and cost-effectiveness by shifting the emphasis to implementation quality and the delivery of successful results. In October 2013, Social Finance Ltd. and the Center for Global Development released a report outlining the findings of a high level working group set up to explore the potential of this new mechanism.

Arguments in favour

Social impact bonds being a new program, the hypothetical benefits predicted by its advocates have not been measured or verified yet. Advocates of these performance-based investments claim that they encourage innovation and tackle difficult social problems, asserting that new and innovative programs have potential for success, but often have trouble securing government funding because it can be difficult to prove their effectiveness rigorously. This type of financing allows the government to partner with private service providers and, if necessary, private foundations or other investors willing to cover the initial costs and assume performance risk to expand promising programs, while assuring that taxpayers will not pay for the programs unless they demonstrate success in achieving the desired outcomes. The expected public sector savings are used as a basis for raising investment for prevention and early intervention services that improve social outcomes. Advocates also believe that SIB programs can achieve positive social outcomes, may create fiscal savings for government, but also involve changes of funding arrangements that bring risks to service agencies.
The benefits of social impact bonds depends on the definition being used, but the broad benefits are:
  • Prevention — more funds are available for prevention and early intervention services.
  • Risk transfer — the public sector only has to pay for effective services; the third party investor bears all the risk of services being potentially ineffective.
  • Innovation — risk transfer enables innovation since investors and service providers have an incentive to be as effective as possible, because the larger effect they have on the outcome, the larger the repayment they will receive.
  • Performance management — the SIB method includes continuous evaluation of program effects, increasing the rate of learning about which methods work and which do not. Governments will therefore fund "what works"; repositioning government spending to cost-effective preventive programs. Additionally, independent evaluation creates transparency for all parties.
  • Collaboration — enable collaboration across multiple commissioners and within service provider networks and attract new capital to the social, educational and healthcare sectors.