The idea of social impact bonds is an innovative way of attracting new investment that benefits individuals and communities. Social impact bonds are contracts with the public sector in which commitment is made to pay for improved social outcomes that result in public sector savings; therefore they are also known as “pay for success bonds.”
In terms of investment risk, social impact bonds are more similar to that or structured products or equity investments – they operate over a fixed period of time, and do not offer a fixed rate of return; repayment is contingent upon specified social outcomes being achieved.
Ronnie Horesh, New Zealand economist, first advocated the idea of social impact bond in 2000, in which he called “social policy bonds.” In the UK, the Prime Minister’s Council on Social Action was asked in 2007 to explore alternative models for financing social action. In the U.S., in February 2010, Barack Obama proposed 2012 budget and stated that up to $100 million would be freed up to run social impact bond pilot schemes, and in January of 2011, the emerging U.S. social impact bonds were offered in Boston, MA.
Overall, the social impact bond model offers the broad benefits of:
- Improved performance and lower costs
- Embedded rigorous ongoing evaluation into operations
- The public sector only has to pay for effective services; the third party investor bears all the risk of services being potentially ineffective
The problems that social impact bonds aim to address are real, however, there are limited financial resources available for social interventions, and the most significant obstacle to making social impact bonds work is identifying interventions with sufficiently high net benefits to allow investors earn their required rate of return. Given the history of impact evaluations of government-funded social programs, achieving a sufficient level of success will be difficult.
The return on investment is tied to outcomes indicators. When an investor purchases a bond in a particular social program, he receives his principal plus additional monetary return if the agency he invests in yields measurable results. If the agency fails to meet its outcomes threshold, the investor loses money.
Whether protecting a retirement pot or signaling problems with a government’s debt burden, finance can be “socially useful” without being obviously social, as “it is in the nature of markets that there are some things which are indirectly socially useful but which in the short term will look to the external world like pure speculation.”
To evaluate the success of a program, you not only need measurable outcomes, but also a way of assessing what the outcomes would have been in the absence of the program. For social impact bonds to achieve their objectives, payments must be based on a credible assessment of program impacts.
Beyond all mentioned above, arguably, social impact bonds are still in its infancy, and a few products inevitably look inherently flawed. A more modest, realistic, and longer-term vision is needed.