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What Are Social Impact Bonds?

What Are Social Impact Bonds?

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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.
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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Published by: Center for American Progress on Mar 21, 2012
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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 bries 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 poenial; dening and measuring oucomes or SIBs; and appro- priae roles or governmen agencies in he SIB process.
Below we answer basic quesions abou Social Impac Bonds—wha hey are, wherehey can be mos useul, and how hey dier rom radiional governmen conracs. Wealso look a some o he issues governmen needs o consider beore beginning SocialImpac Bonds. Tese arrangemens show real poenial o help solve dicul socialproblems and give axpayers beter value or heir money.
What are Social Impact Bonds?
Social Impac Bonds are a new and innovaive nancing vehicle or social programs haip radiional governmen unding srucures on heir head. Insead o paying upronor a proscribed se o services, SIBs allow governmen o ocus unds on approachesha work—wihou paying a dime i agreed-upon oucomes are no achieved. SIBs work by bringing ogeher governmen agencies, social service providers, and phil-anhropically minded nanciers o achieve beter resuls or people receiving socialservices and or he axpayers unding hose services.Te Social Impac Bond concep is relaively sraighorward: Governmen agencies denean oucome hey wan o accomplish and agree o pay an exernal organizaion a sum o money i he exernal organizaion achieves ha oucome. Tis unusual mechanism pro-moes innovaion in public services by puting axpayer dollars oward he mos eeciveapproaches. Tis is markedly dieren rom normal unding arrangemens or social pro-grams, in which agencies ypically commi o unding aciviies regardless o he oucome.
2Center or American Progress | What Are Social Impact Bonds?
 While Social Impac Bonds are sill in heir inancy, he concep has enormous poenialin areas o social policy such as homelessness, juvenile delinquency, prevenive healhcare, and workorce developmen. In paricular, SIBs could become a key vehicle orunding prevenion iniiaives designed o save governmen money over he long erm.
 Early inervenions o reduce homelessness or smoking, or example, could lead o con-siderable reducions in Medicare and Medicaid spending—no hrough program cus bu hrough lower hospializaion raes.
There are lots o reerences to “Pay or Success” arrangements and “SocialImpact Bonds.”
Sometimes people use the terms interchangeably tomean the same thing, and sometimes they mean dierent things. It canget very conusing or the lay reader.In this issue brie, we use the term Social Impact Bonds rather than Payor Success to avoid this conusion. By SIB, we are reerring 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.
But over timeit has been used in looser ways to describe a variety o situations wheregovernment payments are in some manner dependent on successuloutcomes, including traditional perormance 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
Beore we delve deeper ino he concep, le’s sar wih a simple deniion o SocialImpac Bonds:
 An arrangemen beween one or more governmen agencies and an exernal organizaionwhere he governmen species an oucome (or oucomes) and promises o pay he exer-nal organizaion a pre-agreed sum (or sums) i i is able o accomplish he oucome(s).
In addiion, SIBs require:
Governmen o place ew, i any, conrols on he way ha he exernal organizaionaccomplishes he oucome
Governmen o cooperae wih he exernal organizaion so ha i is able o akehe acions necessary o achieve he oucome—or example, by ensuring access orelevan daa
 A clearly dened populaion and clariy on wha a successul oucome” would be
3Center or American Progress | What Are Social Impact Bonds?
Some hings o noe:
 All paymens are coningen on he oucome being achieved. I oucomes are noachieved, he governmen pays nohing. Hence, risk is ranserred rom he govern-men o he exernal organizaion or is invesors.
Te crux o he relaionship is beween governmen and he exernal organizaioncommited o accomplishing he oucome. While here may be oher players presen(as discussed below), hey are no essenial o he concep, and hey do no have adirec relaionship wih governmen.
 While Social Impac Bonds are likely o be paricularly useul in areas where accom-plishing oucomes resuls in direc savings or governmen, no all Social ImpacBonds 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-oending rate o pris-oners leaving Peterborough prison.
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 dischargedrom other prisons. The greater the reduction in the rate o re-oending, thegreater the payments, which are capped at around $12 million.
 Social Finance is a nonprot, but it does not directly provide services tocurrent or ormer prisoners. Instead it has established the organizationOne Service, which enters into contracts with other nonprots that work with the prisoners and manages overall progress toward achieving theoutcome. Under the arrangement, One Service has signicant 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 upront 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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