Social Impact Bonds: Finance for the Common Good?

The Benefits of Social Impact Bonds

Governments around the world face the challenge of economic uncertainty. Unfortunately, when financial crises occur, social programs usually bear the brunt of funding cuts. One innovative concept for dealing with reduced government revenues for vital social programs is the Social Impact Bond (SIB).  Though the idea behind the SIB is not new, its application is truly progressive because it brings together the public and private sectors to promote social welfare.

Essentially, SIBs are an economic arrangement between government and a private entity with the intent to resolve a specific social need and where the private entity is compensated only if a mutually agreed upon outcome is achieved.  SIBs are uniquely different from other “pay for success” financial strategies.  Unlike more traditional bond measures, taxpayers are not expected to pay anything unless the private entity meets its obligation. Moreover, government may place few if any regulations on the private entity, effectually depoliticizing the social issue at hand. Understandably, implementation of SIBs is likely to be much more complex. However, this innovative solution to difficult social problems demands attention and might very well resolve the lack of financial resources currently facing society.  SIBs might also provide a necessary bridge between the public and private spheres, based on mutual incentives and benefits.

Social Impact Bonds offer immense potential in the field of social policy. Particularly, problems such as homelessness, preventative healthcare, prison reform, and unemployment could provide a proving ground for SIBs.  Since many of these social issues have seen funding cuts in the past decade, government agencies are anxious to find other ways to meet the needs. Traditionally, taxpayer money is spent regardless of whether the programs actually work. SIBs offer a solution to both problems; the social program receives needed funding and innovative solutions and the government bears none of the financial risk.

Additionally, SIBs propose an investment in society, with potentially great returns for private investors.  Where government falls short because of inefficiency, lack of resources or bureaucratic red tape, private organizations may provide more flexibility and creativity when motivated by financial incentives to succeed.    In this win-win situation, the government achieves better results and the private entities receive a return on their investment.  Since many private corporations already give money to social programs via philanthropic contributions, SIBs allow them to demonstrate a measured commitment to society through successful outcomes.

While the application of SIBs still remains relatively new in the United States, the world’s first SIB test case is ongoing at Peterborough prison in the United Kingdom.  In this situation, the British government agreed to pay a nonprofit organization, Social Finance, to reduce recidivism of prisoners by 7.5 percent over a 6-year period. If the non-profit succeeds and the outcomes are met, the British government will pay the investors back with interest.  Ideally, the government will save money in the long run, since the cost of re-incarceration further increases demands on public expenditures.  Since, in this case, the government spends nothing upfront, Social Finance must raise the funds needed to achieve its goals.  Investors, mostly socially conscious philanthropists and foundations, will only be paid back if the desired outcome is reached.  However, most third-party observes agree that the success of Social Finance, and its partner in the project, One Service, seems likely.  As part of the SIB, the government must allow the private entity flexibility to carry out the project the way it sees fit. In the case of Peterborough, this personalized care given to inmates may be just the solution for reducing the prison’s high rate of re-offenders.

Several organizations in the United States are attracted to the benefits of SIBs.  The Annie E. Casey Foundation, for example, is looking into projects that would assist in homelessness, juvenile crime and drug addiction.  According to the foundation’s website, a successful partnership shouldn’t be limited to just one approach.  Additionally, the state of Massachusetts is pursuing the applicability of SIBs in areas of criminal justice and homelessness.  Virginia, California, New York and Minnesota are also considering pilot projects involving SIBs taking the place of failing governmental programs. These partnerships are still in their infancy, but seem to be creating a buzz that will potentially change the face of social expenditures.  In short, once the first domestic SIB proposal succeeds, it is likely that investors will take advantage of the opportunity to fund viable social programs.

Both state and federal agencies should take a hard look at the benefits of SIBs and the potential they have to transform the relationship between governments, investors and nonprofit organizations. Particularly in a time of economic struggle, these partnerships are essential for maintaining needed social programs. Of course, as with any new financial strategy, the complexities of implementation may pose obstacles. However, the advantages of SIBs should drive not only government agencies, but should fuel the fire for potential investors to make a profit and a difference.


Other sources:

Center For American Progress


Obama’s Social Impact Bonds: Private Money, Public Benefit

Nonprofit Quarterly