Social impact bond

Overview

A social impact bond (SIB), also known as pay-for-success financing, pay-for-success bond (US), social benefit bond (Australia), pay-for-benefit bond (Australia), social outcomes contract (UK), social impact partnership (Europe), social impact contract (Europe), 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. Geoff Mulgan claims to have coined the term while he was chief executive of the Young Foundation. The first SIB was launched by UK-based Social Finance in September 2010. By July 2019, 132 SIBs had been initiated in 25 countries, and they were worth more than $420m. As of May 2023, 23 countries use SIBs, with (as of 2022) 276 projects in place and capital raised to the value of $745m.

History

The SIB is a non-tradeable version of social policy bonds, first conceived by Ronnie Horesh, a New Zealand economist, in 1988. The first SIB was announced in the UK on 18 March 2010 by then Justice Secretary Jack Straw, to finance a prisoner rehabilitation program at Peterborough Prison. This grew out of research on alternative financing models by the Young Foundation, the Prime Minister's Council on Social Action (CoSA, a cross-sector advisory group) and Social Finance beginning in 2007 and published in 2009. The work was continued by the Centre for Social Impact in Australia, and other NGOs and private companies. In Australia, the intention to trial SIBs 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. Political support for SIBs in the US emerged in federal budget proposals in 2011, and from the cities of New York and Baltimore. The Rockefeller Foundation supported the US expansion of Social Finance, the SIB Technical Assistance Lab at Harvard Kennedy School and the October 2011 SIB convention hosted by the White House Office of Social Innovation and Civic Participation. 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 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. In February 2013 Allia, a charitable social investment organisation, announced a bond fund intending to diversify into real estate lending and the Essex SIB, which would have been the first opportunity for retail investors to in a SIB. The product was later withdrawn from sale due to lack of investors. In 2016 the Government Outcomes Lab was launched as a partnership between the UK government's Office for Civil Society and University of Oxford Blavatnik School of Government to study SIBs and outcomes-based contracting approaches more broadly. In July 2016, Social Finance initiated a white paper on the state of the SIB market, "Social Impact Bonds: The Early Years" and a live, sortable global database of SIBs. In February 2018 the Social Impact Partnerships to Pay for Results Act (SIPPRA) was signed into law, allocating $100 from the US Treasury towards SIBs. The bill had been introduced with bipartisan co-sponsorship in January 2017. In 2021 the Treasury awarded grants to local and state agencies in three states. Six further awards were announced in December 2024.

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 (usually a government), if contractually agreed-upon outcomes are achieved, are often referred to as ‘Social Impact Bonds’ ... Social Impact Bonds (SIBs) 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 (DIB) 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.

Arguments in favour

Advocates of SIBs 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 (though not measured and verified yet) 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.

Criticism

Critics note that because the outcomes-based payments are dependent on governmental funds which must be budgeted, social impact bonds do not actually raise additional capital for social programs, but instead displace funding for other programs. Given the need to budget for a return on investment, a program evaluation, middle managers, and the expenses of designing the complex financial and contractual mechanisms, social impact bonds, according to critics, may be an expensive method of operating social programs. Other criticisms include:

Criteria for success — Donors will seek to fund that which can be observed and measured, the outcomes (not just the outputs). This will leave agencies addressing problems in society unable to access these funds. This is going to be particularly true for advocacy, arts and alternative organizations. It will be difficult for social coalitions to get funding as their contributions are dispersed through member organizations and the effect they have on government policies, for example. The terms of these instruments may be set to overpay for more readily achievable goals. Doing so would increase long term government spending and divorce such spending from direct deliverables. More donor influence — Donors, or now investors, will want to make sure their money is being used according to contract, and will therefore want to be more involved in the delivery of social services. They may want NGOs to adopt a style of delivery used in for profit business. Unfair competition — Competition with NGOs will emerge. Agencies that secure funds will be able to operate in areas where NGOs now operate, but they will have greater resources, more narrowly defined goals (and therefore successes to publicize) and will set the standard for government funded agencies and their actions. Reduces public responsibility — By reducing the government's responsibilities and accountability for delivering services. Though governments may not genuinely represent their societies, they are still the best representatives of the public will and governments play an important role in maintaining a civil society sector. Devolving Social services to businesses risks this social contract when other tax and program options can be made available. Non-tradability — New Zealand economist Ronnie Horesh argues that because SIBs are not tradable, SIBs favour existing institutions, are inherently narrow and short-term in scope, and impose relatively great monitoring costs. Not required — Social Programs targeted to be transferred into social impact bonds are targeted because they are compatible with the SIB structure, not because of the merits of SIB or out of dire need. Financialization of public services — social impact bonds require a clear measurement of the costs and outcomes of the programs, which encourages SIB projects to "focus on financial targets rather than eliminating the underlying cause of the social problem at hand".

Past and present SIB initiatives

Below are a few examples of SIB initiatives that have been launched.

United Kingdom

On 18 March 2010, Secretary of State for Justice Jack Straw announced a six-year Social Impact Bond (SIB) pilot scheme managed by Social Finance that will involve about 3,000 short term prisoners from Peterborough prison, serving less than 12 months, receiving intensive interventions both in prison and in the community. Funding from investors outside government will be initially used to pay for the services, which will be delivered by Third Sector providers with a proven record of working with offenders. If reoffending is not reduced by at least 7.5% the investors will receive no recompense. The Social Impact Bond in Peterborough was launched by Secretary of State for Justice Kenneth Clarke MP and Prisons Minister Crispin Blunt on 10 September 2010.

United States

New York City: In 2012 Goldman Sachs agreed to lend up to $9.6 million for rehabilitation managed by MDRC at Rikers Island jail. If successful in reducing recidivism, the program would have saved the city money, which would have paid back Goldman's capital plus a variable profit. Goldman disbursed the loan in tranches, so when evaluations by the Vera Institute of Justice found that interim targets were missed, Goldman ceased funding and partially recouped its invested capital from a partial loan guarantee from Bloomberg Philanthropies. New York State: In mid-2012, the New York State Department of Labor (DOL) selected Social Finance US as its intermediary partner in structuring an application for federal funding for a Social Impact Bond. In 2013, New York approved $30 million in its budget to fund social impact bonds during the subsequent five years. In September 2013, New York State received a $12 million grant from the United States Department of Labor (USDOL) to fund a Pay for Success project designed to increase employment and reduce recidivism among 2,000 formerly incarcerated individuals in partnership with Social Finance US and the Center for Employment Opportunities. This was the largest grant awarded by USDOL for Pay for Success projects. Initial outcomes indicate that, at least in the first phase of these PFS projects, the interventions did not produce the desired effects of reducing recidivism and improving employment among the populations of concern. Massachusetts: On 1 August 2012, the Commonwealth of Massachusetts announced that Third Sector Capital Partners will serve as main intermediary, in partnership with New Profit Inc., for the youth recidivism initiative. Roca, United Way of Massachusetts Bay and Merrimack Valley, and Youth Options Unlimited will also participate in the youth recidivism project.The program, called Social Innovation Financing, operates on a simple "pay for success" model, in which nonprofits must demonstrate that by keeping youth from being reincarcerated. According to the state's press release, the juvenile justice contract "will be designed with the specific goal of reducing recidivism and improving education and employment outcomes over several years for a significant segment of the more than 750 youth who exit the juvenile justice system, and the several thousand who exit the probation system annually." Federal: The U.S. Department of Justice gave "Priority Consideration" to Fiscal Year 2012 Second Chance Act grant applications that include a Pay for Success component. The Second Chance Act (P.L. 110-199) authorizes federal grants to fund services that help reduce recidivism. In 2013, the U.S. Department of Labor awarded nearly $24 million in grants for Pay for Success projects that provide employment services to formerly-incarcerated individuals in order to increase employment and reduce recidivism.

Australia

The Government of New South Wales, Australia, announced on 20 March 2012 that it will develop a pilot to reduce adult recidivism with Social Ventures Australia and Mission Australia. Several States in Australia have now initiated social impact bonds - the latest of which is Victoria which, on 21 December 2017, announced the conclusion of a SIB deal with Sacred Heart Mission. A major external adviser to Sacred Heart Mission was Latitude Network. Also in 2017, Social Ventures Australia funded the Aspire Social Impact Bond, marking the first SIB in South Australia.

United Kingdom

Housing Minister Grant Shapps and London Mayor Boris Johnson announced in March 2012 that a Social Impact Bond would be initiated to help London's persistent rough sleepers off the streets and into secure homes. The two bonds issued under this programme were launched in December 2012. One successful SIB in the UK is the GM Homes Partnership in Manchester which took on 356 long-term rough sleepers. According to The Guardian, three years on, in 2021, 79% of those are still accommodated with several having started employment or training and other receiving help for their mental health.

United States

Massachusetts: In the second of two pilots launched by Massachusetts in 2012, Third Sector Capital Partners joined with the Massachusetts Housing and Shelter Alliance (MHSA), main intermediary for a chronic homelessness project, as well as the Corporation for Supportive Housing and United Way. The Massachusetts Housing and Shelter Alliance represents nonprofit housing organizations that provide housing and support services, such as medical care and vocational training. The consortium' goal was to increase the number of housing units it provides to about 600 from 220.

Australia

Australia's second Social Impact Bond concerning chronic homelessness was initiated on 21 December 2017 by the Victorian Minister for Housing, Disability and Ageing. The SIB will concern three cohorts of 60 individuals, providing rapid housing and comprehensive, individualised case-management assistance for three years each. The SIB provides expansion capital for Sacred Heart Mission's 'Journey to Social Inclusion' program which had previously been through pilot testing. Lead external advisors for this SIB deal were Latitude Network.