Social Impact Bonds
A Social Impact Bond (SIB) is an impact investing model used to increase the level of prevention investment in niche social areas. It is one tool emerging that governments are exploring to help attract private capital for public benefit and nonprofit organizations that are considering to diversify sources of revenue.
This page provides basic information for those interested in learning more about social impact bonds, as well as links to Canadian resources, reports and articles. The Pay for Success Learning Hub provides a global perspective as well.
Q. What is a social impact bond?
A social impact bond (SIB) is a contract with a public sector commissioner in which it pays for improved social outcomes.
On the back of this contract, investment is raised from socially interested investors.
The investment capital is used to fund service providers, with government agreeing to provide a return to investors from a portion of the projected cost savings if the intervention is successful.
An example: The pilot social impact bond in Peterborough Prison in the United Kingdom is a program to reduce reoffending rates of short term prisoners. £5m was raised from 17 social investors to fund a consortium of nonprofit organizations over six years to work with 3,000 prisoners after they are released to reduce their reoffending, measured by convictions. If the social impact bond delivers a drop in re-offending beyond 7.5%, investors will receive an increasing return capped at a maximum of 13% per year over an eight year period.
Q. How does a social impact bond differ from the current government grants/contribution regime?
To compare the two, one approach is to explain what government programs are and what they are not.
(In general) Current government granting programs:
- Commit to funding arrangements that focus on inputs and outputs of social programs.
- Provide funding to programs on a short-term, (sometimes) recurring basis.
- Act as one-time cash injection to cover program costs, not as an investment that may yield financial returns.
- Commission on the basis of cost of service, not value derived.
(In general) Current government granting programs do not:
- Have a long time horizon
- Leverage other private capital sources or cross-sector partnership opportunities
- (significantly) Fund prevention methods
- Use a set metric, aligned to the interests of multiple stakeholders, to measure the outcome of an intervention.
- Produce financial returns that can be reinvested into producing positive social outcomes.
- Provide an opportunity for government agencies to work together to commission service.
- Commission on the basis of ability to deliver positive social outcomes
Q. Who would be interested in investing in a social impact bond?
Investors that are interested in achieving a dual social and financial return would take part in a social impact bond (i.e. impact investors). Specifically, investors interested in providing capital for preventative, evidence-based interventions. These investors may be motivcated for a variety of reasons that could include: a specific social cause, early adoption or proof of concept for an emerging impact investing model, reducing the strain on public funds, or a financial vehicle with limited correlation to financial markets.
These investors would understand the risk inherent in making a social investment and, importantly, the chance that they will not receive their principal back if the intervention is not successful in meeting its target objectives.
Motivated investors could include community and family foundations and high net worth individuals. After a track record is established, other investors who are seeking blended returns could be interested in SIBs.
Q. What type of service provider would a social impact bond apply to?
SIBs are best suited to service providers that have a track record of successfully delivering interventions within a target population. Some of the the characteristics shared by these providers include:
- In-house ability to collect data, track outputs and measure outcomes over a period of time.
- Focus on prevention measures in a given issue area.
- Ability to provide programs in collaboration with other providers, or have the ability to adapt quickly to meet the needs of a complex population.
- Existing capacity and expertise for multi-year and forward-looking planning, budgeting and financial management that is necessary for the efficient utilization of upfront SIBs capital
- Key indicators of financial health reflect levels of durability and sustainability reasonably required for participating in longer term contracts
- Operate in an intervention area where significant cost savings and downstream value creation opportunities exist.
Q. What risks and benefits should a service provider consider in this new model?
- A reliable source of funding for the life of the program
- The ability to deploy capital in a flexible manner, not tied to funding constraints
- Opportunity to enter into collaborative, not competitive, long term relationships with other service providers offering similar or complementary services
- The ability to work across, and tap into support from, multiple sectors
- If successful, potential to scale program through increased exposure and (potentially) new funding sources.
- Reputational risk involved - if the intervention fails to achieve the targeted social outcomes, investors may lose trust in the approach and the organization may not be able to win future contracts
- Private investors may seek to assert control over service providers and interfere in order to influence the process to achieve ‘better’ social outcomes
Q. What issue areas would a social impact bond apply to?
The SIB model is useful in intervention areas where there is the potential to monetize social outcomes by capturing the value between the cost of prevention now and the price of remediation in the future. Early exploration of the model will be useful in niche social issue areas where there are currently high costs of treatment for a defined population and the existence of interventions with a track record and a high probability of success.
The following criteria apply:
- The issue must be a target priority area for government (significant cost saving/value creation opportunity)
- The population in the issue must be well defined
- The intervention should have evidence of past success
- An outcome metric must be decided by all stakeholders
Q. What is outcome measurement? How does that differ from the way non-profits report on the way they use grant money?
Outcomes are distinct changes seen as a result of an activity or process. Impact determination goes one step further and attributes causation to the change.
Because of the inherent challenge associated with determining an outcome (cost, causality, time lags, etc.) most nonprofits report on the basis of outputs, not outcomes. They report on actions that they have taken, not outcomes of those actions. For example, they may report how many hours they have spent on clients, or how many educational materials they have produced and at what cost.
The SIB model proposes to have all stakeholders (government, investors, and service providers) decide which metrics provide a reasonable assessment of positive social outcomes for a target group. Pitted against rigourous counterfactuals, the performance measurement aspect of the model can be a significant advancement in social impact determination.
Q. Is government relieving themselves of their obligation to fund social services with this model?
No; Although the model does transfer the risk associated with funding the service to investors, governments view the model as a means of enabling other sources of capital to support meaningful programs that provide public benefit in areas where current funding levels are inadequate. This is especially important during times of increased fiscal challenges faced by government. Other points to consider:
- The social impact bond model is intended to complement existing funding for social services, not act as a replacement.
- This model only applies to certain niche issue areas (see above) and represents an opportunity to test and scale approaches that demonstrate effectiveness.
- Social impact bonds are not intended to replace models of public service delivery that are proven to be successful - they are targeted towards areas where funding is difficult to obtain or where there is an opportunity to re-engineer processes to achieve significant value.
- If carried out successfully, social impact bonds could increase the capacity of government to fund social services, by freeing up funding from ineffective approaches
Q. What are some of the other perceived disadvantages/criticisms with the model?
- A step towards result-oriented evaluations and the quantification of the progress made by society where social interventions are privatized and subordinated to measurable and profitable performance outcomes.
- Increases pressure on non-profit organizations that already bear large responsibilities and commitments.
- Contributes to resolving social problems through processes of financialization and privatization
- Most likely applied to activities deemed less risky and with a high probability of achieving positive results, ignoring those non-profits organizations that cannot deliver these results in an environment of disengagment by government.
- Larger established non-profit organizations will benefit from this initiative to the peril of smaller organizations
*Information adapted from: Mendell, Margie. Social Impact Bond Working Paper. CEDnet, March 2012.
Q. Who is involved in a social impact bond?
There are four principal actors in a social impact bond:
Service provider: Program deliverer within specified treatment population
Investor: Provides upfront capital for program delivery
Government: Guarantees a rate of return for the investor if social outcomes are met
Intermediary: Underwrites contract; assesses impact of interventions and manages ongoing performance; acts as body through which funds flow from investor to service provider, and from government to investor (Note: it is possible to create an SIB arrangement without an intermediary)
Q. What are some characteristics of outcome metrics selected in a social impact bond?
An effective the outcome measure should be:
- A metric that is already measured and for which good data is available
- A metric that is understood and agreeable by all stakeholders in the model
- A measure that has the most direct link to costs/cost savings
“Cream skimming” or “cherry picking” - intervening with the easiest to treat clients - is a perceived risk within the model that needs to be considered and factored when designing performance measurement systems and counterfactuals.
Q. What is the process of implementing a social impact bond?
Implementing a SIB requires feasibility testing, government procurement alterations, a capital raise and deal structuring, and a performance management strategy grounded on the acceptance of performance metric(s). Various roles and responsibilities are required in the implementation of the model. This can be illustrated in stages:
Stage 1- Feasibility
- Identifying and defining an appropriate outcome
- Identifying appropriate interventions and the availability of potential service providers
- Analyzing potential returns to investors
Stage 2- Preparation for Implementation
- Developing a robust contract between public sector agencies and the social impact bond delivery agency
- Raising investment into the social impact bond
Stage 3 - Delivering Outcomes
- Identifying appropriate service providers
- Monitoring and flexing interventions through the intervention period
- Ensuring ongoing impact
Bolton, E.; Savell, L. (March 2010) Towards a new social economy: blended value creation through Social Impact Bonds. Social Finance UK.
Disley, E; Rubin, J; Scraggs, E; Burrowes,N; Culley, D. (May 2011) Lessons learned from the planning and early implementation of the Social Impact Bond at HMP Peterborough. Retrieved from Ministry of Justice http://www.justice.gov.uk/publications/research.htm
Jagelewski, Adam (2011) Social Impact Bonds - A Practical Social Innovation. Horizons Policy Research Initiative.
Mandell, Margie (2012) Social Impact Bonds. Retrieved from CEDNet http://www.ccednet-rcdec.ca/en/node/10591
Profile of an "SIBs Ready" Service Provider (2011) Retrieved from Nonprofit Finance Fund http://payforsuccess.org/provider-toolkit/sib-service-provider-profile
Social Finance (2012) A New Tool for Scaling Impact. Social Finance and The Rockefeller Foundation
Strickland, Pat. (2010) Social Impact Bonds - the Pilot at Peterborough Prison. House of Commons, Home Affairs Section.
- Paying for outcomes: Solving complex societal issues through Social Impact Bonds by Deloitte Canada (March 2012)
- Social impact Bond (SiB)/Pay for Success Bond by Margie Mendell and Emilien Gruet (March 2012): A brief synthesis summarizing SIBs and current developments, with a discussion of major critiques
- Social Impact Bonds in Canada: From Theory to Implementation by Arjun Langford (March 2011)
- Social Impact Bonds: A Practical Social Innovation by Adam Jagelewski, Social Innovation Generation for Horizon’s Magazine (Feb 2011): Explains SIB issues and opportunities in Canada
- Social Impact Bonds: Addressing Key Stakeholder Issues by Nora Sobolov and Adam Jagelewski, Social Innovation Generation (Dec 2010): Explain SIB issues in Canada
- Mobilizing Private Capital for Public Good by the Task Force on Social Finance (Dec 2010): Recommendations to catalyze social finance in Canada, one specifically recommends the use of social impact bonds.
- Social Impact Bonds: Potential Applicability for Canada by Adam Jagelewski, Social Innovation Generation for HRSDC (March 2010): An introduction to SIBs in Canada.
- View all posts on SocialFinance.ca that relate to SIBs.
- New social impact bond targets the greater good by Tara Perkins, Globe and Mail
- Federal government and non-profits inch toward issuing social impact bonds by Heather Scoffield for the Canadian Press
- Will the federal budget carve out space for the development of social impact bonds in Canada? by Kathryn Martin, Credit Union Central Social Responsibility Hub
- Social Impact Bonds: New Winds of Change in Canada by Peter Shergold on the CSI blog
- Pay for Success Learning Hub
- Social Finance UK
- Social Finance US
- Young Foundation
- Social Finance Case Study for innovative funding mechanism (2010) Euclid Network
- Presentation for SIX global teleconference (Dec 2010) Social Innovation Exchange
- Social Impact Bonds: Finance for the Common Good?