A social impact bond (SIB), also known as pay-for-success financing, pay-for-success bond (US), social benefit bond (Australia), pay-for-benefit bond (Australia), social outcomes contract (UK), social impact partnership (Europe), social impact contract (Europe), or simply a social bond, is a type of outcomes-based contracting, whereby a contractor typically attempts to effect a policy of government but does not get paid by the government unless specified goals are achieved. Geoff Mulgan claims to have coined the term while he was chief executive of the Young Foundation. The first SIB was launched by UK-based Social Finance in September 2010.
By July 2019, 132 SIBs had been initiated in 25 countries, and they were worth more than $420m. , 23 countries use SIBs, with () 276 projects in place and capital raised to the value of $745m.Social Finance Ltd., Impact Bonds, accessed 17 May 2023
History The SIB is a non-tradeable version of social policy bonds, first conceived by Ronnie Horesh, a New Zealand economist, in 1988.
The first SIB was announced in the UK on 18 March 2010 by then Justice Secretary Jack Straw, to finance a prisoner rehabilitation program at Peterborough Prison. This grew out of research on alternative financing models by the Young Foundation, the Prime Minister's Council on Social Action (CoSA, a cross-sector advisory group) and Social Finance beginning in 2007 and published in 2009. The work was continued by the Centre for Social Impact in Australia, and other NGOs and private companies.
In Australia, the intention to trial SIBs was announced in New South Wales in November 2010 by Premier Kristina Keneally of the Australian Labor Party. The policy was continued by the Coalition after a change of Government in 2011.
Political support for SIBs in the US emerged in federal budget proposals in 2011, and from the cities of New York and Baltimore. The Rockefeller Foundation supported the US expansion of Social Finance, the SIB Technical Assistance Lab at Harvard Kennedy School and the October 2011 SIB convention hosted by the White House Office of Social Innovation and Civic Participation. In August, 2012, Massachusetts became the first US state to create a policy which encourages the creation of Social impact bonds, termed "Social innovation financing". The state legislature authorised spending as much as $50 million on the initiatives.
In November 2012, Essex County Council became the first local authority in the UK to commission a social impact bond in Children's Services, with the intent of providing therapeutic support and improving outcomes for adolescents at risk of going into care. In February 2013 Allia, a charitable social investment organisation, announced a bond fund intending to diversify into real estate lending and the Essex SIB, which would have been the first opportunity for retail investors to in a SIB. The product was later withdrawn from sale due to lack of investors.
In 2016 the Government Outcomes Lab was launched as a partnership between the UK government's Office for Civil Society and University of Oxford Blavatnik School of Government to study SIBs and outcomes-based contracting approaches more broadly. In July 2016, Social Finance initiated a white paper on the state of the SIB market, "Social Impact Bonds: The Early Years" and a live, sortable global database of SIBs.
In February 2018 the Social Impact Partnerships to Pay for Results Act (SIPPRA) was signed into law, allocating $100 from the US Treasury towards SIBs. The bill had been introduced with bipartisan co-sponsorship in January 2017. In 2021 the Treasury awarded grants to local and state agencies in three states. Six further awards were announced in December 2024.
Definitions
There are a range of interpretations of what the term ‘social impact bond’ means. Generally, social impact bonds are a type of bond, but not the most common type. While they operate during a fixed period of time, they do not offer a fixed rate of return. Repayment to investors is contingent upon specified social outcomes being achieved. Therefore, in terms of investment risk, social impact bonds are more similar to that of a structured product or an equity investment. Third Sector Capital Partners describes social impact bonds as “a potential financing option available to support pay-for-success programs. Social impact bonds bring together government, service providers and investors/funders to implement existing and proven programs designed to accomplish clearly defined outcomes. Investors/funders provide the initial capital support and the government agrees to make payments to the program only when outcomes are achieved. So government pays for success.”
Social Finance UK describes social impact bonds as: “a social impact bond is a public-private partnership which funds effective social services through a performance-based contract.”Social Finance (2016) Social Impact Bonds: The early years Social Finance, therefore, specifies that the investment is from non-government bodies.
The Young Foundation describes social impact bonds as: “a range of financial assets that entail raising money from third parties and making repayments according to the social impacts achieved.”John Loder, Geoff Mulgan, Neil Reeder & Anton Shelupanov (2010), Financing social value: implementing Social Impact Bonds. Young Foundation The Young Foundation envisages that public bodies could be potential investors.
The Non-Profit Finance Fund describes social impact bonds as: “PFS financing agreements, in which private investors provide upfront capital for the delivery of services and are repaid by a back-end, or outcomes payor (usually a government), if contractually agreed-upon outcomes are achieved, are often referred to as ‘Social Impact Bonds’ ... Social Impact Bonds (SIBs) are a mechanism by which to shift financial risk from service providers to investors, with investors underwriting service providers’ based on their ability to deliver on positive social outcomes.”
The Government Outcomes Lab identifies four main dimensions along which SIBs might vary: “the nature and outcome of payment outcomes”, “the nature of capital used to fund services”, “the strength of performance management”, and “the social intent of service providers”. According to the GO Lab, a 'core' SIB is therefore defined by “100% payment on outcomes”, “independent and at-risk capital”, “a high degree of performance management”, and “a strong social intent of service providers”.
In developing countries, a development impact bond (DIB) is a variation of the SIB model. DIBs are outcomes-based funding structures for the delivery of public services in low- and middle-income countries.
Arguments in favour
Advocates of SIBs claim that they encourage innovation and tackle difficult social problems, asserting that new and innovative programs have potential for success, but often have trouble securing government funding because it can be difficult to prove their effectiveness rigorously. This type of financing allows the government to partner with private service providers and, if necessary, private foundations or other investors willing to cover the initial costs and assume performance risk to expand promising programs, while assuring that taxpayers will not pay for the programs unless they demonstrate success in achieving the desired outcomes. The expected public sector savings are used as a basis for raising investment for prevention and early intervention services that improve social outcomes. Advocates also believe that SIB programs can achieve positive social outcomes, may create fiscal savings for government, but also involve changes of funding arrangements that bring risks to service agencies.
The benefits of social impact bonds depends on the definition being used, but the broad benefits (though not measured and verified yet) are:
Prevention — more funds are available for prevention and early intervention services.Cabinet Office (2009), Putting the front line first: smarter government Risk transfer — the public sector only has to pay for effective services; the third party investor bears all the risk of services being potentially ineffective. Innovation — risk transfer enables innovation since investors and service providers have an incentive to be as effective as possible, because the larger effect they have on the outcome, the larger the repayment they will receive. Performance management — the SIB method includes continuous evaluation of program effects, increasing the rate of learning about which methods work and which do not. Governments will therefore fund "what works"; repositioning government spending to cost-effective preventive programs. Additionally, independent evaluation creates transparency for all parties. Collaboration — enable collaboration across multiple commissioners and within service provider networks and attract new capital to the social, educational and healthcare sectors.
Criticism
Critics note that because the outcomes-based payments are dependent on governmental funds which must be budgeted,http://www.smf.co.uk/files/7713/7518/4818/Risky_Business_final.pdf social impact bonds do not actually raise additional capital for social programs, but instead displace funding for other programs. Given the need to budget for a return on investment, a program evaluation, middle managers, and the expenses of designing the complex financial and contractual mechanisms, social impact bonds, according to critics, may be an expensive method of operating social programs. Other criticisms include:
Criteria for success — Donors will seek to fund that which can be observed and measured, the outcomes (not just the outputs). This will leave agencies addressing problems in society unable to access these funds. This is going to be particularly true for advocacy, arts and alternative organizations. It will be difficult for social coalitions to get funding as their contributions are dispersed through member organizations and the effect they have on government policies, for example. The terms of these instruments may be set to overpay for more readily achievable goals. Doing so would increase long term government spending and divorce such spending from direct deliverables. More donor influence — Donors, or now investors, will want to make sure their money is being used according to contract, and will therefore want to be more involved in the delivery of social services. They may want NGOs to adopt a style of delivery used in for profit business. Unfair competition — Competition with NGOs will emerge. Agencies that secure funds will be able to operate in areas where NGOs now operate, but they will have greater resources, more narrowly defined goals (and therefore successes to publicize) and will set the standard for government funded agencies and their actions. Reduces public responsibility — By reducing the government's responsibilities and accountability for delivering services. Though governments may not genuinely represent their societies, they are still the best representatives of the public will and governments play an important role in maintaining a civil society sector. Devolving Social services to businesses risks this social contract when other tax and program options can be made available. Non-tradability — New Zealand economist Ronnie Horesh argues that because SIBs are not tradable, SIBs favour existing institutions, are inherently narrow and short-term in scope, and impose relatively great monitoring costs. Not required — Social Programs targeted to be transferred into social impact bonds are targeted because they are compatible with the SIB structure, not because of the merits of SIB or out of dire need.