Last week I was fortunate enough to participate in Saïd Oxford Business School’s Impact Investing Programme. A part from interesting case studies and very inspiring discussions with fellow students, I was particularly struck by a new approach for government spending: Social Impact Bonds… By focusing on performance-based payments, i.e., flipping around traditional government funding structures and rather than paying upfront for a proscribed set of services, these Social Impact Bonds (or “SIBs”) allow governments to focus funds on approaches that work—without paying a dime if agreed-upon outcomes are not achieved.What are SIBs?
The approach is fairly straight forward: Government agencies define an outcome they want to accomplish (e.g., to reduce teen pregnancy, increase education or employment in certain areas, etc.) and agree to pay an external organization a sum of money if the external organization achieves that outcome.
Out of Oxford Press.Social Finance.
A SIB is a financial mechanism (more a social futures contract rather than a debt instrument) in which investors pay for a set of interventions to improve a social outcome that is of financial interest to a government commissioner. The service provider obtains operating funds by raising capital from private commercial or philanthropic investors who provide upfront capital in exchange for a share of the government payments which becomes available if the performance targets are met. The intermediary uses these operating funds to contract with one or more service partners to deliver the interventions necessary to meet the performance targets. If the social outcome improves, the government commissioner repays the investors for their initial investment plus a return for the financial risks they took. Payments typically rise for performance that exceeds the minimum target, up to and agreed-upon maximum payment level. If the social outcomes do not improve above an agreed threshold, the investors stand to lose their investment.
Some might also call SIBs “payment by results agreements” or “outcomes based contract”, or “payment by success”
Steps in the development of a SIB:
adapted from Goldman Sachs
SIBs – What are their benefits and disadvantages?
Governments love SIBs since this approach since they
- shift the risk of innovation from tax payers to private investors;
- provide resources for preventive investments;
- offer ways to make more rapid progress in achieving social policy goals;
- incentivize service providers to innovate in order to maximize outcomes for their target populations.
In addition, if the project succeeds, the government pays the full cost of services, though in some cases achievement of performance goals may produce budgetary savings that partly or fully offset the cost of the services.
Service providers like SIBs because they
- provide stable multi-year funding;
- have a longer duration than typical government contracts;
- begin a relationship with the government that can enable operations to scale rapidly if the provider is able to demonstrate program effectiveness.
Philantropic investors like SIB since they provide rigorous performance assessments of the initiatives
So everybody is very excited about this new funding vehicle! The world’s very first SIB was launched in the UK in 2010. But more and more countries start to experiment with this new instrument including Australia, Canada, the US, Columbia, India, Ireland or Israel. Most SIBs have been launched in the UK for now. Many of the SIBs currently under development have been highlighted by the G8 Social Impact Investing Task Force. The Social Impact Investment Taskforce was announced by Prime Minister David Cameron at the G8 Social Impact Investment Forum in June 2013. It aimed to catalyse the development of the social impact investment market.
I am very excited about how SIBs can change the effectiveness, but also the efficiency of social impact initiatives. I plan to use this blog in the coming weeks to tell you about the experience with SIBs up to now, a few case studies of the early ones launched, the lessons learned, etc. So… stay tuned and come read this blog.
