Social Impact Bonds: A New Model for Scaling Effective Impact Investments

Q: When social entrepreneurs have developed a program, demonstrated its effectiveness, and are ready to take it to scale, what do they do?

A: Social Impact Bonds (SIBs) may be one solution to the challenge of securing sufficient multi-year funding to make a preventive program available to all who can benefit.

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by Karabi Acharya, Contributor, Forbes

A SIB is “… a new approach for expanding social programs. It is a partnership in which private investors — not governments — provide capital for non-profits to scale up. The government pays only if the program succeeds

We caught up with Laura Callanan from McKinsey & Company’sSocial Sector Office to talk about her recent report, “From Potential to Action: Bringing Social Impact Bonds to the US.”

Why are Social Impact Bonds a useful model for scaling proven social programs?

SIBs fill a gap between philanthropy and government. Philanthropy is the risk capital of the social sector — it pays for research and early pilots. But philanthropy does not have sufficient resources to take programs to scale, making them available to everyone who needs them. Only government has that level of resources. But government’s budget is currently tied up in legacy programs, many of which are remedial in nature. This means new preventive innovations, better programs often don’t get resources and are being under-utilized.

SIBs structure the handoff from philanthropy to government. Philanthropy and other impact investors provide upfront capital to scale a proven program and government actively watches the program, seeing how it goes. When the less expensive, more effective preventive program works, then the system saves money and government pays the investors back — but only if there are results. Hopefully when SIB-funded programs are successful government is motivated to take the rest of the savings to fund more of what works, save more over the current remedial programs, and realign the system to fund more proven preventive programs.

Can you explain how government pays for results in SIBs?

A lot of government funding today is based on program inputs, activities and outputs rather than actual performance. It’s easier to count the number of people enrolled in a program and pay per person than it is to actually measure whether the program achieves its intended results and pay based on performance. But reducing recidivism, or helping chronically homeless people into stable and healthy lives needs to be assessed on more than effort and good intentions — performance matters.

Under a SIB, performance targets are set upfront and there is an independent assessor who determines at the end of the life of the SIB (approximately 3-5-7 years) whether those targets have been achieved. If the program meets its targets, the government is committed to make a payment — investors get their capital back plus a return, the intermediary and service providers get performance pay. If the program doesn’t meet targets, the government doesn’t pay. This is the risk SIB investors agree to take on.

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