The Innovation: Social Impact Bonds
What are Social Impact Bonds?
Social Impact Bonds are a funding model where private investors provide upfront capital for social programs, allowing the government to use public money on programs that have proven impact by paying only for results, not activity. In the traditional Social Impact Bond (or SIB) model, the government contracts with a third party to fill a gap in service provision. Unlike traditional contracts, the government will pay for the work of service providers only if they achieve the desired outcome. For example, instead of paying a nonprofit that works with released inmates based on how many individuals go through its program, the contract would pay based on the ultimate reduction in recidivism (reoffense) that the program achieves. Also unlike traditional contracts, the funds necessary for service providers to implement projects are fronted by private sector investors, later returned with interest contingent upon the success of the project.
(Rita Perakis from the The Center for Global Development)
How are Social Impact Bonds Innovative?
Social Impact Bonds encompass the following procurement, financial, and programmatic innovations:
1. Procurement Innovation. Governments and development agencies typically purchase social services by making up-front payments to service providers that are weakly tied to performance outcomes. In a SIB, these agencies can condition payment on outcome, channeling taxpayer money toward programs that work.
2. Financial Innovation. Investment managers often struggle to find double-bottom line investments and offer social and environmental screens for their clients. In a SIB, financial return is conditioned on social return, and social return is tied to a powerful evaluation. This guarantees investors alignment of their financial and social goals.
3. Programmatic Innovation. Regular donations often short-change nonprofits’ internal operations and stifles their ability to experiment and improve their programs by restricting donations to program-specific activity. In a SIB, investment is tied to outcomes rather than activities, enabling nonprofits to innovate and improve its programs.
Value of Social Impact Bonds
1. SIBs help strengthen and scale promising programs. The SIB theory of change is that programs with demonstrated success can scale and achieve impact by addressing systemic failures in incentives, risk, accountability and transparency. An SIB starts with a vision of improving a social outcome, shared by sponsors of social services, such as the government, and service providers. Instiglio pursues that vision with a focus on implementation. The SIB mechanism transfers implementation risk in scaling programs to investors. Its results-based structure improves the chances of success at scale.
2. SIBs improve the implementation of social services. By emulating the incentives and outcome-focus of private markets, SIBs introduce innovation, rigor and effectiveness to the social sector. In the existing funding structure, non-profit service providers compete on project structures, which are weakly tied to impact. Once selected, service providers receive up-front funding, which, when combined with the lack of rigorous impact evaluation or active monitoring, can lead to a moral hazard that leads to poor services being delivered. These misaligned incentives discourage thorough implementation, organizational efficiency and learning. In a SIB contract, service providers internalize the benefits of good performance and invest in human capital, organizational systems and learning infrastructure. Our SIB model catalyzes four major changes in service delivery and service providers:
3. SIBs improve process innovation and learning. SIBs create the space for social innovators to demonstrate and validate their programs and teams. SIB sponsors do not have to pay for unsuccessful projects and, therefore, are more likely to try different service delivery models. Also, whereas traditional procurement contracts reward a service provider’s adherence to prescribed program models, the SIB model rewards a provider’s ability to improve the efficiency and effectiveness of its services. This incentivizes monitoring, learning and feedback and focuses them on strengthening implementation.