A Social Impact 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 expected public sector savings are used as a basis for raising investment for prevention and early intervention services that improve social outcomes.
The US government is exploring the use of social impact bonds as a means of encouraging greater efficiency in the delivery of social services. It essentially involves foundations and non-profits putting up initial funding for a project with government reimbursement, and the possibility of a ‘return’ if the project meets certain goals.
The benefits of Social Impact Bonds could be:
- 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 services 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.
According to the New York Times, President Obama is to launch in 2011 seven pilot schemes, which would issue a total of $100 million in bonds to support programs in the areas of job training, education, juvenile justice and children’s disabilities.
The Rockefeller Foundation has announced a $400,000 grant to the Nonprofit Finance Fund for a number of projects that will help bring the social impact bond concept to the US. The Fund, a community-development financial institution, recently launched an online platform for funders, non-profits and educators to share ideas about the bonds. After gathering research and opinions, they will conduct a feasibility study of the bonds in the US and identify opportunities where the financing structure could work.
Simona, it's a great financial concept. The public sector savings you refer to are used as some kind of collateral towards the repayment of the loan. As in most of this stuff, the devil is in the details: assessing savings is going to be very difficult. How much would we have spent if this project had not happened, but everything else was much the same? Prevention is very tricky: for example you roll out a programme to get people to quit smoking, and some people do indeed quit smoking. But your impact is not measured by their number; it is measured by the number of people who quit MINUS the number of people who quit and would have quit anyway, even without the programme. That's a counterfactual, and measuring counterfactual is difficult. I foresee a lot of litigation over estimates in the U.S.
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