Social impact bond
A Social Impact Bond, also known as a Pay for Success Bond or a Social Benefit Bond, is a contract with the public sector in which a commitment is made to pay for improved social outcomes that result in public sector savings. The first Social Impact Bond was launched by Social Finance UK in September 2010.
Advocates of these performance-based investments claim that they encourage innovation and tackle challenging social issues. According to advocates, new and innovative programs have potential for success, but often have trouble securing government funding because it can be hard to rigorously prove their effectiveness. Social innovation financing allows the government to partner with innovative service providers and, if necessary, private foundations or other investors willing to cover the upfront costs and assume performance risk to expand promising programs, while assuring that taxpayers will not pay for the programs unless they demonstrate success in achieving the desired outcomes. The expected public sector savings are used as a basis for raising investment for prevention and early intervention services that improve social outcomes.
Critics note that because the outcomes-based payments are dependent on governmental funds which must be budgeted, , Social Impact Bonds do not actually raise additional capital for social programs, but instead displace funding for other programs.  Given the need to budget for a return on investment, a program evaluation, middle managers, and the expenses of designing the complex financial and contractual mechanisms, social impact bonds, according to critics, may be an expensive method of operating social programs. 
Social Impact Bonds are not bonds in the conventional sense. While they operate over a fixed period of time, they do not offer a fixed rate of return. Repayment to investors is contingent upon specified social outcomes being achieved and therefore in terms of investment risk Social Impact Bonds are more similar to that of a structured product or an equity investment.
In the US, Social Impact Bonds have been called Pay for Success Bonds. A report from the Center for American Progress (released in February 2011) analyzes their potential. In early 2012, the White House announced the Department of Justice's plans to give priority funding consideration in 2012 Second Chance Act grant solicitations to highly qualified applicants who incorporate a Pay for Success model in their program design. The Department of Labor will also launch Pay for Success funding opportunities through the Workforce Innovation Fund, making up to $20 million available for programs that focus on employment and training outcomes.
On August 1, 2012, Massachusetts, under the Patrick-Murray Administration, became the first state in the nation to issue a competitive, transparent procurement to obtain services using social innovation financing. The program operates on a simple “pay for success” model, in which nonprofits must demonstrate that by keeping youth from being reincarcerated or the homeless from living in costly shelters, they have saved the state money.
In 2012, the city of New York financed a $9.6 million social bond for prisoner rehabilitation led by MDRC and delivered by The Osborne Association. The Departments of Justice and Labor are also funding Pay for Success models to improve outcomes for past offenders and workers outside the economic mainstream.
Both the Massachusetts and NYC pilots illustrate how US state and local governments are adapting PFS transactions to meet their specific needs. For example, Massachusetts will use both a financial intermediary and a program intermediary in its pilots, and NYC will use solely a program intermediary. Also, NYC will structure its pilot with a partial private guarantee to support the transaction.
With start-up funding from the Rockefeller Foundation, the Harvard Kennedy School recently established a social impact bond technical assistance lab led that provides pro bono technical assistance to additional state and local governments that are considering the pay for success approach.
In Australia, Social Impact Bonds have been called Social Benefit Bonds. A Request for Proposal was released by the New South Wales Treasury on 30 September 2011 asking non-government organisations to propose pilots in the areas of reoffending and children in out-of-home care. On 20 March 2012 three successful respondents were announced and entered into a joint development phase with the Government of New South Wales.
The idea of the Social Impact Bond has been promoted and developed by a number of agencies and individuals in an attempt to address the paradox that investing in prevention of social and health problems saves the public sector money, but that it is currently difficult for public bodies to find the funds and incentives to do so. New Zealand economist Ronnie Horesh first advocated them in 1988 (pdf), calling them Social Policy Bonds. He argues that they be made tradable.
The first Social Impact Bond was announced in the UK on 18 March 2010 by then Justice Secretary Jack Straw, to finance a prisoner rehabilitation program. In the UK the Prime Minister’s Council on Social Action (a group of ‘innovators from every sector’ brought together to ‘generate ideas and initiatives through which Government and other key stakeholders can catalyse, celebrate and develop social action’) was asked in 2007 to explore alternative models for financing social action. The group began to develop the idea of a Social Impact Bond, and the work is being taken forward by a number of organisations including Social Finance, an organization committed to increasing investment in the third sector, the Young Foundation, the Center for Social Impact in Australia, and other NGOs and private firms.
Social Impact Bonds have also generated interest in the United States. In February 2011, Barack Obama’s proposed 2012 budget stated that up to $100m would be freed up to run Social Impact Bond pilot schemes. In August, 2012, Massachusetts became the first state in the nation to use a competitive procurement process to secure social innovation financing for social services. The state legislature authorized spending up to $50 million on the initiatives.
In Australia, the intention to trial Social Impact Bonds was announced in New South Wales in November 2010 by Premier Kristina Keneally of the Australian Labor Party. The policy direction was continued by the Coalition (Australia) after a change in Government in 2011.
In November 2012 Essex County Council became the first local authority in the UK to commission a Social Impact Bond in Children’s Services, with the aim of providing therapeutic support and improving outcomes for adolescents at risk of going into care. Nick Hurd, the minister for civil society, commented: "Social impact bonds are opening up serious resources to tackle social problems in new and innovative ways. This is about communities, businesses and charities all working together to change people's lives, whilst at the same time making savings for the taxpayer."
In February 2013 Allia, a charitable social investment organisation, announced the first public opportunity in the UK to invest in a social impact bond. Funded by Big Lottery, the Future for Children Bond is a capital plus bond, which combines a low-risk ethical investment into affordable housing to provide the funds to repay capital to investors, with a higher risk investment into the social impact bond with the aim of delivering a high social impact and providing an additional variable return. It will invest into the Social Impact Bond for Essex County Council to ‘improve the life outcomes’ of children aged 11 – 16 at risk of going into care.
There are a range of interpretations of what the term ‘Social Impact Bond’ means.
Third Sector Capital Partners describes Social Impact Bonds as:
'A social impact bond is one potential financing option available to support Pay for Success programs. Social Impact Bonds brings together government, service providers and investors/funders to implement existing and proven programs designed to accomplish clearly defined outcomes. Investors/funders provide the initial capital support and the government agrees to make payments to the program only when outcomes are achieved. So government pays for success.'
Social Finance describes Social Impact Bonds as:
‘Social Impact Bonds are based on a commitment from government to use a proportion of the savings that result from improved social outcomes to reward non-government investors that fund the early intervention activities.’
The Young Foundation describes Social Impact Bonds as:
‘a range of financial assets that entail raising money from third parties and making repayments according to the social impacts achieved.'
Social Finance therefore specifies that the investment is from non-government bodies, whereas the Young Foundation envisages that public bodies could be potential investors.
In many cases, Pay for Success programs can achieve positive social outcomes, may create fiscal savings for government, but also involve changes in funding arrangements that bring risks to service agencies. The assumed benefits makes Pay for Success politically attractive to governments and businesses. For example, $250 million of investments towards preventative programs that reduce recidivism might eventually make it possible to close prisons that cost taxpayers $1 billion per year to run.
The benefits of Social Impact Bonds depends on the definition being used, but the broad benefits (though not measured and verified yet) are that:
- More funds are available for prevention and early intervention services.
- The public sector only has to pay for effective services; the third party investor bears all the risk of services being potentially ineffective.
- Investors and servicers have an incentive to be as effective as possible, because the larger impact they have on the outcome, the larger the repayment they will receive.
- The Social Impact Bond approach imbeds vigorous ongoing evaluation of program impacts into program operations, accelerating the rate of learning about which approaches work and which do not.
- Government funds “what works”; thus repositioning government spending to cost-effective preventative programs.
- Attract new forms of capital to the social, educational and healthcare sectors.
- Independent evaluation creates transparency for all parties.
The Risks and Dangers in social impact bonds.
- Criteria for success – donors will seek to fund that which can be observed and measured, the outcomes (not just the outputs). This will leave agencies addressing the huge structural problems in society unable to access these funds. This is going to be particularly true for advocacy, arts and alternative organizations. It will be difficult for social coalitions to get funding as their contributions are dispersed through member organizations and the affect they have on government policies, for example.
- More donor influence – donors, or now investors, will want to make sure their money is being used according to contract, and will therefore want to be more involved in the delivery of social services. They may even want to see NGOs adopt a more business style of delivery.
- Unfair competition – among NGOs will emerge. Agencies that secure funds will able to operate in areas where NGOs now operate, but they will have greater resources, more narrowly defined goals (and therefore successes to publicize) and will set the standard for government funded agencies and their actions.
- Reduces Public responsibility – by reducing the government’s responsibilities and accountability for delivering services. Though governments may not genuinely represent their societies, they are still the best representatives of the public will and governments play an important role in maintaining a civil society sector. Social services are a part of our national social contract and the government is devolving their responsibility to businesses though encouraging such funding when other tax and program options can be made available.
The Government has continued to remain interested in the idea of Social Impact Bonds, and in December 2009 it published the white paper ‘Putting the Frontline First: Smarter Government’, which stated ‘We will pilot Social Impact Bonds as a new way of funding the third sector to provide services.’
On 18 March 2010, Secretary of State for Justice Jack Straw announced a six-year Social Impact Bond (SIB) pilot scheme run by Social Finance that will see around 3,000 short term prisoners from Peterborough prison, serving less than 12 months, receiving intensive interventions both in prison and in the community. Funding from investors outside government will be initially used to pay for the services, which will be delivered by Third Sector providers with a proven track record of working with offenders. If reoffending is not reduced by at least 7.5% the investors will receive no recompense. The Social Impact Bond in Peterborough was launched by Secretary of State for Justice Kenneth Clarke MP and Prisons Minister Crispin Blunt on 10 September 2010.
On February 2012, the City of New York issued a $9.6 million social bond for prisoner rehabilitation to be run by The Osborne Association with support from Friends of Island Academy. Goldman Sachs bought the bond and will profit if recidivism decreases. While the City of New York didn't actually issue bonds or put up-front capital for MDRC to run the program (this was done by Goldman Sachs directly with MDRC), the City may be liable for some amount if the program is successful, presumably to be paid with savings associated with reduced recidivism. Independent evaluation would be performed by the Vera Institute of Justice.
On August 1, 2012, the Commonwealth of Massachusetts announced that Third Sector Capital Partners will serve as lead intermediary, in partnership with New Profit Inc., for the youth recidivism initiative. Roca, United Way of Massachusetts Bay and Merrimack Valley, and Youth Options Unlimited will also participate in the youth recidivism project.The program, called Social Innovation Financing, operates on a simple “pay for success” model, in which nonprofits must demonstrate that by keeping youth from being reincarcerated. According to the state’s press release, the juvenile justice contract “will be designed with the specific goal of reducing recidivism and improving education and employment outcomes over several years for a significant segment of the more than 750 youth who exit the juvenile justice system, and the several thousand who exit the probation system annually.”
The U.S. Department of Justice gives “Priority Consideration” to Fiscal Year 2012 Second Chance Act grant applications that include a Pay for Success component. The Second Chance Act (P.L. 110-199) authorizes federal grants to support services that help reduce recidivism.
Rough Sleeping and Chronic Homelessness 
Housing Minister Grant Shapps and London Mayor Boris Johnson announced in March 2012 that a Social Impact Bond would be launched to help London's persistent rough sleepers off the streets and into secure homes. The two Social Impact Bonds under this programme were launched in December 2012.
The second of two pilots launched by the Commonwealth of Massachusetts in 2012 addresses the issue of chronic homelessness. In this Pay for Success model, Third Sector Capital Partners will partner with the Massachusetts Housing and Shelter Alliance (MHSA), lead intermediary for a chronic homelessness project, as well as the Corporation for Supportive Housing and United Way. The Massachusetts Housing and Shelter Alliance represents nonprofit housing organizations that provide housing and support services, such as medical care and vocational training. The consortium will try to raise the number of housing units it provides to around 600 from 220.
Through the social innovation financing contract, MHSA and its partners plan to expand MHSA’s Home & Healthy for Good (HHG) low-threshold housing initiative. HHG has demonstrated that the often traumatic and undertreated health conditions which beset chronically homeless individuals are better treated after a person gains the basic level of stabilization that permanent housing provides. In addition to successfully housing those often considered the hardest to serve, HHG has demonstrated significant cost savings to the Commonwealth.
The chief secretary to the Treasury, Liam Byrne, announced that Social Impact Bond trials could be expanded across government departments. “The Department for Children, Schools and Families have pledged to explore the potential of SIBs to lever in additional resources to support early intervention approaches with children and young people,” he said in Parliament.“Communities and Local Government are also working with Leeds City Council and NHS Leeds to enable them to use a SIB approach to reduce health and social care costs among older people. Similarly Bradford Metropolitan District Council are considering applying this model as part of their involvement in the government’s Total Place programme.”
Children and Families 
Social Finance worked with UK local authorities to assess the potential for social impact bonds to improve family support services. These studies assessed the potential of social impact bonds to fund preventive and early intervention services which improve outcomes for children and generate cost savings for Local Authorities.
In March 2012 Manchester City Council announced a social impact bond to fund Multi-dimensional treatment foster care.
The Government of New South Wales, Australia, announced on 20 March 2012 that it will develop three pilots in the area of child protection / foster care and Juvenile Justice. One of the child protection pilots is with a consortium involving the Benevolent Society, Westpac Bank and the Commonwealth Bank of Australia. The other child protection pilot is led by UnitingCare Burnside, a division of UnitingCare Australia. The juvenile justice pilot is being run by a consortium of Social Finance and Mission Australia.
- Social Finance (2011) A Technical Guide to Developing Social Impact Bonds, 
- Centre for American Progress (2011) Social Impact Bonds 
- Social Finance (2010) Towards a New Social Economy: Blended value creation through Social Impacts Bonds, 
- Young Foundation (2010) Social Impact Investment: the challenge and opportunity of Social Impact Bonds, 
- Social Finance (2009) Social Impact Bonds: Rethinking finance for social outcomes, 
- Impact Economy (2011) Four Revolutions in Global Philanthropy, 
- Technical Guide to Commissioning Social Impact Bonds(2011),
- Social Impact Bonds: The One Service. One Year On(2011),
- A New Tool for Scaling Impact: How Social Impact Bonds Can Mobilize Private Capital to Advance Social Good(2012),
- Benjamin R. Cox, Financing Homelessness Prevention Programs with Social Impact Bonds, 31 REV. BANKING & FIN. L. 957 (2012), 
See also 
- Social impact bond
- Social Policy Bonds
- Third Sector Capital Partners
- Pay For Success Bonds
- Social Finance UK Homepage
- The term was originally coined by Geoff Mulgan, Chief Executive of the Young Foundation: Social Impact Bonds: Rethinking finance for social outcomes, http://www.socialfinance.org.uk/downloads/SIB_report_web.pdf
- Massachusetts First State in the Nation to Announce Initial Successful Bidders for 'Pay for Success' Contracts, http://www.mass.gov/anf/press-releases/fy2013/massachusetts-first-state-in-the-nation-to-announce-ini.html
- Social impact bonds, http://www.socialimpactbond.org.uk
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- Debunking the Myths Behind Social Impact Bond Speculation, http://www.ssireview.org/blog/entry/debunking_the_myths_behind_social_impact_bond_speculation
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- Horesh, Ronnie, Injecting Incentives into the Solution of Social Problems: Social Policy Bonds, Economic Affairs 20(3), September 2000 
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- Kristina Keneally, “Social Impact Bonds – First in Australia”, 25.11.2010
- NSW Government, “NSW Engages Private Sector to Tackle Social Challenges with Innovative Bond”, Budget 2011-12, 06.09.2011
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- Towards a New Social Economy: Blended value creation through Social Impacts Bonds
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- NYU Wagner Executive Briefing Series, “Managing the Social Bond Initiative”, 20.09.2012
- Mass. program ties nonprofits’ pay to success, http://www.bostonglobe.com/business/2012/07/31/massachusetts-among-first-pay-for-success-social-programs/FckmI2GZ0vycLNBLXpgRCM/story.html
- "Pay for Success and the Department of Justice's Second Chance Act Programs Frequently Asked Questions". U.S. Department of Justice, Bureau of Justice Assistance. Retrieved 28 September 2012.
- "Second Chance Act". National Reentry Resource Center. Retrieved 28 September 2012.
- Department for Communities and Local Government, "Grant Shapps: New £5m 'payment by results' deal to get rough sleepers off London's streets". Retrieved 2012-03-15.
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- "Third Sector, Councils consider Social Impact Bond to reduce number of children in care", http://www.thirdsector.co.uk/news/Article/1048566/Councils-consider-social-impact-bond-reduce-number-children-care/
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