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Defining Terms in a Social Impact Bond Agreement

Defining Terms in a Social Impact Bond Agreement

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Jitinder Kohli, Douglas J. Besharov, and Kristina Costa address the essential elements of Social Impact Bond contracts.
Jitinder Kohli, Douglas J. Besharov, and Kristina Costa address the essential elements of Social Impact Bond contracts.

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Published by: Center for American Progress on May 07, 2012
Copyright:Attribution Non-commercial


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1Center for American Progress | Inside a Social Impact Bond Agreement
Inside a Social Impact Bond Agreement
Exploring the Contract Challengesof a New Social Finance Mechanism
Jitinder Kohli, Douglas J. Besharov, and Kristina Costa May 3, 2012
Te Social Impac Bond, a promising new model or unding some social programs, is besundersood as an agreemen beween a governmen agency and an ouside organizaion in which paymen rom he governmen is enirely coningen on he organizaion achievingmeasurable, posiive social oucomes. Tere is paricular exciemen in sae and local gov-ernmens and among philanhropic oundaions and social service providers abou usinghese agreemens o nance prevenive social programs ha oen save governmen money down he road bu are sill vulnerable o budge cus in scally igh imes.Social Impac Bonds also pose signican challenges because hey require governmenagencies o ac in unamiliar ways. Mos obviously, agencies accusomed o paying serviceproviders or perorming a proscribed se o aciviies may nd i challenging o make heswich o only paying or resuls in a SIB agreemen. Te governmen will also need oclearly dene he beneciary populaion receiving social services and mus provide sae-guards o make sure he exernal organizaion doesn’ jus “cream skim” or work wih only he easies cases o achieve he oucome. And, o course, he governmen mus coninue ocooperae wih he exernal organizaion hroughou he ull erm o he agreemen.Tese challenges mean ha he agreemen isel—he conrac signed by he governmenagency and he exernal organizaion—is criically imporan o he success or ailure
2Center for American Progress | Inside a Social Impact Bond Agreement
o a Social Impac Bond. Among oher hings, he conrac will dene he relaionshipsand responsibiliies o all he paries in his unusual arrangemen, will se ou he circum-sances under which he exernal organizaion can expec o earn heir paymen, and willdeermine when eiher he governmen or he exernal organizaion can erminae heagreemen. Wriing he agreemen well will help guaranee ransparency and cooperaion beween he governmen and he exernal organizaion, help proec he vulnerable popu-laions ha he agreemen serves, and make beter oucomes possible.In his issue brie, we presen some dra language ha could be included in a SocialImpac Bond agreemen. I is mean o help readers undersand some o he complexi-ies o SIB arrangemens and he ways o address hem. As an example, his SIB conracocuses on improving employmen oucomes or he long-erm unemployed, bu SIBscan also be used in many oher policy conexs.
Tis dra language is not intended to be legal advice and is not a model contract. Every agree-ment will be diferent, and parties to a Social Impact Bond should always consult their lawyersto establish which clauses are required in their particular context. Please note that in a number o places we reer to appendices where additional detail would be included. Tese appendiceswould need to be agreed upon by the parties in each instance, and we have not sought to dra language or them. Also in some cases we have included suggested timelines that are meant to illustrate how the agreement might work. But the timetable will difer based on the localcircumstances in each agreement. Tese instances are marked in red.
3Center for American Progress | Inside a Social Impact Bond Agreement
Draft language for inclusion in an agreement
1. Tis agreemen is made beween _______, he
 government agency,
and _______,he
external organization
Broad responsibilities
2. Under his agreemen, he broad responsibiliies o he paries are as ollows:2.1. Te
 government agency
is responsible or dening he oucomes ha i wisheso see accomplished.2.2. Te
external organization
is responsible or devising and implemening asraegy o accomplish he oucomes.2.3. Te
 government agency
should no seek o direc he sraegy or operaions o he exernal organizaion, bu i mus cooperae wih he eors o he exer-nal organizaion o achieve he oucomes.2.4. Te
 government agency
will pay he exernal organizaion i one or more o heoucomes are achieved.3. In addiion, his agreemen ses ou responsibiliies or he independen assessor andhe arbier:3.1. Te
independent assessor 
is responsible or deermining wheher oucomeshave been achieved and he level o paymen ha is due.3.2. Te
is responsible or resolving dispues ha may arise beween hegovernmen agency and he exernal organizaion.
We believe that Social Impact Bonds are un-damentally an agreement between governmentand an external organization where paymentis promised in return or achieving one or moreoutcomes. Both parties must work together toachieve the outcome. We do not believe thatother parties such as investors should be a partyin the agreement.
This clause seeks to set out the broad responsi-bilities o the parties but omits details about howthe arrangement will work. Many o those detailsare included in later clauses.

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