Social Impact Bonds (SIBs) have been developed as an alternative source for raising capital for social projects - linking returns with social indicators. Unfortunately, by nature SIBs are high-risk, high-return and low-liquidity investments that are susceptible to moral hazard. An investor may be hell-bent on tweaking the social indicators in his favor just to get the desired return. The costs that are incurred in drafting legal documents outlining precise social impact metrics might outweigh the actual benefits accrued. In other words, while the concept of SIBs is fabulous, the execution leaves much to be desired.
A social innovation gaining prominence, Social Impact Bonds are being termed as a vehicle to fund social-purpose organizations in an operationally efficient manner by tying returns to predefined social indicators. The return on investment would effectively be contingent upon the ability to generate cost savings by deploying capital in an effective manner. In theory it is a reasonable proposition, which involves the private sector, makes the sovereign accountable, and inculcates a sense of societal ownership in the private sector. However, the attractiveness of these bonds in actually making a difference would be contingent upon their relative attractiveness to investors and the control that the private sector can exercise over the service providers (in which they have deployed their capital).