Social Impact BondsBy: Ethan Choy, Ross Higgins, and Spencer Bezirdjian

How to cite this guide: Choy, E., Higgins, R., and Bezirdjian, S. A New Horizon for Impact Investment: The Future of Social Impact Bonds. Business & Government Relations Management Guide. Washington DC, The George Washington University. Prepared under the supervision of Professor Jorge Rivera as a basis for class discussion.

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A New Horizon for Impact Investment: The Future of Social Impact Bonds

A New Way to Finance Social ProgramsWhat’s it all about? A Social impact bond is regarded as a performance-based investment bond. This financial vehicle is considered to be a part of the new impact investment market. The first SIB was launched in the UK on March 18, 2010 by then Justice Secretary Jack Straw to finance prisoner rehabilitation programs. The idea is quickly catching the interest of countries such as: UK, US, Australia, and India. On February 2011, President Obama proposed his 2012 budget, which included $100m going towards SIB projects. What makes a SIB different from other types of bonds is that it does not offer a fixed return on investment. Rather, ROI is based on the efficiency of the project outcome. SIB’s contain higher than average risks to outside investors willing to fund the projects, but offer the potential for increased profits. Due to this high-risk investment, SIBs have often been compared to equity investments or structured products. The table below depicts the differences among both social impact bonds and traditional bonds:

SOCIAL IMPACT BONDS❏ Payment is not upfront❏ Returns can vary

depending on the success level of the project

❏ Relies on private philanthropy and capital markets for upfront capital

❏ Outcomes are observable and measurable within 3 to 8 years

❏ A lot of time spent on contracting

❏ Many external intermediaries

TRADITIONAL BONDS❏ Payment is received

when incentivized❏ The government will

pay a fixed return❏ Government pays

investors directly through debt

❏ Easier to measure outcome as service is more heavily regulated

❏ Not as many contracts to be issued

❏ Divided among different agencies

How they Work: SIBs work through a legal contract between a government agency and a private sector financing intermediary or external organization. By providing an in-depth scope and comprehensive analysis as to why the external organization would like to conduct an intervention, the external organization initiates the proposal of a SIB to a government agency. The agency then suggests the set timeframe, payment level, and desired outcome. Once the “Pay for Success” contract has been approved and signed, the external organization takes the responsibility to form secondary contracts with outside investors and service providers. If the outcome is achieved, outside investors will be rewarded with a return according to the level of program performance. However, if the outcome is not achieved, the government will not pay for the service. Because the outside investors and financial intermediary assumes 100% of the risk, they must insure that the scope of the service or project is both measurable and achievable. In conclusion, service providers carry out the intervention and are overseen by the external organization.

Pettus, Ashley. "Social Impact Bonds." Social Impact Bonds Harness Private Capital to Tackle Social Ills . Harvard Magazine, July-Aug. 2013. Web. 26 Apr. 2015.

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Why is it Useful? Social impact bonds offer an opportunity to improve social outcomes by providing an alternative source of funding to public programs. SIBs are an alternative because they provide a means of conditional funding based on the achieved outcome performance as opposed to traditional financial methods that simply measure inputs and outputs. SIB’s have the ability to benefit the community, the government, and the investors. The community benefits from the implementation of a new program designed to better their environment. The investors benefit if they are able to create a program that provides efficient results. The government benefits because SIB’s free up valuable time and save money in the long-run due to the increased efficiency of the process.

Application in GovernmentSIBs offer a new, innovative initiative for governments to influence an effective change in the services that they offer through the “payment for success” plan. By allowing outside investors and businesses to collaborate and offer a strategy of implementation, the government is relieved from their duties and concurrent obligations while the contracting businesses work toward achieving the desired outcome. By signing a SIB contract, the government actually saves the taxpayers’ money in the process (the underlying returns will be discussed in further detail). One of the largest benefits of the government in accordance with the social impact bond stems from their ability to only pay the cost to third party affiliates if the service was effectively carried out and the set outcome was achieved (“payment for success”). However, the government involved in the procurement of the bond must be in absolute compliance throughout the process. Without complete compliance, the bond issuer and the rest of the contractual system will collapse.

Application in Business

Similar to the government, the contracting businesses must clearly define the project or service in which they are choosing to implement. The chart on the left is a simplified model of a service’s financial feasibility, as assessed by a company’s own ability to effectively achieve the project. A good reason as to why a company may choose to take on the complexities of reinstating a social

service is because it offers a new profitable market niche if the company involved can implement and perform the tasks effectively (profitability statements will be assessed in greater detail).

Programs with PotentialSIBs are considered to be a versatile tool that is applicable to various program areas. Their effectiveness is most evident when they address issues that save the government money in the long-term and whose outcomes can be easily measured. In essence, SIBs do not tackle preventative programs that try to stop issues from growing too severe. They likely address remedial programs that involve a problem after it has occurred like prison sentences.The Center for American Progress has defined prison recidivism, workforce development, and homelessness as examples of areas that could benefit greatly from SIBs. Preventative programs have been proven to be effective ways to deal with longstanding social problems while saving money down the line. The only problem is that preventative programs are also the most likely to have budget shortfalls and get budget cuts - enter private investors who seek a social impact as well as a financial return.

Other Resources

The Center for American Progress: CAP is a public policy research and advocacy organization. They are “dedicated to improving the lives of Americans through progressive ideas and actions.” CAP has clearly defined industries that can benefit from SIB’s.

Rockefeller Foundation: is an organization whose mission is to “improve the well-being of humans around the world.” The Rockefeller organization gives detailed information about the various governments who have invested in SIB’s and the potential commercial capital these SIB’s can provide.

Harvard Kennedy School: HKS has set up a Social Impact Bond technical assistance lab, which provides users with all the information they need to know about SIB’s. HKS also hires contractors who are looking to take on various SIB’s. A list of SIB’s currently in process can also be found here.

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Contracting for SuccessSIBs center around multiple contracts that lay out the general terms for a proposed program. Important topics that need to be addressed in a SIB contract are the beneficiary population that will be receiving services, compensation levels, measures of success, and a timeframe. A major challenge of these contracts is clearly defining the beneficiary population. The government agency needs to make sure that the external organization doesn’t have the opportunity to simply target the easiest cases, but works toward bettering all those affected by the chosen issue, including the most vulnerable. The implications of these challenges mean that the contract is pivotal to the success or failure of the project. Furthermore, due to the complex nature of social problems in addition to the number of stakeholders involved in SIBs, it is important that all participating parties understand the causes of the social issue. An effectual contract will reflect this understanding and guide the external organization in its actions.

The New York Social Impact Bond Agreement

The chart to the right shows the number projections for the SIB between New York City and MDRC. With a 10% reduction in re-incarceration, the government pays MDRC its initial investment of $9.6m. At this break-even point, the government is still projected to save $1m in long-term savings. If re-incarceration rates are reduced by less than 10%, then MDRC is only paid half of their initial investment. Even at this rate, the government is still projected to save $1m in long-term savings. Conversely, if re-incarceration is reduced by 20%, the city will pay MDRC $11.7m, a price well above their initial investment. At this price, the city is projected to save over $20m in long-term savings. This projection chart is just one example of how the pay for performance process works.

The Bright Future of Social Impact BondsWhat is possibly the most alluring aspect of the social impact bond is the potential influence that it may bring across the three key global markets. These markets make up the triple bottom line or the three pillars of sustainability. Each bar (or pillar) on the graph to the left represents a different market. In order from left to right these markets are seen as: US philanthropic giving (social), global social screening and stakeholder advocacy (environmental), global managed assets (financial), and impact investing potential market size. As much as 1% of global managed assets ($500 Billion) can be channeled into the impact investment market as a source of capital to fund programs and introduce new innovative techniques and operations to effectively conduct social services. In theory, that there boasts a potential win-win-win across all platforms. For this reason, social impact investment and, more specifically, social impact bonds have the capacity by 2020 to

reach a market size of $1 Trillion. Governments around the world are beginning to invest in this new market in hopes of delivering a business-driven strategy that will deliver positive results for both the environment and the community.

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Social Impact Bonds From Around The WorldToday, we live in a society that is globally connected. It is almost impossible to be uninformed about subsequent events that eventually influence other countries around the world. By now, most people are tuned into social media and other forms of communication to deliver them the latest and greatest news about current events happening in countries halfway across the globe. For this reason, social impact bonds can gain a considerable amount of momentum as think tanks, and other industry leaders, collaborate together to better the welfare of the community. The map above, outlines the volume and

interrelatedness of the various contracted SIBs all over the world. Each program is faced with the challenge of raising the standard of social service and thus, setting in motion a more efficient operating system in the way that we conduct services.

“With promising new vehicles such as social enterprises, social impact bonds, impact investments, and benefit corporations, we have a chance to use public and private investment in ways that generate real, measurable social impact.” - Deloitte GovLabs

The graph to the right depicts the amount of SIBs that have been launched since 2010. The United Kingdom is seen as the dominant contracting country that is setting the pace for the rest of the world to follow. Since the first social impact bond was issued in Peterborough, England in 2010, the UK has strived to issue nearly 25 SIBs. Because of an ever-increasing optimism in the social impact market, the amount of social impact bonds that have surfaced has reached to match nearly that of the UK. Due to the fact that SIBs are still a new investment method, the certainty of the installment and operations process is not completely smoothed, however, after considerable application and research, the complex procedural contracting process will become just a bump in the green road of social impact investing. Hopefully, we will all enjoy the fruits of these new financial vehicles that bring the rest of the world one step closer to a new horizon of efficiency that is impact investing.

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Sources:

Costa, Kristina, Sonal Shah, and Sam Ungar. "Frequently Asked Questions: Social Impact Bonds". Center for American Progress, 5 Dec. 2012. Web. 22 March 2015. <http://cdn.americanprogress.org/wp-content/uploads/2012/12/FAQSocialImpactBonds-1.pdf>.Liebman, Jeffrey B. "Social Impact Bonds: A promising new financing model to accelerate social innovation and improve government performance". Center for American Progress, 1 Feb. 2011. Web. 22 March 2015. <http://cdn.americanprogress.org/wp-content/uploads/issues/2011/02/pdf/social_impact_bonds.pdf>.

Dermine, Thomas. "Establishing Social Impact Bonds in Continental Europe." N.p., 1 May 2014. Web. 22 March 2015. <http://www.hks.harvard.edu/var/ezp_site/storage/fckeditor/file/dermine_final.pdf>."What is a Social Impact Bond?" Home. N.p., n.d. Web. 22 March 2015. <http://www.socialfinanceus.org/social-impact-financing/social-impact-bonds/what-social-impact-bond>.

"Peterborough Social Impact Bond". Social Finance Limited, 1 Jan. 2011. Web. 22 March 2015. <http://www.socialfinance.org.uk/sites/default/files/SF_Peterborough_SIB.pdf>.

"Fair Chance Fund." . Social Finance Limited, n.d. Web. 22 March 2015. <http://www.socialfinance.org.uk/fair-chance-fund>.

"Investment Example Essex Social Impact Bond." Investment Example Essex Social Impact Bond. ANANDA, n.d. Web. 22 March 2015. <http://www.socialventurefund.com/eng/social_enterprises_portfolio/investment_example_essex_social_impact_bond/>.

"Social Impact Bond Project at Rikers Island." mdrc. MDRC, n.d. Web. 22 March 2015. <http://www.mdrc.org//project/social-impact-bond-project-rikers-island?gclid=CjkKEQjwttWcBRCuhYjhouveusIBEiQAwjy8IK9OwQknPEU65H3Y4lg4C1Gw8uW1l4I2eBJ3dTBXD6rw_wcB#featured_content>.

"Public Health Law and Policy Innovations: Social Impact Bonds". Centers for Disease Control and Prevention, n.d. Web. 22 March 2015. <http://www.cdc.gov/phlp/docs/sib-brief.pdf>.

"Grant for Fresno asthma project paves way for Social Impact Bond." Collective Health. Collective Health, 25 Mar. 2013. Web. 22 March 2015. <http://collectivehealth.wordpress.com/2013/03/25/grant-for-fresno-asthma-project-paves-way-for-social-impact-bond/>.

"A Bill for an Act: Relating to Social Impact Bonds". House of Representatives Twenty-Seventh Legislature, 1 Jan. 2013. Web. 22 March 2015. <http://www.capitol.hawaii.gov/session2013/bills/HB1402_HD1_.htm>.

"Pay For Success Learning Hub." Washington DC Seeks a SIB to Reduce Teen Pregnancy. Nonprofit Finance Fund, 1 Jan. 2013. Web. 22 March 2015. <http://payforsuccess.org/resources/washington-dc-seeks-sib-reduce-teen-pregnancy>.

"Mayor Pursues Nation’s First Social Impact Bond for Financing Programs to Reduce Teen Pregnancy & Improve Education". Executive Office of the Mayor, 14 May 2014. Web. 22 March 2015. <http://payforsuccess.org/sites/default/files/mayor_pursues_nations_first_social_impact_bond_for_financing_programs_to_reduce_teen_pregnancy__improve_education___mayor.pdf>.

"Pay for Success Social Impact Finance." Working Groups: Pay for Success Working Groups. Council for a Strong America, n.d. Web. 22 March 2015. <http://www.readynation.org/PFS>.

Kahn, Zia. "Developing Social Impact Bonds: Where Next?": The Rockefeller Foundation. The Rockefeller Foundation, 16 July 2013. Web. 22 March 2015. <http://www.rockefellerfoundation.org/blog/developing-social-impact-bonds-where>.

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