1Center or American Progress | What Are Social Impact Bonds?
What Are Social Impact Bonds?
An Innovative New Financing Tool for Social Programs
By Jitinder Kohli, Douglas J. Besharov, and Kristina Costa March 22, 2012
Tis is he rs in a series o issue bries ha looks a Social Impac Bonds and heir value o governmen agencies. Subsequen pieces will ocus on geting he SIB agreemen righ; models or SIBs and heir long-erm poenial; dening and measuring oucomes or SIBs; and appro- priae roles or governmen agencies in he SIB process.
Below we answer basic quesions abou Social Impac Bonds—wha hey are, wherehey can be mos useul, and how hey dier rom radiional governmen conracs. Wealso look a some o he issues governmen needs o consider beore beginning SocialImpac Bonds. Tese arrangemens show real poenial o help solve dicul socialproblems and give axpayers beter value or heir money.
What are Social Impact Bonds?
Social Impac Bonds are a new and innovaive nancing vehicle or social programs haip radiional governmen unding srucures on heir head. Insead o paying upronor a proscribed se o services, SIBs allow governmen o ocus unds on approachesha work—wihou paying a dime i agreed-upon oucomes are no achieved. SIBs work by bringing ogeher governmen agencies, social service providers, and phil-anhropically minded nanciers o achieve beter resuls or people receiving socialservices and or he axpayers unding hose services.Te Social Impac Bond concep is relaively sraighorward: Governmen agencies denean oucome hey wan o accomplish and agree o pay an exernal organizaion a sum o money i he exernal organizaion achieves ha oucome. Tis unusual mechanism pro-moes innovaion in public services by puting axpayer dollars oward he mos eeciveapproaches. Tis is markedly dieren rom normal unding arrangemens or social pro-grams, in which agencies ypically commi o unding aciviies regardless o he oucome.
2Center or American Progress | What Are Social Impact Bonds?
While Social Impac Bonds are sill in heir inancy, he concep has enormous poenialin areas o social policy such as homelessness, juvenile delinquency, prevenive healhcare, and workorce developmen. In paricular, SIBs could become a key vehicle orunding prevenion iniiaives designed o save governmen money over he long erm.
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Early inervenions o reduce homelessness or smoking, or example, could lead o con-siderable reducions in Medicare and Medicaid spending—no hrough program cus bu hrough lower hospializaion raes.
There are lots o reerences to “Pay or Success” arrangements and “SocialImpact Bonds.”
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Sometimes people use the terms interchangeably tomean the same thing, and sometimes they mean dierent things. It canget very conusing or the lay reader.In this issue brie, we use the term Social Impact Bonds rather than Payor Success to avoid this conusion. By SIB, we are reerring to a relativelynarrow and truly innovative concept where payment rom governmentis tied solely to outcomes and where government places ew controls onthe external organization.When the term Pay or Success was rst used in the United States in Feb-ruary 2011 it was synonymous with Social Impact Bonds.
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But over timeit has been used in looser ways to describe a variety o situations wheregovernment payments are in some manner dependent on successuloutcomes, including traditional perormance contracting where bonuspayments might be available to contractors. But those arrangements arenot new—and so we think it’s important to separate out the SIB conceptas the truly innovative idea it is.
What’s the difference between Pay for Success and Social Impact Bonds?
A definition of Social Impact Bonds
Beore we delve deeper ino he concep, le’s sar wih a simple deniion o SocialImpac Bonds:
An arrangemen beween one or more governmen agencies and an exernal organizaionwhere he governmen species an oucome (or oucomes) and promises o pay he exer-nal organizaion a pre-agreed sum (or sums) i i is able o accomplish he oucome(s).
In addiion, SIBs require:
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Governmen o place ew, i any, conrols on he way ha he exernal organizaionaccomplishes he oucome
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Governmen o cooperae wih he exernal organizaion so ha i is able o akehe acions necessary o achieve he oucome—or example, by ensuring access orelevan daa
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A clearly dened populaion and clariy on wha a “successul oucome” would be
3Center or American Progress | What Are Social Impact Bonds?
Some hings o noe:
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All paymens are coningen on he oucome being achieved. I oucomes are noachieved, he governmen pays nohing. Hence, risk is ranserred rom he govern-men o he exernal organizaion or is invesors.
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Te crux o he relaionship is beween governmen and he exernal organizaioncommited o accomplishing he oucome. While here may be oher players presen(as discussed below), hey are no essenial o he concep, and hey do no have adirec relaionship wih governmen.
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While Social Impac Bonds are likely o be paricularly useul in areas where accom-plishing oucomes resuls in direc savings or governmen, no all Social ImpacBonds have o resul in governmen savings.
The rst Social Impact Bond arrangement in the world is in the United King-dom, where the British government has promised to pay an external organi-zation called Social Finance i it is able to reduce the re-oending rate o pris-oners leaving Peterborough prison.
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Under the arrangement the governmentmakes payments so long as there is a measured reduction in ex-prisonerreconviction o 7.5 percent relative to a group o similar prisoners dischargedrom other prisons. The greater the reduction in the rate o re-oending, thegreater the payments, which are capped at around $12 million.
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Social Finance is a nonprot, but it does not directly provide services tocurrent or ormer prisoners. Instead it has established the organizationOne Service, which enters into contracts with other nonprots that work with the prisoners and manages overall progress toward achieving theoutcome. Under the arrangement, One Service has signicant exibilityon what it does to achieve the outcome, and the government has prom-ised the organization its cooperation. For example, it guaranteed OneService access to the prison to support inmates.Social Finance needs unds to pay One Service in advance o anypayment rom the government, so it raises money rom investors. Inexchange or paying the upront costs, these investors receive an agreed-upon return i the outcome is achieved. This return is paid rom thegovernment payout that will be triggered by a reduction in recidivismo more than 7.5 percent. But this is a risky investment, as the investorsstand to lose their capital i the outcome is not achieved.
Continued on next page
The first Social Impact Bond: Peterborough prison
GovernmentagencyExternalorganization*Provider 2Provider 3Provider 1Investor 1Investor 2Investor 3Beneficiary population
Governmentmakes paymentif outcomeachievedExternalorganizationpromisesto achieveoutcomeExternal organizationmanages andfunds providersProviders work with beneficiarypopulation andreport progressto externalorganizationInvestors fundexternalorganizationExternal organizationpromises return toinvestors if successful
*There are several appropriate variations on the Peterborough-style Social Impact Bond, explainedin detail on page 9. The external organization may raise funds from its own balance sheet rather thanfrom outside investors. The external organization also may choose to be one of the service providers,or the sole provider, for the intervention.
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What Are Social Impact Bonds?
Jitinder Kohli, Douglas J. Besharov, and Kristina Costa answer basic questions about Social Impact Bonds—what they are, where they can be most useful, and how they differ from traditional government contracts.
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