This article introduces a new version of the social impact bond model, described earlier on SocialFinance.ca, that marries the SIB concept to new hybrid legal tools that are under consideration in the US and UK. Part I, published here, explained the potential benefits of this model. Part II, below, reviews current and future developments that can help turbocharge social impact bonds by harnessing new market structures.

Future potential developments of the social impact bond

Of course, the SIB is not a ‘bond’ as such but what bankers would call a structured product. The current return of the SIB operating at Peterborough Prison in the UK is structured to allow anything from negative 100% to plus 13%. Dependent on the social issue and level of opportunity cost that can be captured and/or subsidy employed, the new developments mean different risk-reward parameters could be achieved.

In addition, the cash flow of a SIB could be securitised. This would be easy to do in its current form as it is British Government cash flow. That would create an instrument that would trade as a function of the achievement of that individual social target. One could possibly see a number of these instruments traded on a Social Stock Exchange. This would then de facto create a secondary market, providing liquidity and exits for investors – a current clear deterrent to investment in scale in the current social capital market.

Furthermore, international applications may well require some form of guarantor structure to attract mainstream investors. This is well within the capability of current development agencies. An example might be OPIC, the Overseas Private Investment Corporation, in the US, or – by a revision of the rules – the Export Credits Guarantee Department (ECGD) in the UK.

Critical factors

The Social Impact Bond will work where there is a clear, definable social benefit which can be monetised to the financial benefit of another player – government or corporate. There also needs to be a robust, independent metric process since in this structure “what gets measured will get done”, together with an independent auditor. In addition, the process should in some cases have an additional audit process, namely a further independent community feedback mechanism for validation of the social purpose and to ensure that the metric is not distorting the social endeavour.

As in all these impact investing structures, a minimum level that it does no harm should be adhered to. Developing technology also is beginning to give the ability to map a systemic outcome model on the ground of the interaction of a number of players.

With shortage of money there will be pressure for two-part relationships around Social Impact Bonds. This would be wrong, although it is clear the existing status quo may argue for it. It is critical that there are relationships involving several partners across government, civil society and corporate sectors, with the disciplines and flexibilities of the corporate sector and private capital market injected into the framework. This will also ensure that a premium is attached to innovation, disruptive technologies and the attainment of solutions.

Current projects

Domestic initiatives – Since the launch of the UK prison bond in Peterborough, there are a further four projects in process with more being considered in the UK. One of them integrates the legal framework noted in this paper.

International initiatives– In the US the Obama administration has placed a line of $100m in the US budget for Social Impact Bonds. The Rockefeller Foundation has made a grant to the Nonprofit Finance Fund to further development of the structure in the US. There are a number of projects now in design or launch phase in Canada (Health), Mexico (Public Safety), Netherlands (Health in Africa) as well as around the issue of sanitation. This has a broad collaboration of players, including McKinsey, with metrics analysed by the WSP (Water Sanitation Programme) of the World Bank, indicating the annual cost to many developing markets is at between 2% and 7% of GDP – circa $500bn annually. It is worth noting that in many of these markets the benefits potentially to be monetised under a social impact bond are eight times or more the size of the current required investment.

In Europe, the EU is at the early stages of reviewing such vehicles. However, it is worth noting the proactive stance taken by Luxembourg in revising its investment law to create the legal framework for more sophisticated social investments. Of particular note is a layered microfinance structure supported by the Swiss and German development agencies. The structures are also being reviewed in a Pan Asian application and domestically in Hong Kong, Singapore, Canada, Italy and Holland. Indeed in the Dutch case, FMO, the development agency, has been working with the Scandinavians (Swedes and Tällberg Forum) and others (including my organisation, Total Impact Advisors) looking at full value chain models where it has been noted that these models are two critical elements in a broader strategy to redefine the relationship between the public and private sectors. Following the Tällberg Forum, there has been a positive response to these innovations, including a speech by the Direcor General of the Swedish International Development Agency which can be viewed on this link.

Other than the US domestic agenda on these instruments (L3C and the US Social Impact Bond), internationally from the US there are initiatives applying these concepts in water as well as an entity created in Geneva focusing on mechanisms to drive efficiency into the cost structures of multilaterals where the application of modern commercial or social entrepreneurial practices (with a legal enshrined social purpose) can be leveraged further through the innovative uses of social impact bonds which incentivise franchising structures to ensure quick and effective replication of such socially entrepreneurial ideas.

Conclusion

One does not want to over egg the pudding and we are still at the early stage in the development of these structures. However, the critical element is that SIBs, when linked to hybrid legal structures (guaranteeing social mission), move the delivery of social goods from within fragmented silos to a space where there are collaborative partnerships of “for profit” multilaterals and the broader citizens sector – who are then rewarded for real outcomes based on the delivery of tangible social impacts. 

The application of these existing commercial and legal concepts to social purpose is of course a broader trend associated with impact investing and, as can be seen, there is limited downside risk from a policy perspective if properly structured.

It is fairly clear to most observers that the current “for profit”/“not for profit” paradigm fails to deliver sufficient capital to issues that could be argued threaten the very existence of our species. Equally, even to hardened skeptics the opportunity to drive a focus on performance and efficiency into the social capital market and the provision of social services is particularly relevant in these times of austerity. It is time to bring the skills and resources of the market to the most pressing issues of our time.

Note: This article has been cross-posted from Social Enterprise Live.

Photo credit: http://www.flickr.com/photos/marsdd/4370610342/

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