Social Impact Bonds
A Social Impact Bond (SIB) is a multi-party contract enabling the government to pay for better social outcomes. Private investors provide working capital and assume the risk for social benefit programs. Those programs are then implemented by service providers and ultimately paid by the public sector. Governments only make outcomes payments once the desired goals have been achieved.
Investors take risk in the promised social outcome and earn a return on their investment if the outcome is met as measured by an independent evaluator.
Social impact bonds are not bonds
Social Impact Bonds are not bonds, they are pay-for-success contracts. What they have in common with a bond is that payment is dependent on a determined interest rate and term. However, in a Social Impact Bond, payment depends on whether the established objectives are effectively reached at the end of the term. Social Impact Bonds are meant to be a new way of creating public-private-partnerships with independent evaluators.
SIBs emerged out of the aftermath of the financial crisis of 2008, and are predominant in the US and the UK where federal and regional governments were cutting back on safety-net spending, SIBs can now be found in 25+ countries around the world.
Social impact bonds vs. green bonds
Social Impact Bonds are contracts with a pay-for-success mechanism. Green Bonds are in fact bonds: debt securities for which the proceeds have been earmarked for use in special projects that advance environmental objectives, such as investments in renewable energy, energy efficiency, or other measurable climate adaptation and mitigation projects.
Social impact bonds vs. development impact bonds
Social Impact Bonds are typically financed by a private investment group or foundation, whereas social development bonds are typically financed by a nongovernmental organization or development bank.
Example Organizers of SIBs
Bridge Ventures | Goldman Sachs | Rockefeller Foundation | Social Finance | Young Foundation
Are Social Impact Bonds the right capital for your business at this stage?
RECIPIENT PERSPECTIVE
Benefits
- Can be allocated to not-for-profit organizations and for-profit social enterprises
- For preventative programs that are hard to fund through market-rate measures, as long as the intervention ultimately saves the government money.
- Collaborative learning with other stakeholders
Challenges
- Complex and costly to manage involving heavy upfront investment in systems and contract design and substantial program evaluation and monitoring
- SIBs can fail to achieve intended social outcomes, with financial risks for failure
- Community members for whom the SIB is intending to help are rarely involved in the process of co-creating and co-monitoring the outcomes
- Complex and costly to manage involving heavy upfront investment in systems and contract design and substantial program evaluation and monitoring
- SIBs can fail to achieve intended social outcomes, with financial risks for failure
- Community members for whom the SIB is intending to help are rarely involved in the process of co-creating and co-monitoring the outcomes
Key Performance Indicators
- At-risk services fees, success fees, or outcomes promised if social impact is achieved.
CAPITAL GIVER PERSPECTIVE
Benefits
- Prevention: because service providers are compensated primarily on outcomes they are encouraged to focus on the prevention of the root cause vs. short term services
- Risk management: The public sector only has to pay for services that deliver outcomes; the investor bears the risk
- Innovation: Investors and service providers have an incentive to design effective interventions.
- Transparency: Evaluation is conducted by third parties, and may include randomized control trials.
Challenges
- High costs of evaluation
- Not all social service innovations are well-suited to save money in the long run
- Difficult to convene multiple stakeholders to develop contracts, evaluation criteria, and to monitor and measure outcomes
- Risks may be difficult to quantify
Key Performance Indicators
- Interest rate
- Custom KPIs that measure the cost and benefit of prevention
- Risk analysis if social impact is not achieved
When it Works Well
Shifts funding to prevention
The dream of Social Impact Bond creators is to fulfill Ben Franklin’s maxim: an ounce of prevention is worth a pound of cure.
SIBs aim to prove the value of preventative investment and influence government spending to shift away from remedial services to more prevention
Accelerates learning
The best SIBs create multi-stakeholder learning systems in the design of the contract, the methods of evaluation, and the monitoring and reporting processes to determine if the outcomes are met. Successful SIBs are able to test variables that lead to complex system change and understand what works, what does not work, and what is still unknown.
Failure made public
One of the first SIBs was devised with Goldman Sachs to address recidivism rates in Riker’s Island, NYC. While the SIB outcomes were not met, Goldman and other partners actively shared the results publicly so that others could learn for future SIB and social innovation design.
Co-creation and co-production
While this practice is rare, the best SIBs engage the communities they intend to help in the design stage, but also in evaluation and monitoring, acknowledging that value is co-created between services and the people that use them.
This is particularly true when interventions that are considered successful in one community are transported to another.
Validates which services to replicate
SIBs deliver evidence through third party evaluators that the services funded actually deliver the outcomes intended, and result in further investment and granting of government support when replicating in new contexts. However, adaptation and iteration are often required before successful replication when transporting services from one region or target community to another. The Riker’s Island Goldman Sacks SIB was a replication of more successful effort to reduce recidivism rates in Peterborough, UK, the first SIB ever attempted.
Challenges with Social Impact Bonds
Community needs ignored
Many SIBs have been designed with the heavy hand of investors and foundations with little say from the people who face the very social problem the SIB is meant to address. SIBs may focus attention, resources, and state resources from more effective services that communities value and appreciate. Worse, communities that have been historically excluded from capital may be voiceless in how their future will be determined.
High cost to evaluate
Because fees are tied to performance-based contracts, evaluation is conducted rigorously and often by third parties. In some cases with randomized control trials cost up to 20% of the total program or contract.
Measurement may over value quantitative measures and the human part of service work may be radically undervalued.
Delays to address systemic issues
Efforts to attempt fixes through SIBs may distract government leaders from addressing what should be the mandate of the state. For example, while the Riker’s Island Goldman Sachs SIB failures were made transparent, the horrifying reality of system continues to plague incarcerated people, their families and communities.
Commodification of human need
SIBs have been criticized for evaluating services in balance with direct outcomes they produce, thereby commodifying the human experience and challenging the public mandate of the state. Nadine Pequeneza, who created a documentary about SIBs called The Invisible Heart, described a SIB program to reduce the number of people sleeping on the streets of central London that incentivized the deportation of homeless people.
Financializes public service
SIBs were introduced to find a way for more social services to be provided in the context of shrinking social services budgets. Yet not all social services can be designed to deliver an intervention with the goal of saving money. Or worse, governments may end up paying more taxpayer money to fund the funders of innovative social services, thereby financializing social services.
Trends in Social Impact Bonds
Alternative evaluation
SIBs in the US started with randomized control trials at the gold standard to measure impact and outcomes. Given the high cost to design and conduct these types of evaluations, newer SIBs are experimenting with process tracking, qualitative comparative analysis (QCA), contribution analysis, and other methods.
SIBs and DIBs for SDGs
Development banks and nongovernmental organizations are designing SIBs and Development Impact Bonds to finance address social services in low-income countries. Many new SIBs and DIBs have been created to achieve the Sustainable Development Goals (SDGs).
Hybrid capital stack
In the US, foundations and investors collaborate to invest across a capital continuum, developing a capital stack of higher-risk high-interest rate capital, along with concessionary debt and non-recoverable grants to fund SIBs.
Before You Consider Social Impact Bonds
- Have you mapped your challenge area with the community you intend to help?
- Do you have a specific service or program that you believe could effectively address a root social issue, while simultaneously reducing the overall cost to society?
- Have you explored which partners or collaborators would help you address the complex challenge you faced?
- Have you mapped out the externalities and what might go wrong so that there are no glaring so-called unintended consequences?
Exploring Social Impact Bonds
- Review sites like Social Finance, the first investor in SIBs, to see what types of interventions get funded.
- SIB investors typically report their failures and successes, so begin reviewing what SIBs have worked and which have struggled. Read the critiques and understanding how SIBs can go awry.
- SIBs are invested regionally, often with city or regional governments backing the contract.
Discover Alternative Capital
Compare Social Impact Bonds to Grants and Other Types of Capital. These capital types each represent one way to grow your company, and you can choose other capital types as an alternative or pair and combine at different stages of your business. Consider these alternative capital sources or explore our Capital Library.
