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Potential Social Impact Bonds in Development
Instiglio is exploring potential applications for social impact bond model in low- and middle-income countries. This page describes several promising broad areas for the SIB model and lists more specific potential SIB applications. For more information about these applications, please e-mail us.
The SIB Model in International Development
This section briefly describes the traditional SIB model, how that model might work in international development, and some potential financing arrangements for the model. For more information about the SIB model, please visit this page.
The traditional SIB model has four roles, as shown in the diagram above. The payer specifies the relevant social outcome and the amount of money it’s willing to pay for that outcome. The service providers work with the target population to deliver that outcome. The investors fund the service providers for the duration of their work. The independent evaluator determines whether outcome has been achieved. And the intermediary negotiates the government contract, finds good service providers, raises money from investors, and manages providers over the duration of the contract.
The social impact bond model may take a different form when applied to developing countries. In low- and middle-income countries, the payer of the intervention may be the government, the donor, or a combination of interested parties. Local or multinational NGOs can play the role of the service provider. In addition, the payer may be interested in financing only direct budget savings, paying for positive social outcomes (such as improved educational performance), or using the model to incentivize improved performance even in the absence of measurable savings.In theory, the government pays for social outcomes out of budget savings that those outcomes produce. However, social programs are unlikely to fully cover their costs in the social; only part of the government’s payment will come from direct budget savings. We identify below three sources of financing for a SIB model in international development.
1. Prevention: In these applications, up-front investment in prevention services generates savings through reduction of treatment costs. The party incurring the treatment cost (the government or the donor) repays the up-front investment from the resulting savings.
2. Cost Effectiveness: These applications generate a reduction in projected expenditure by funding more cost-effective interventions. The party liable for the projected expenditure pays for the intervention.
3. Revenue Generation: In these applications, up-front investment generates additional revenue for the government. The government repays that initial investment out of the generated revenue.
This section describes several potential applications for a social impact bond in international development. These SIB applications summarize some of the preliminary analysis by the Instiglio team and its advisors. After additional research, we expect to add other potential applications, remove ones that we believe no longer hold promise, and update existing ones with more details.
Criminal Justice – Recidivism
Problem: A significant number of released prisoners re-offend and return to prison shortly after release.
Cost: This recidivism imposes a) direct budgetary costs to the government in terms of policing cost, courthouse costs, and incarceration costs, and b) indirect costs to society due to increased crime and foregone taxes, among others.
SIB Application: A social impact bond could reduce these costs through up-front prevention services.
Challenges: Challenges to implementing this social impact bond include a) difficulty identifying high-risk offenders, marginal costs of treatment that may be insufficient to justify prevention services.
(Note: For detailed analysis, see the McKinsey social impact bond report.)
Criminal Justice – Youth Gangs
Problem: In Latin American countries, paramilitary organizations and street gangs have presented an enduring problem not only to security, but also to social development in general.
Cost: Youth enter gangs and actively impose a cost on society through criminal activity, then exit gangs (e.g., through DDR) and require significant social investment to become productive citizens.
SIB Application: A SIB can fund up-front services to prevent youth from entering gangs, and to facilitate DDR (Demobilization, Disarmament and Repatriation) programs. Government would repay investors into a SIB from the resulting cost savings.
Challenges: Challenges include identifying and monitoring a target population and discovering credible interventions for reducing youth gang violence.
Governance – Tax Collection
Problem: Governments in some developing countries collect a small proportion of taxes owed to them. Suboptimal tax collection results from resource constraints, logistical problems, insufficient or missing documentation, and corruption.
Costs: The government faces a significant cost in terms of lost tax income. This issue is especially pernicious for budget-constrained governments.
SIB Application: The MIT Poverty Action Lab (J-PAL) is currently conducting a trial to identify the optimal wage and incentive structures for tax collectors. The four schemes tested all entail rewarding (but not penalizing) tax collectors; if these schemes are an improvement from the baseline, the costs of tax collection and administration are likely to increase. A social impact bond could financially support the implementation of these programs.
Challenges: Any tax collection scheme that incentivizes additional collection faces the challenge of maintaining adequate safeguards for tax payers.
(Note: For information about one potential intervention, see this J-PAL study.)
Healthcare – Mobile Clinics
Problem: Many people live too far from healthcare facilities to receive preventative care or treatment when they need it. Thus, many develop costly health conditions that could have been cheaply prevented, or cheaper to treat had they been detected earlier.
Costs: Governments often fund significant portions of treatments for chronic or acute healthcare conditions that could have been cheaply prevented with routine check-ups. Further costs may include excessive use of acute hospital services.
SIB Application: A social impact bond can fund up-front investment in mobile clinic that visit remote communities and conduct basic exams and complete diagnosis services, decreasing treatment costs and improving overall health conditions and quality of life of the population served.
Challenges: Challenges include attributing prevention efforts given multiple co-morbidities of the target population.
Healthcare – Safe Drinkable Water
Problem: Lack of access to clean drinking water can have disastrous impacts on development. Water-borne illnesses cost money to treat. In addition, they decrease productivity and reduce school and work attendance rates. There are many proven technologies to purify water in different types of settings. However, they have not reached all of the communities that need them.
Costs: Costs include healthcare expenditures, lost productivity, and foregone tax revenue.
SIB Application: A SIB could be used to fund filtration centers in communities with no access to drinkable water, thus improving the overall health conditions of communities. The payer would pay if predetermined health outcomes were met.
Challenges: Challenges include potentially large maintenance costs, difficulty creating a sustainable post-SIB investment structure, and low marginal savings.
Healthcare – Family Planning
Problem: Many households in developing countries prefer smaller families, greater use of contraception and larger per capita household earnings. Yet governments under-invest in family planning programs that can deliver these benefits.
Costs: Larger-than-desired family sizes strain many social services and spread thin service provision that is already insufficient.
SIB Application: A social impact bond can fund contraception services that reduce unwanted pregnancies. Governments—or, more likely, donors—will pay for only successful interventions out of the projected savings that the intervention generates.
Challenges: The challenges to a SIB for family planning include difficulty attributing a service provider’s efforts to the ultimate outcome and difficulty identifying line item budget savings from avoided pregnancies. Because of these challenges, the SIB model addressing family planning might be substantively indistinguishable from a Cash on Delivery model.
Healthcare – Asthma
Problem: Chronic asthma patients impose significant costs on their insurer through frequent hospital visits. Although Accountable Care Organizations in the United States have built-in incentives to reduce healthcare costs of their members, most private insurers do not face such monetary incentives.
Costs: This cost is reflected in the broader healthcare system and in the premiums of an insurer’s member pool.
SIB Application: A social impact bond can drive up-front investment into reducing environmental asthma triggers for the chronic asthma population, thereby reducing the number of hospital visits.
Challenges: Insurers may have insufficient incentive to fund a SIB if patients frequently switch insurance providers.
Healthcare – HIV/AIDS
Problem: Governments and donors make large investments into expensive anti-retroviral drugs for citizens with HIV/AIDS, although in many cases cheaper prevention services can reduce that downstream cost.
Costs: In countries with large incidences of HIV/AIDS, governments and donors spend up to $1300/person per year on ARV drugs.
SIB Application: A SIB can be used to fund prevention services that reduce downstream treatment of AIDS patients.
Challenges: Challenges include identifying the impact of the intervention in a population with a large number of co-morbidities.
Education – Financial Literacy
Problem: Developing countries are witnessing a rapid increase in financial inclusion of citizens without previous access to, or experience with, complex financial instruments.
Costs: An increasing number of credit defaults hits lenders’ balance sheets, government safety nets, and household finances.
SIB Application: A SIB that funds financial education may reduce the frequency of credit defaults.
Challenges: One challenge is the difficulty of ex-ante defining a treatment population at risk of credit default. Another is controlling for the spillover effects of financial education when evaluating the intervention relative to a comparison group.
Education – Attendance
Problem: About 600 million school-aged children have intestinal worms, which decimate their health, reduce their productivity, and keep them out of school. Yet rigorously-evaluated delivery of deworming medication has been proven to reduce the incidence of intestinal worms in several African countries.
Cost: Intestinal worms increase healthcare costs, reduce taxes governments would get from otherwise-productive citizens, and, perhaps most important, create less-educated workforces in developing countries.
SIB Application: A SIB could be used to scale proven deworming interventions. In one potential scenario, Investors would pay for the intervention, then funders would repay investors based on predetermined attendance targets. Governments would participate up-front, or observe and later adopt the scaled-up model.
Challenges: The main challenge in using the SIB model to scale deworming is that the economic value of increased attendance is spread across government budgets, appears in budgets over time, and often is not captured in government budgets at all.
(Note: For an overview of some potential interventions, see the J-PAL policy brief on deworming.)
Education – Early Childhood Readiness
Problem: Widespread government budget cuts are reducing investment into education at every level, including early childhood education. Yet evidence increasingly demonstrates significant economic returns to early childhood education programs.
Cost: Insufficient investment in early childhood education increases downstream government costs through additional spending on special education, English language training, and grade retention. In addition, students with inadequate early childhood education earn smaller wages and pay less taxes as adults. For example, the marginal cost to New York state of low birth weight or preterm birth is $28,000-$40,000, and the marginal cost of special education is $5000-$15,000.
SIB Application: A social impact bond could fund school readiness services for at-risk children. Bond interest and principle repayments would come from the cost savings from lower public school spending on special education, grade retention and English language training.
Challenges: Challenges for this SIB include difficulty attributing educational outcomes to the SIB-funded intervention, and long delays between the SIB intervention and the avoided cost.
(Note: For detailed analysis, see the Kauffman Foundation March 2012 report.)
Environment – Climate Change
Problem: Governments make insufficient investments in programs to curb climate change. Of potential programs, curbing deforestation in developing countries is potentially a very cost-effective way to reduce carbon emissions.
Costs: Climate change is a type of “problem without passports” that increases future costs of natural resources and crosses borders to affect neighbors. While estimates of environmental problem face methodological challenges, they usually appear in the billions of dollars.
SIB Application: Recently, the United Nations launched REDD+, a major initiative to pay developing countries for reduced deforestation, which may be incorporated into global carbon markets under the next international climate treaty, resulting in billions of dollars in payments from wealthier countries for forest conservation. A social impact bond can facilitate thes payments through a Payments for Ecosystem Services (PES) model, where participants receive payments if they comply with a set of conditions that are protective of the environment, such as refraining from cutting down trees on their land. Investors would pay service providers
Challenges: One serious challenge to this SIB application is attributing the intervention to the efforts of a specific firm.
(Note: For information about one potential intervention, see the ongoing J-PAL study here.)
Environment – Waste Management
Problem: Waste management in developing counties is oftentimes expensive and inefficient.
Costs: Waste mismanagement increases demand of landfills and may cause land contamination. Recyclable materials are lost because of a lack of effective selective collection.
SIB Application: A SIB can be used to scale waste-picking organizations that selectively collect waste. This would: 1) increase the treatment of organic waste, produce fertilizers, reduce landfills use, and avoiding soil contamination; 2) organize waste pickers; and lastly 3) improve the environment by increasing the amount of materials that are recyclable.
Challenges: Challenges include an underdeveloped market for recyclable materials, challenges around governance and collaboration, creating a counterfactual scenario, and calculating marginal savings.
Labor – Workforce Development
Problem: The current economic downturn has increased unemployment and reduced the government budget for workforce development programs.
Costs: Governments are paying for unemployment insurance and workforce development programs, while seeing fewer tax dollars and increased use of social programs.
SIB Application: In this SIB, investors fund workforce development programs that train unemployed people and connect them to jobs. Governments repay investors from the unemployment funds that they save as a result of increased job matching.
Challenges: This SIB faces the challenge of identifying a counterfactual scenario, especially if increasing job matching for the treatment group means fewer available jobs for the control group.
Poor SIB Candidates
At this time, we think some of the social impact bond programs being designed in high-income countries hold little promise for application to low- and middle-income countries. These programs are described below. We intend to revise this list as our research progresses.
Homelessness: In high-income countries, chronically homeless individuals receive costly government assistance. For example, in the Massachusetts request for proposal for social impact bond, the state asked respondents to assume that the “the annual cost savings to the state per successfully-housed individual from reductions in health care and other spending will be roughly $20,000.” At this time, we believe the cost savings for housing homeless individuals in low- and middle-income countries are significantly lower than the cost of service provision.
Elderly Assistance: Some municipalities in high-income countries are considering the application of social impact bonds to improving the health and lives of the elderly. One potential application is funding the transition of elderly people to cheaper housing. Similar to the homelessness example, we currently believe that cost savings for interventions targeted at this group in low- and middle-income countries are insufficient to design a compelling social impact bond.
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