Social Impact Bonds – Useful to Achieve Social Change?
John Perovich has a M.S. in Financial Engineering from Columbia University. He is interested in using quantitative methods to maximize triple bottom line returns.
What is a Social Impact Bond?
Social impact bonds (SIBs) are a new financial tool for non-profit organizations to raise capital from private investors for social programs that generate future savings to government and society. If social results are achieved, the government pays a portion of savings to investors in return for their having taken on the risk of funding the program. For example, SIBs have targeted educational programs, prison recidivism, and health interventions, where there are significant public cash flows and high costs for the lack of or poor service with measurable results in graduation rates, literacy levels, job attainment, recidivism, and health.
SIBs are still very early in development. The financial repayment cash flows is like a bond, but the structure is more like equities as investor returns are determined by level of performance of social programs. For non-profits, SIBs are a tool to provide capital to scale proven, cost-effective social services where government and philanthropic funds are lacking. For investors, SIBs blend the social return of philanthropy with the financial return of typical investments. For governments, SIBs offer potential long-term cost savings to achieve community and environmental betterment.
Necessary Conditions in the Creation of Social Impact Bonds
1. Evidence of significant public expenses linked with a strong probability of reduction of these costs associated with social interventions
2. Possibility to gather data and to develop the analysis necessary to clearly evaluate the potential results
3. Strong co-operation between involved stakeholders
Key Players in the Social Impact Bond Model
The following graphic details how a SIB works, the stakeholders involved, and the flow of capital:
Jeffrey B. Liebman, "Social Impact Bonds," Center for American Progress (February 2011)
"First, the bond-issuing organization raises funds from private investors and distributes those funds to service providers to finance operating costs. Next, the government makes payments to the bond-issuing organization if the performance targets are met. Finally, the bond-issuing organization uses these payments to reimburse the private investors and provide the investors with a return on their initial investment."
To better show SIBs in action or potential, two examples are provided below.
Example 1: Rikers Island Corrections in New York
In 2012, New York City Department of Correction and Goldman Sachs arranged the first known SIB in the United States. It was a $9.6 million loan to support delivery of therapeutic services to 16- to 18-year-olds incarcerated on Rikers Island.
New York City will repay investors a portion of the projected cost savings associated with decreased recidivism on a sliding scale based on program results. The better the program does at keeping young people out of jail, the more return will be provided to investors. This reflects ‘savings' due to fewer young people in prison, which carries a high price tag that is measureable each year.
Example 2: Hypothetical Impact Bond to End Homelessness
Consider a fictional situation where the cost of homelessness (emergency rooms, jails, shelters, etc.) in one state is $100 million. Intervening with a combination of affordable housing, case management and behavioral health care could both reduce cost to the public and improve the wellbeing of homeless people. Assume that building affordable housing costs $40 million and ongoing social services cost $25 million. Using a SIB, the state could raise $40 million from investors to build affordable housing. Based on the measurable success of the program, the state would fund investor returns with a portion of cost savings from reduced government services, projected to be $35 million. This ‘free cash flow' is used to repay investors and retain a remainder.
The Future of SIBs and Challenges
According to Judith Rodin, President of Rockefeller Foundation, preliminary results are encouraging for the first-ever SIB launched in the UK in 2010. SIBs have been applied to prisoner recidivism, homelessness and juvenile asthma. Rodin notes governments are "maybe too excited" about SIBs. UK Prime Minister David Cameron intends to use the UK's presidency of the G8 to promote SIBs as a way to improve social services without increasing government debt.
Social impact bonds are not suitable for every social problem and all institutions. SIBs should focus on areas where government and social programs are unable to reach people now. Current identified situations are limited. The impact of social intervention must be simple to measure and empirically proven.
Performance-based payments from governments to investors can only be determined by easily quantifiable results over a fixed time frame. The projected cost savings to governments, which are used to justify SIBs, are dependent on assumptions and forecasts.
When several SIBs have run to completion, their benefits for non-profit organizations, governments and investors can be assessed. For the time being, they are an exciting idea for scaling proven social innovations.
Social Enterprise Associates supports the idea in concept and the advancement of serving more people with needs. We recommend a prudent, case study approach with extensive pilots. Where it brings in new capital to solve problems, it is highly welcome. Where it is approached as a means for government to avoid its contract of responsibilities with its populace, it is discouraged. We welcome comments and suggestions. Email: firstname.lastname@example.org.
References and Resources
5. Judith Rodin (President of the Rockefeller Foundation) Sees Up to 9% Yields on Social Impact Bonds
"Social-Impact Bonds: Commerce and Conscience." The Economist. The Economist Newspaper, Feb 23rd 2013
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