The Social Impact Bond Model and Why It Matters

I recently returned from the Social Capital Markets conference in San Francisco where I introduced the Social Impact Bond model to the global impact investor community alongside a distinguished panel. My role representing Social Innovation Generation was to share the R&D that is happening in Canada and to explain why we are supporting this exploration. Our office has been working with numerous partners and now with growing momentum behind us, I feel it is an opportune time to share some of our thinking.

The Social Impact Bond (SIB) model was pioneered in the UK by an organization called Social Finance (no relation to SocialFinance.ca) and by innovation thought leaders like Geoff Mulgan and Arthur Wood. The crucial details that drive this model are found in a comprehensive report by Social Finance UK, Towards A New Economy: Blended Value Creation through Social Impact Bonds.

An SIB is not actually a traditional bond mechanism, but acts more like an equity investment that contracts between private investors and government, and pays for the provisioning of social services and experimentation by innovative organizations. If these services are successful in achieving targeted outcomes, investors are provided a financial return based on savings to government. If they are not successful, government pays nothing and investors receive nothing.

This model could be useful in a variety of different policy areas that include: reducing residential placements for children in care; lowering demand for power generation; decreasing the prevalence of diabetes; reducing youth re-offending rates in the justice system; and increasing Aboriginal employment – all areas that currently have high costs to taxpayers and significant social benefits tied to prevention.

The SIB model reduces the risk to government of supporting innovative interventions. The focus of government shifts to aligning funding with client outcomes and affords the flexibility (and incentive) for program experimentation along the way. The SIB is a partnership opportunity for government, nonprofits/social enterprises, and investors that tackles the root problem of complex problems. Let’s explore the attributes of the model from the government, service delivery, and investor perspectives.

Currently and historically government’s social innovation policy has been constrained by a bureaucratic regime. This translates into relatively small amounts of funding for innovative prevention (e.g. 3% of total health budget) and results in funding low risk outputs (e.g. # of training sessions delivered) rather than commissioned outcomes (e.g. # of new jobs created).

Social entrepreneurs, enterprise and charities developing innovative social services are often constrained by the current government funding model. In general, funding is short-term in nature and earmarked for programs rather than core operations. Inadvertently, these dollars do not meet the long-term commitment needed to make a significant and lasting impact. Competition for these funds is fierce, ultimately providing disincentives for organizations to share knowledge, best practices, or even collaborate around shared outcomes.

In Canada, a new wave of investors are looking for financial vehicles that produce social value for money and provide a financial return. Canadian options for impact investors, however, are limited. Social Innovation Generation and a growing network believe the Social Impact Bond model is one way among many to create opportunities for impact investors. Implementations of the SIB model would create vehicles that channels impact investor dollars toward positive outcomes in areas aligned to their mission and values.

The SIB model can be a stimulus for the expansion of Canada’s innovation policy and can help build a social finance ecosystem. One should note that this model is not relevant to all social problems and is not the silver bullet for all non-profits facing capital barriers. The role of grants and philanthropy in the sector should not be discredited. An SIB is simply one new model that some organizations may find useful particularly if they are working in an area where there are high public costs and where evidence-based interventions are in place.

There is no debate that outcome-related commissioning is more difficult and measurement is complex, but the time is right to advance methodologies on this. The SIB model does exactly that by creating an environment where longer-term funding (program and operational) can be pooled by investors and provided upfront to organizations demonstrating they can work together to put in place the most effective programs for tackling a social problem.

Some may regard the SIB as a radical new approach, but stripped of its provocative name, the model is similar to that of a contingent revenue model or innovative marketing for new products or services in the corporate world. For more context and further explanation of the ideas herein, I offer Social Innovation Generation’s recent report commissioned by HRSDC, Social Impact Bonds: Potential Applicability for Canada.

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