Social Impact Bonds

Social impact Bond
Social impact Bond (SiB) / Pay for Success Bond

What is a Social Impact Bond?
SiBs are restructuring the relationships between government, non-profit service providers, and existing and potential social investors (the “impact investment” universe; social finances, etc.), such as foundations, that are beginning to invest in “social enterprises” in addition to their role asdonors.
With the ability to issue SiBs, a non-profit organization is able to raise capital from private investors based on a contract with government. Through this contract, a non-profit organization commits to obtaining social results that will generate future savings to the government.
If these results are reached, the generated savings will be used to reimburse the capital invested byinvestors plus a rate of interest that is contingent on the social outcome. If these results are not achieved, government pays nothing to the investors, representing a transfer of risk from the public to the private sector. In the end, the non-profits’ social goals become performance-oriented to assure returns for the investor. Social responsibilities assumed by government are subordinated to generatingprofitable returns for investors.
In terms of financial investments, SiBs are not bonds in the traditional sense. These “bonds” are closer to an equity investment in which risk is associated with the failure of non-profit organizations to produce concrete and quantifiable results.
Necessary conditions in the creation of SiBs:
* Evidence of significant public expenses linked with a strongprobability of reduction of these costs associated with social interventions.
* Possibility to gather data and to develop the analysis necessary to clearly evaluate the potential results.
* Strong co-operation between the various stakeholders.
Where were these programs initiated and implemented?
United Kingdom
* Instrument designed by Social Finance Ltd. (an organization based inLondon that is developing the social investment market) within a working group on social investment.
* Implemented in September 2010 by the Ministry of Justice to reduce repeat offending of inmates upon their exit from prison (recidivism).
* The 6-year program targets the rehabilitation of 3,000 inmates from the Peterborough prison through repeated interventions both within prison and in thecommunity.
* This type of bond is based upon a mechanism focussing on performance outcomes.
* Advantages: the reduction of government expenses and positive fiscal outcomes.
Amount of bonds | Decrease in repeat
offence rates (recidivism) | Financial returnto investors |
£5 million (~Can$8 million) | 7.5% to 15% | 2.5% to 13.3% |

This financial innovation was designed to attractprivate investment into the non-profit sector to improve social outcomes and generate public savings. As a result of this approach to reduce the rate of repeat offences, the number of prison inmates would decline as well as the cost of judicial procedures. The multiplier effects to government would also include the fiscal advantages associated with the potential integration of inmates into the labourmarket.
The return on investment in the case of “social impact bonds” is directly related to a quantifiable social benefit. The program launched in Peterborough in September 2010 offers its investors a graduated return between 2.5% and a maximum of 13.3%, once the minimal rate of 7.5% reduction in repeat offences is reached. The financial return increases in tandem with the decrease in the repeatoffence rate. The annual return to investors is capped at 13.3% (representing a 15% decline in repeat offences). Even in this situation, the cost to public authorities is only about one-third of the planned savings. On the other hand, if the reduction of the repeat offence rate is less than 7.5%, the government pays no interest and investors lose their investment.

United States
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