What are social impact bonds?
A social impact bond (SIB) is an outcome-based contract designed to channel private investment into programs that address major issues affecting society.
Under an SIB, a bond-issuing organisation raises capital from investors as part of a contract with the government to deliver improved social outcomes through programs run by not-for-profit (NFP) organisations. These improved outcomes generate future costs savings for the government, which are used to pay investors a reward in addition to the repayment of the principal. SIBs provide capital to fund long-term programs implemented by NFPs, which can range from three to seven years.
Social impact bonds vs social bonds
It is important to distinguish SIBs from social bonds. Social bonds are comparable to traditional corporate bonds whereby reward payments to investors are met from the cash flow of the organisation’s day-to-day operations. In contrast, a SIB reward payment is dependent on achieving defined social outcomes and is therefore referred to as a ‘payment for success’ or ‘payment by results’.
SIBs are unlikely to be used to launch a wholly new program. Instead, they are more likely to be used to enhance and increase the scale of existing well-founded programs. These programs are typically based on early intervention, prevention or breaking the cycle of dependence; where complexity makes it difficult or impossible for mainstream programs to be effective. However it is important to remember that SIBs are not a solution for all social problems and will supplement existing funding mechanisms.
From the UK to Australia
The first SIB was developed by Social Finance UK, an organisation that aims to enable the third sector to have better access to investment through implementing financial structures and raising capital. Social Finance UK acts as the co-ordinating organisation for the implementation of the SIB and is responsible for (drawing up) the contracts with the government and social investors, and sub-contracting a range of NFP organisations to deliver the programs.
In Australia, the New South Wales Government was the first to thoroughly test the feasibility of implementing a SIB and is currently trialing three SIB propositions. Social Finance Australia and Mission Australia will jointly develop a trial SIB, which aims to assist 500 young adult repeat offenders. Additionally, two consortia have been selected to trial SIBs in out of home care – one of which comprises the Benevolent Society, Westpac Corporation and the Commonwealth Bank of Australia and the other with Uniting Care Burnside.
Professor Peter Shergold, who has been appointed to chair the Social Investment Expert Advisory Group, says the bonds are a win for government, NFPs and investors.
“They are good for government because they are able to pay on the basis of outcomes, transferring the risk from the public sector to the private and NFP sector. They are good for the NFP sector as they provide the capital NFPs need to achieve their mission. And they are good for investors, as they are a new asset class that can provide both financial and social returns,” says Shergold.
Tips for establishing a SIB
The following have been recognised as critical success factors for a SIB proposition:
Aligned goals
Ensuring the SIB is a priority for the government, the social investor and the NFP organisation. A SIB proposition is viable when the incentives of each stakeholder are optimised. This is achieved through negotiation.
Measurable outcomes
The SIB outcomes have to be robustly defined and specified. A key factor is that they have to be measurable and the achievement of targets independently verified.
Evidence of measurable savings to the government
The repayment of the principal and the reward payment are dependent on the achievement of outcomes which are directly linked to measurable cost savings to government.
Robust program evaluation/evidence
In developing an SIB the government, investors and NFPs will undertake a detailed risk assessment. The availability of robust program evaluations and evidence of effectiveness will serve to reduce risk.
Availability of relevant robust data
The measurement of outcomes, measurement of cost savings to government and the role for evidence to reduce risk are all dependent on the availability of relevant robust data. The absence of robust data and associated measurement frameworks constitutes the biggest barrier to the development of SIB propositions.
When engaging government and investors in a SIB proposition, a NFP organisation should demonstrate a:
- Track record of managing and growing large complex programs
- Strong and effective relationship with government
- Good reputation in terms of governance, financial control, quality service, and monitoring and evaluation
- Positive relationship with social investors.
The challenge
SIBs are fundamentally financial instruments that are dependent on evidence that insensitive government agencies, NGOs and social investors to enter into binding outcome-based contracts. The absence of robust evidence is a barrier to the wider usage of SIBs. Further investment is therefore needed to develop the evidence base in high-priority policy areas.