Finance
Social Impact Bonds

WHAT ARE SOCIAL IMPACT BONDS? ... they started in 2007 in the UK with the support of government and foundations.

Burgess COMMENTARY

Peter Burgess

WHAT ARE SOCIAL IMPACT BONDS?

In the UK, approximately 40,200 adults leave prison after serving less than 12 month sentences. It costs taxpayers £213 million per year for the prisons yet 73% of these offenders reoffend within 2 years of release as they unsuccessfully resettle into the community. As government spending is focused on expensive interventions that deal with the consequences of the issue rather than root causes, fewer resources are available for early intervention. This leads to a cycle of poorer social outcomes and more money required on expensive interventions. With this problem at hand, Social Finance started developing Social Impact Bonds to address deep-rooted social problems.

Social Impact Bonds that started in the UK raises funds from non-government investors to pay for the provision of services. If social outcomes improve, investors receive returns, or success payments, generated from a proportion of the reduction in public spending on services. The size of the payments depends on how successful the services are. Investors carry the risk that interventions fail to improve outcomes.

The idea of the Social Impact Bond was first explored in 2007. In September 2010, the world’s first Social Impact Bond was launched by Social Finance, Ltd. They raised £5 million ($8 million US) from 17 investors to fund a reentry program – One* Service – for short-sentenced prisoners leaving Peterborough prison over a six year period.

Contracted organizations include the St Giles Trust, Ormiston Children and Families Trust, and the YMCA who will provide services to prisoners. The Ministry of Justice and the Big Lottery Fund have agreed to repay these investors if one-year, post-release reconvictions decrease by at least 7.5 percent, relative to a comparison group. This bond has an eight year term with capital drawdowns made annually in years one through six. Payments to investors, if they become due, occur approximately in years four, six, and eight. Returns will range between 2.5 to 13 percent.

Why Social Impact Bonds?

Government agencies have committed their funds to remediation programs and will have to find funding to pay for preventive programs. If they indeed fund prevention, governments risk having to pay for both remediation and prevention programs if their prevention programs fail to improve social outcomes. This risk deters government investment in prevention.

Agencies tend to work in a structure that discourages collaboration on cross-cutting issues. For example, homeless individuals impose significant costs on health and correction agencies, but solutions to homelessness are implemented by housing agencies. The costs are divided between departments in a way that there is no incentive to collaboratively develop and deliver effective, integrated solutions at scale.

As a result, Social Impact Bonds is a solution that allows governments to transfer the financial risk of prevention programs to private investors based on the expectation of future recoverable savings.

A successful Social Impact Bond would also benefit several stakeholders. Nonprofits would have access to growth capital, investors would diversify their portfolio and achieve financial returns and social impact, governments would reduce costly remediation programs and increase effectiveness of services to citizens, and communities have access to more effective social services. At the same time, a program that affects many stakeholders will require careful consideration when drafting legal documents outlining precise social impact metrics.

The Future of Social Impact Bonds

Just over a year has passed since the launch of the first Social Impact Bond. The question of whether reoffending was reduced to generate returns for investors will be answered in year four. There are currently over 500 individuals on watch in the community. These individuals can choose whether they want to engage in the One* Service program, yet the proportion that choose to engage with pre- and post-release initiatives is said to be encouragingly high. The program delivers services such as accommodation, employment, and banking and health needs.

Since the launch of this program, other countries have taken notice. In September 2011, governments and nonprofits in Canada and Ireland began actively exploring the concept. President Barack Obama proposed a funding of $100 million in his FY2012 budget to run Social Impact Bond pilot schemes. Massachusetts became the first state to formally indicate interest when it released a Request for Information in May 2011, followed by Requests for Response in January 2012.

Social Finance is also undertaking a number of feasibility studies to assess the potential of Social Impact Bonds in improving outcomes for children and disadvantaged young people. As Social Impact Bonds are still early in their implementation, these pilots will broaden the understanding of how they can be implemented most effectively and become a promising source of growth capital for the social sector.

For more information on Social Impact Bonds, visit Social Finance