Social Impact Bonds 101
What is a social impact bond?
A social impact bond is a contract signed between a government agency and an external organization that promises to achieve an outcome the government agency wants achieved. The contract codifies the outcome, payment schedule, and assessment. It also establishes the responsibilities of the government and the external organization, how disputes should be resolved between these two parties, and under which circumstances either party can terminate the agreement.
How does it work?
An outcomes-based contract enables government to pay directly for successful social outcomes, once they are delivered.
What are the roles of those involved?
(1) The Government
If government truly wants the designated outcome achieved, it must fully cooperate and collaborate with the external organization, and the terms and conditions of what “cooperation” entails should be set out in the Social Impact Bond (“SIB”) agreement. At the most basic level, this means the contract should require government to provide the external organization access to the beneficiary population and any information or data about the population that can help the external organization with its work (providing it can be legally shared). Government should also be open to making changes to its policy or practices to help the external organization succeed. The contract should also place some restrictions on the government. In most SIB agreements this will include clauses prohibiting the government from exerting control over the external organization’s strategy or day-to-day operations. The contract should also prevent the government from intervening in the external organization’s selection of subcontractors and investors, though subcontractors will be held to the same standards as the external organization itself.
(2) The External Organization
The external organization shoulders one overriding responsibility: doing everything reasonable to achieve the outcome. But, the contract will likely set out some limited constraints on the organization’s activities to guarantee the beneficiary population’s safety. For instance, most SIB agreements will include clauses prohibiting the external organization from engaging in activities that they reasonably believe could cause harm. Other clauses may prohibit the external organization from doing things that will harm the government’s reputation or result in increased costs to government or others. The external organization should be free to modify its strategy and activities, particularly if its original plans are not accomplishing the expected outcome. That’s why the restrictions placed on the external organization in the contract should be broad rather than specific.
(3) The Investors
A third party – the investor – supplies capital upfront to cover the costs of the intervention on behalf of the external organization. This investment could be in full or in part. Investor returns are contingent on the successful delivery of outcomes.
What does it look like?
A social impact bond aligns at least three distinct parties – government or donor, service provider and investor (or multiples thereof) – around the delivery of a pre-agreed set of outcomes for an agreed financial value per social outcome (or set of outcomes). This tying of investor returns to successful outcomes is what distinguishes social impact bonds from broader pay-for-success or payment-by-results contracting. In these broader contracts, private finance may be involved but repayment and returns are not directly contingent on the delivery of successful social outcomes. Given that investor returns are contingent on the successful delivery of outcomes, SIB’s differ from traditional bonds.
To gain more understanding on what social impact bonds actually look like, you can click here to view an infographic from Goldman Sachs.
Why do we have social impact bonds?
The purpose of the SIB model is to generate cost- savings for a government, focus on outcomes rather than inputs or outputs, and reduce political and financial risk. SIB’s were created to alleviate high governmental spending associated with social problems. Few negative consequences exist if the external organization determines it cannot achieve the outcome and discontinues services. Outcomes are observable and measurable within three to eight years.
Social Impact Bonds in CA: