Benjamin Murphy, March, 21 2019. Updated November 9, 2019
“A SIB is a pay-for-performance [financial] instrument that incentivizes investors to take [on] the risk of a certain project achieving specified social outcomes in exchange for a potential financial reward” (Jain, A., 2019).
In other words, a SIB is a way for an investor to say, Hey, Government. If you eventually pay me back and give me some of your long-term cost savings, I’ll lend you the money necessary to finance the up front expenses involved in your best nonprofits implementing and sustaining higher-quality, more efficient, more impactful, and less costly preventive services.
– ‘Impact Bond’ is an umbrella term which encompasses Social Impact Bonds, Social Benefit Bonds, Social Impact Partnerships, Development Impact Bonds, Humanitarian Impact Bonds, Environmental Impact Bonds, Collective Impact Bonds, and ‘Pay for Success’ arrangements.
– For the most part, these are all similar financial instruments with different impact goals, rates of return, and varied time horizons. Social Impact Bonds (SIBs) are the most common vehicle and have become the default term used for this emerging asset class.
– Pay for Success (PFS) is not necessarily a financial instrument, but is an American branding of “pay-for-performance” or “outcomes-based” contracting. While many PFS contracts are SIBs, the term is often used loosely. Not all PFS contracts are SIBs.
– Allows high-performing nonprofits the opportunity to provide service interventions [primarily EBPs] outside the usual constraints of limited public funding and managed care / value-based payment arrangements.
– Offers investors [typically private equity or mission related investments] an investment vehicle that simultaneously provides socially-responsible impact and reduced exposure to traditionally correlated asset class risks.
– Allows Commissioners (usually government funders) to pilot cost savings, promising new service modalities, and/or delivery methods while offloading the associated financial risk to a private investor (who takes on that risk in exchange for a portion of any resultant commissioner cost-savings).
– Impact Bonds are still very experimental, with only 36 SIBs having been completed – with varying degree of success – and only another 149 in various stages of design or implementation. The current SIB market is only ~$500 million globally.
– SIBs are complicated. There are many moving parts requiring extensive documentation, cost modeling, data infrastructure, and verification capacity. Pragmatically, their sophistication puts them out of reach for all but the highest-performing nonprofits. That said, there is ample opportunity in this space for planful nonprofits.
– No legal regulatory guidelines exist, as of yet, specifically for SIBs. Largely self-regulated, they can be structured in whatever manner the parties at the table deem agreeable. This can be a positive aspect, but should be approached prudently.
The following visuals were created using the Datawrapper tool based on data pulled from the Oxford University Blavatnik School of Government’s Government Outcomes Lab (GO Lab) Projects Database in January 2019. An updated data visualization, based on more recent information, is currently being developed.
How are SIB outcomes measured? While they are primarily benchmarked against the Evidence-Based Practices (EBPs) (CEBC, 2019) upon which they are built, they are also often aligned with the measurement tools and metrics outlined below.
– Government cost reduction methodology (e.g. – SIPPRA Outcome Valuation Template (U.S. Department of the Treasury, 2018))
– See also MIT J-PAL, listed below under ‘Resources’.
Measuring impact within the context of a SIB contract is particularly tricky because successfully delivered outcomes are not always correlated to payable outcomes. This is due to the fact that the financial value of a SIB lies in commissioner cost-reduction and not in service delivery. Efforts to align these considerations need to be undertaken fully during the development of the contract and prior to the launch of services.
THOUGHTS AND OBSERVATIONS
1.) SIBs are complicated, and that’s ok. But it should be clear they are not a turnkey solution for nonprofits or communities trying to quickly mitigate tight government funding. They take time (9-36 months) to develop properly and require the alignment of many complicated components, including strong data demonstrating the efficacy of previously-provided services. That said, for organizations who can develop and execute SIBs well, it opens the door to substantial private funding markets.
2.) SIBs are often, quite rightfully, tied to higher-quality outcomes. But it is important to understand and remember that the fiscal value of a SIB does not lie in the delivery of quality services or in the achievement of outcomes. It lies solely in the cost savings to the commissioning entity (usually a government). Theoretically, there should be a high correlation between quality outcomes and government cost savings, but building a financial instrument that empirically reflects that can become a tricky matter. Much thought and consideration needs to go into the program design and contracting mechanisms to ensure that providers are made whole for the services they deliver, and to allow ample room for contract modification should unanticipated complications arise.
3.) SIBs raise ethical concerns. They are a potentially scalable, market-based solution for funding of social services. But they are also a clear monetization of poverty. Are we ok with that? And is that any different from the systems currently in place? Serious consideration needs to be given to ensure (a) the services proposed are actually needed vs. simply being a revenue generating opportunity for an investor, and (b) the communities to be impacted have been included in the ideation and design of the SIBs to be developed. The, “have we been given permission [by the community impacted] to solve this problem?” question bears mention here.
– The Harvard University Kennedy School of Government’s Government Performance Lab was instrumental in the first Pay for Success SIBs in the United States and maintains extensive PFS materials and data. In addition, the HKS ‘Social Impact Bonds 101’ document is a well-written primer on the subject.
– Instiglio is an international social finance consultancy headquartered in Bogota, Columbia and has compiled additional “SIBs and DIBs” resource material as well as a global map and dataset for current impact bond work.
– Massachusetts Institute of Technology’s (MIT) Abdul Latif Jameel Poverty Action Lab (J-PAL) maintains extensive reference and research resources (including publicly-available in person and online courses) on randomized evaluations, policy publications, and social impact research resources. Members of J-Pal were awarded the 2019 Nobel Prize in Economic Sciences for their seminal work in development economics.
– In 2016, OECD published a comprehensive working paper –
Understanding Social Impact Bonds – outlining the global landscape of SIBs.
– The Oxford University Blavatnik School of Government’s Government Outcomes Lab (GO Lab) is currently the best single repository of global SIB project data, impact bond basics, technical guidance, and publicly accessible events.
– Third Sector Capital Partners, one of the largest SIB intermediaries in the United States, maintains a useful list of the numerous SIB projects they have been involved in.
– Princeton University‘s 2014 working paper – Social Impact Bonds: A New Tool for Social Financing – is another solid introductory work on the topic.
SIB CONTRACT EXAMPLES
The best way to learn about the various moving parts of a SIB is to read through one. As such, the following resources bear mention:
– The U. S. Department of Treasury’s SIPPRA Notice of Funding Availability was released in spring of 2019 and is a valuable set of documents to read through as it outlines the rigor and detail involved in setting up, maintaining, and successfully executing a SIB.
– Social Ventures Australia’s Uniting Newpin Social Benefit Bond, focused on family restoration, was one of the earliest SIBs globally. The 2013 prospectus (information memorandum) is a valuable read, as are the annual investor reports.
What We Learned from the Failure of the Rikers Island Social Impact Bond
(Cohen & Zelnick, 2015)
Why the Social Impact Bond at Peterborough Prison is being Halted
(Lander & Cook, 2014)
Third Sector UK
Social Financing and Payment by Results: Greater driver in efficiency, innovation, and impact in tackling social problems?
Rochester Institute of Technology, Department of Public Policy
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All material, unless otherwise noted, © Benjamin Murphy, 2019. All Rights Reserved.
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