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Social Impact Bonds and Government Contracting

Social Impact Bonds and Government Contracting

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Jitinder Kohli, Douglas J. Besharov, and Kristina Costa explain how government should make contractor decisions in a SIB agreement.
Jitinder Kohli, Douglas J. Besharov, and Kristina Costa explain how government should make contractor decisions in a SIB agreement.

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Published by: Center for American Progress on May 29, 2012
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1Center for American Progress | Social Impact Bonds and Government Contracting
Social Impact Bonds andGovernment Contracting
How to Choose the Best External Organizationto Achieve Your Outcome
Jitinder Kohli, Douglas J. Besharov , Kristina Costa May 2, 2012
Social Impac Bonds , or SIB, are an innovaive new ool ha ips governmen nancingon is head. Tey allow agencies o pay only or measurable, posiive social oucomesaer achievemen raher han paying upron or a se o aciviies. Tis ool will likely prove challenging or many in governmen, rom program designers who are no usedo dening measurable oucomes o poliicians who like making decisions abou whichinervenions will be used o ackle social problems.Bu i will be conracing ocers who ace a real Cach-22: In a SIB agreemen heexernal organizaion has signican laiude o change is work plan midsream i heinervenions i has chosen are no working. Ineviably, however, SIB conracs will beawarded parly on he basis o he proposed plan’s srengh. So he conracing agency aces he problem o how o choose he exernal organizaion bes able o achieve heoucome when heir ulimae means o he end may be very diferen rom heir originalplans. (Broadly, we hink ha SIB parners should be allowed o deploy any sraegy hadoes no cause harm or increase coss or governmen, ciizens, or business.)Beore awarding a conrac, governmen agencies should be clear abou he oucomehey wan achieved and he mos hey are willing o pay or ha oucome. Someimes,agencies will have a budge ha hey will wan o mainain.For insance, in he recidivism example (box), he governmen will pay he exernalorganizaion once hey reach a cerain hreshold o achievemen—a 10 percen reduc-ion in he re-ofending rae. Bu he exernal organizaion may be able o do even beterand reduce recidivism by 20 or 30 percen—in which case hey will expec higher remu-neraion. So i he governmen agency has a budge consrain, i should indicae haduring he process o selecing an exernal organizaion. Oherwise poenial parnersmay develop plans ha are oo ambiious.
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 | Social Impact Bonds and Government Contracting
Ulimaely, governmen agencies wan o parner wih an exernal organizaion ha willsuccessully deliver he oucome. As we explain below, agencies should evaluae bids romexernal organizaions using hree key ses o crieria: he qualiy o he organizaion’s plansor achieving he oucome; he overall qualiy and demonsraed abiliies o he organiza-ion isel; and he price governmen will pay he organizaion i i achieves he oucomes.
Confidence in plans
 Alhough he governmen should no require he exernal organizaion o use a paricu-lar inervenion o achieve a Social Impac Bond’s oucome, he exernal organizaion’s bid should sill conain a work plan. Te plan should:
Describe the interventions that will be used—and why.
Te governmen will cedeconrol over day-o-day aciviies o he exernal organizaion, bu he exernal orga-nizaion needs o demonsrae ha hey have hough seriously abou how o achievehe oucome. o ha end conracing ocers should wan a leas some o he orga-nizaions planned inervenions o have rigorous evidence o efeciveness in similarcircumsances. I here is any daa available on wha exernal acors make he iner- venion more likely o succeed, he exernal organizaion should seek o demonsraehose acors will hold rue in heir plan.
Describe a back-up plan.
Since he exernal organizaion is allowed o change is ac-ics midway hrough he SIB agreemen, conracing ocers should expec he organi-zaion o have plans in place o respond o and replace unsuccessul inervenions.
Confidence in the external organization
Te governmen shouldn’ jus evaluae he exernal organizaion’s plans when awardinga Social Impac Bond agreemen. Because o he rus inheren in hese unusual arrange-mens, he governmen agency will wan a high degree o condence ha hey will beable o orm a cooperaive working relaionship wih an exernal organizaion capable o carrying hrough he plans. o gain condence, he agency should consider:
Te governmen will need o work wih he exernal organizaion regu-larly o, among oher hings, provide access o daa and o he populaion o bene-ciaries. Having condence in he exernal organizaion’s senior employees is essenialas he governmen and he exernal organizaion will need o work closely ogeherhroughou he agreemen.
Track record.
Te governmen should also consider he organizaion’s rack record— wheher hey have successully conraced wih he governmen beore, wheher hey 
3Center for American Progress | Social Impact Bonds and Government Contracting
are able o manage complex projecs, and wheher he service providers hey plan ouse have srong hisories o success.
Working capital.
 Alhough he governmen agency should no expec o approve or ve he exernal organizaions invesors—who will provide working capial o run heinervenions—he exernal organizaion should provide srong evidence ha hey undersand how much money is needed o und he inervenions and demonsraehey will be able o raise he necessary unds. Tis is imporan o assure he govern-men agency ha he Social Impac Bond agreemen will ge of he ground.
Cost considerations
 While governmen should no pry ino he exernal organizaion’s cos srucure, i musconsider he price i needs o pay or oucomes.For insance, exernal organizaion A may bid or a SIB conrac o reduce juvenilerecidivism and ask or a $10 million paymen, while exernal organizaion B asks ora $15 million paymen or he same oucome. I he wo bids are oherwise similar,paricularly in providing evidence o efeciveness, and he governmen agency believesha eiher organizaion could be successul, i mus choose he bid rom organizaion A  because o he lower cos.O course, hings will oen be more complicaed han his. Governmen ocials willsomeimes nd ha he organizaions hey are mos conden working wih are alsomore expensive, and hose ha wan less money have less convincing sraegies orsuccess. Procuremen ocials are used o making decisions ha look a qualiy and cosconsideraions alongside each oher and Social Impac Bonds are no diferen o oherconracing arrangemens in his regard.
During he conracing process or a Social Impac Bond agreemen, governmen agen-cies will need o ask quesions abou he exernal organizaion’s sraegy and ensure hahe organizaion is srong enough o achieve he oucome.Bu he bigges challenges will crop up aer he ink has dried. Because, wih ew excep-ions, ha’s when he governmen will have o le go and allow he exernal organizaiono change is work plan, raise money rom any invesors i wishes, and do wha i can oachieve he oucome. Few governmen agencies will be used o providing ha level o reedom o exernal parners.

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