Social Impact Bonds: A Model for Aligning Resources and Outcomes

0ct. 2015

What Are We Solving For?

Solutions: Preventive vs. crisis solutions Identifying and expanding social interventions that work

Capital: Diminishing and siloed public resources Attracting incremental / private capital

Partnerships: Building partnerships to tackle challenging social issues - across

expertise, across entities, across agencies

Measurably improving the lives of people in need by driving resources towards effective programs

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Elements of Pay-for-Success

Pay-for-Success projects require a payor, service providers, and funders to agree on targeted outcomes around a social challenge. These partners then enter into a multi-year contract, in which the payor agrees to make success payments if targeted outcomes are achieved. Successful Intervention / Provider – supported by data Payor – usually a government entity who commits to repay the

investors if project outcomes are achieved Investor(s) – usually private investors who provide up-front

funding for services (operating costs) Independent Auditor – third-party who evaluates success

metrics focused on outcomes Intermediary – coordinates parties and contracts

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Payor InvestorsService Provider

• Achievement of financial returns and social impact

• Participation in a new asset class with portfolio diversification benefits

• Accountability for taxpayer funds

• Reduction in the need for costly downstream remediation

• Increased supply of effective services for citizens without financial risk (risk is transferred to investors)

• Access to an increased supply of effective social services

• Access to available preventative services

• Access to growth capital to scale operations

• Access to revenue that reflects true costs and value of services provided

• Facilitated coordination with organizations / agencies/systems working on overlapping problems

Potential Benefits to Parties

Targetpopulation

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PFS Financing: How it Works

Upon launch, a Pay for Success project follows the mechanics below, as detailed in the contract:1. Private and philanthropic funders

provide the necessary up-front capital to fund the Pay for Success project and service delivery to an intermediary

2. The intermediary disburses payment to the service provider for service delivery

3. One or more service providers deliver the social intervention

4. An independent evaluator monitors outcomes against agreed-upon benchmarks and reports to project partners on evaluation results

5. Based on evaluation results, government makes success payments only if targeted social outcomes are achieved

6. Success payments are then used to repay funders and/or reinvest in the project

h/t: Third Sector Capital Partners

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Steps to PFS Development9

• Identify key issue area(s) to assess, including desired outcomes targets and target populations to be reached

1. Explore and Initiate

• Identify evidence-based intervention(s) and program design• Economic analysis of potential projects’ cost-benefit• Engage evaluator on data analysis and evaluation design support• Identify infrastructure (legislation, regulations, data systems)

2. Assess Feasibility and Impact

• Structure and finalize project design• Programmatic planning, including evaluation plan, governance, etc.• Financial modeling and capital raise• Negotiate and document terms of contracts

3. Structure and Negotiate PFS Contracts

• Ramp up with Pilot?• Implement / trouble shoot / implement / trouble shoot• Ongoing evaluation, monitoring, reporting

4. Project Launch, Operation and Evaluation

Roles in PFS Development10

Transaction Coordinator

Coordinate all parties and manage all transaction elements

Raise capital and develop

structure

• Develop program model, timing, budget• Negotiate service contract• Solicit target population feedback

Service Provider

• Identify & value outcomes• Negotiate PFS contract with repayment terms• Select service provider, investor, evaluator

Payor

• Provide capital, negotiate repayment terms

Investors

• Create evaluation plan• Validate service model & outcomes

Evaluator

Case Study: Cuyahoga County

First-ever county multi-year PFS contract: Partnering for Family Success Program Special legislation created a Social Impact Financing

Fund, funded by annual appropriations of $1 mm, up to cap of $5 mm

Target: 135 homeless heads of household with children placed in out-of-home care

Service: housing placement services and therapeutic services

Success metric: reduce the time children spend in out-of-home care

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Case Study: Cuyahoga County

$4.0 million in total PFS financing: $1.575 million in a senior loan at 5% interest

$2.275 million in subordinate loans at blended rate >2%

$0.150 million in recoverable grant

Project target impact of 25% reduction in OHP days for the treated population: At this level of impact, all funders would recoup their principal

investment and interest

At higher levels of impact, subordinate funders will receive up to $1 million in success fees paid through additional savings to the County

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Cuyahoga County Deal Structure

Referral Sources

Impact Funders

Provide up-front financing

Repays funders if outcomes are met

Makes Success

Payments if outcomes met

Provides payment for

services

Prioritize housing units for project

Designs evaluation methods and measures

outcomes

Services

Payments

Success Payments

Provides technical assistance and financial arrangement

Cuyahoga  County Division of Children and Family Services

Homeless Continuum of 

Care

Referral Source &Case Management

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Social Impact Bonds:A Model for Aligning Resources and Outcomes

0ct. 2015