Win-Win-Win Outcomes Possible with Social Impact Bonds

Friday, November 15, 2013

As Illinois moves into Budgeting for Results, officials are working to identify programs that improve outcomes while reducing costs, which can help the budget situation while making services more effective and efficient. Social impact bonds are a relatively new tool that can give investors and grantmakers new options for supporting activities with concrete results and real savings. The effectiveness of the tool, the ways it can be used, and what results it will bring are all open question. State officials, investors, and grantmakers will be watching the process to see what the results will be and how the tool can be used in the future.

P1020641editDonors Forum's Associate Members Group recently sponsored a session exploring social impact bonds, which featured presentations from Cristal Thomas, Deputy Governor of the State of Illinois (pictured); Scott Kleiman, Harvard Social Impact Bond Technical Assistance Lab; Ryan Maley, Dunham Fund; Nima Krodel, Nonprofit Finance Fund; and Christa Velasquez, Arabella Advisors.

Key takeaways at the program were:

  • Social impact bonds are a mechanism to spur investment in programs that have shown they can reduce government costs while improving outcomes. The basic mechanism is that a government agency contracts with a service provider to deliver a program that can reduce government costs. The contract is performance-based; positive outcomes can generate success payments. Investors can provide funds to this effort to bring it to scale, and the success payments can be used to provide a return on their investment. Sometimes the investments and payments are processed by a financial intermediary. This return will often be below market rates, but it still allows for positive outcomes for investors.
  • Grantmakers can play several roles in social impact bonds, including investing in social impact bonds with a portion of their endowment; funding research into programs that show positive results and could be the subject of future social impact bond investments; funding or otherwise supporting evaluation of programs funded by social impact bonds; and making grants that serve as guarantees on social impact bond investments, which can encourage investors to become involved.
  • The initial Illinois social impact bond investments will focus on juvenile justice, focusing on community- and evidence-based care. By keeping juveniles out of state facilities and reducing the amount of recidivism, the programs can improve outcomes for youth in the state while reducing institutional costs to the Department of Juvenile Justice. This effort will serve as a proof-of-concept project, forming the pattern for future efforts.
  • Social impact bonds have more ability to invest in prevention than does conventional government funding, and can also be used to overcome existing budget siloes. The efforts can also take place across multiple years, which differs from many grants.
  • Evaluation plays a critical role in social impact bonds. Knowing what effect a program had and the savings it generated are important to understanding the savings generated and the positive results. Many nonprofits will need to build their evaluation capacity if they want to participate in social impact bond programs. Funders can help develop this capacity and can also help reduce some of the transaction costs involved in the necessary evaluation.
  • As social impact bonds move forward, there will likely be multiple ways to structure them. The nature of the program involved, the type of savings likely to be generated, the timeframe for the savings, the needs of the investors, and the availability of grant dollars can all play a role in how programs are designed.
  • There is likely not a wide range of ready-to-go programs for social impact bonds with solid evaluation structures already in place. Funders and nonprofits will likely have to put in a significant amount of pre-development work to help programs and organizations move to a state of readiness for implementation.
  • When they work, social impact bonds provide a double bottom line, delivering financial returns as well as social benefit. Measuring and quantifying the social benefit is not simple, but if metrics can be developed, that might help persuade more investors to participate.
  • Due diligence for social impact bonds includes looking for strong program managers, making sure there are strong service providers who can do the needed work, looking for evidence-based practices, and ensuring there are evaluators in place to measure performance. Financial intermediaries may be able to help with the due diligence.
  • Funders who get involved in social impact bonds will need to use both their project expertise and their financial knowledge, so they will need to work to have the specialized parts of their organization working in concert.

 ~ Jason Hardy, Member Services Support, Donors Forum