More Governments Are Turning To Impact Bonds–But Do They Deliver?

Wednesday, February 21, 2018

Connecticut has a social impact bond (SIB) to help the kids of opioid-addicted parents. Massachusetts uses the same financial mechanism to help immigrants assimilate to the U.S. workforce. In Rajasthan, India, a coalition of banks and foundations is funding the world’s first “healthcare development impact bond,” hoping to reduce infant mortality.

Social impact bonds are not bonds in the traditional sense, like, say, bonds of government debt traded on an exchange. They are really pay-for-performance (or pay-for-success) contracts. Normally they are led by governments that see an opportunity to raise fresh capital and cut costs by working with outside service providers to deliver a certain outcome. For example, a state may look to cut the cost of delivering training to refugees or the cost of foster care. It contracts with outside funders, like a bank, to raise capital to pay for the service. If the service provider meets its targets over time, the investor gets paid a return–perhaps 5% on their original investment over five years from the state. In theory, SIBs are win-win: improved social outcomes save governments money while paying investors for their capital. Moreover, they encourage all sides to pursue interventions that are proven and likely to work, as opposed to interventions that someone hopes will work.

The model of the social impact bond, now eight years old, is spreading. Figures recently released by Social Finance, a nonprofit that arranges SIBs, says there are now 108 around the world. Thirty-three launched in 2017 alone, covering areas like homelessness, child and family welfare, education, workforce development, and recidivism, including the three above.

Photo courtesy of Dean Hochman.

Source: Fast Company (link opens in a new window)

Impact Assessment
impact bonds, impact investing