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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 29, 2012
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1Center for American Progress | Defining Terms in a Social Impact Bond Agreement
Defining Terms in a Social ImpactBond Agreement
Explaining Essential Clauses in a SIB Contract
Jitinder Kohli, Douglas J. Besharov, and Kristina CostaMay 2012
Social Impac Bonds , or SIBs, are a promising new model or nancing social programsha urn radiional governmen unding srucures on heir head. Insead o paying con-racors or granees upron or a se o services, Social Impac Bonds allow governmen oocus unds on approaches ha work—wihou paying a dime i agreed-upon oucomesaren’ achieved. Tere is paricular ineres among sae and local governmens, ounda-ions, and service providers in using Social Impac Bonds o pay or prevenive programsin areas such as reducing prisoner recidivism and homelessness—he kinds o services haoen save governmen money down he road bu currenly ace budge cus.Bu Social Impac Bonds also posesignican challengesbecause hey requiregovernmen agencies o ac in unamiliar ways. Governmen is used o exering a greadeal o conrol over social service conracors—a level o conrol ha SIB agreemensdo no allow.Tis means ha he agreemen isel—he conrac signed beween he governmenagency and he exernal organizaion ha promises o achieve he oucome—is enor-mously imporan o a Social Impac Bond’s success. Te conrac codies he oucome,paymen schedule, and assessmen. I also esablishes he responsibiliies o he govern-men and he exernal organizaion, how dispues should be resolved beween hese woparies, and under which circumsances eiher pary can erminae he agreemen.Tis column addresses common quesions abou he roles, responsibiliies, and limia-ions or boh governmen agencies and exernal organizaions in Social Impac Bondarrangemens.
Social Impact Bonds are relativelystraightforward. In a SIB agreement,a government agency decides onan outcome it wants achieved—say,reducing juvenile recidivism in anarea by 10 percent—and contracts anexternal organization that promisesto achieve the outcome. The externalorganization is free to develop andimplement its own strategy. If theexternal organization succeeds, thegovernment pays them a sum of money that may be based on theexpected savings to governmentfrom achieving the outcome. If theexternal organization fails, the gov-ernment pays nothing.
How Social ImpactBonds work 
2Center for American Progress | Defining Terms in a Social Impact Bond Agreement
Setting the outcome, payment, and assessment method
Te conrac should clearly esablish he oucome he governmen agency wans achieved.One o he mos challenging aspecs o a Social Impac Bond is seting an oucome ha will no occur absen he exernal organizaions inervenion. Bu he oucome should no be so difcul o achieve ha he exernal organizaion has litle hope o success. Te con-rac should sae wha he oucome is, how i will be measured, and he paymen scheduleor successul oucomes. In some cases he governmen agency and he exernal organi-zaion may wan o appoin an independen assessor o deermine wheher he exernalorganizaion has achieved he oucome and received he level o paymen due.
Government’s responsibilities
I governmen ruly wans he designaed oucome achieved, i mus ully cooperae andcollaborae wih he exernal organizaion. And he erms and condiions o wha “coop-eraion” enails should be se ou in he Social Impac Bond agreemen. A he mos basic level, his means he conrac should require governmen o providehe exernal organizaion access o he beneciary populaion and any inormaion ordaa abou he populaion ha can help he exernal organizaion wih is work (provid-ing i can be legally shared).Governmen should also be open o making changes o is policy or pracices o help heexernal organizaion succeed. For insance, in a Social Impac Bond agreemen aimeda nding jobs or he long-erm unemployed, he exernal organizaion may ask hegovernmen or assisance in geting sae IDs issued o program paricipans o beterenable hem o apply or employmen.Te conrac should also place some resricions on he governmen. In mos SIB agree-mens his will include clauses prohibiing he governmen rom exering conrol overhe exernal organizaions sraegy or day-o-day operaions. Te conrac should alsopreven he governmen rom inervening in he exernal organizaions selecion o subconracors and invesors, hough subconracors will be held o he same sandardsas he exernal organizaion isel.
 The external organization’s responsibilities
Te exernal organizaion shoulders one overriding responsibiliy: doing everyhingreasonable o achieve he oucome.
3Center for American Progress | Defining Terms in a Social Impact Bond Agreement
Bu he conrac will likely se ou some limied consrains on he organizaion’s acivi-ies o guaranee he beneciary populaion’s saey. For insance, mos SIB agreemens will include clauses prohibiing he exernal organizaion rom engaging in aciviiesha hey reasonably believe could cause harm. Oher clauses may prohibi he exernalorganizaion rom doing hings ha will harm he governmen’s repuaion or resul inincreased coss o governmen or ohers.Te exernal organizaion should be ree o modiy is sraegy and aciviies, paricularly i is original plans are no accomplishing he expeced oucome. Ta’s why he resricionsplaced on he exernal organizaion in he conrac should be broad raher han specic.
Disputes in the Social Impact Bond agreement
Even a cooperaive governmen agency and exernal organizaion may disagree wihone anoher. Ta’s why he conrac should include language appoining an arbiero setle dispues. Te arbier’s key uncion will be o nd ways o deal wih dispuesquickly and amicably.In exreme cases, eiher he exernal organizaion or he governmen agency may wisho erminae a Social Impac Bond agreemen and an imporan par o a SIB conrac ishe language governing erminaion and compensaion level. An exernal organizaionisheavily incenivizedo sop providing services and pull ou o he arrangemen i i begins o hink i will no achieve he oucome. Te conrac should se ou an orderly process or erminaion in hese cases.Similarly, he governmen may legiimaely wan o end a SIB arrangemen, or example,i i reasonably believes ha he exernal organizaion is harming he beneciary popula-ion. Te governmen should also be able o erminae a Social Impac Bond agreemen“or convenience,” ha is, a will. Bu requiring he governmen o generously compen-sae he exernal organizaion should make his an unatracive proposiion.Our issue brie describes he mechanisms or erminaing and alering he agreemenand goes ino deail abou how a SIB agreemen may be ormally srucured.
Tis column is by no means he nal word on how hese unusual arrangemens should work. Social Impac Bonds are sill developing in he Unied Saes and new models willemerge wih heir own resricions and permissions as more saes and ciies explorehe concep. Bu mos agreemens will need o ormalize he responsibiliies and

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