Volume 9, Number 3 – September 2012

Social Impact Bonds and their Potential in the US

In August, New York Mayor Michael Bloomberg announced the first large US experiment with the use of social impact bonds (SIBs).   Under the New York pilot project, investment bankers Goldman Sachs and others have agreed to invest $9.6 million in programs to reduce juvenile recidivism at the Rikers Island jail facility.   If this project succeeds, the investors earn a profit and New York benefits by reintegrating more at-risk youth into the community.

Since this deal was first announced, social impact bonds have been getting a lot of public attention, with several other states also lining up with their own pilot SIB projects.  This issue of EntreWorks Insights takes a brief look at the world of SIBs, and assesses whether the current hype is justified.  And, if SIBs are going to become part of the public finance landscape, can and should they be deployed to support community, workforce, and economic development projects?   At this point, we can conclude with a somewhat tentative yes.  SIBs appear to have potential, but their applicability to supporting economic development programs likely warrants further research and analysis—as well as some re-thinking about how to manage economic and workforce development programs.

A (Very) Brief History of Social Impact Bonds

SIBs are a very recent British import, developed and pioneered by the non-profit Social Finance Ltd.  The first SIB dates all the way back to 2010 when the UK government opted to test the SIB model to cut recidivism rates at Peterborough prison.  Since then, the field has grown rapidly and attracted massive investments from foundations and leading philanthropists, including NY Mayor Bloomberg. 

In the US, a US social finance entity, Social Finance Inc., is now open for business and is aggressively pushing for the expanded use of SIBs across the country.   You can read an excellent summary of SIBs and Social Finance’s vision here.   (In addition, a detailed McKinsey and Co. study on SIBs can be accessed here.)  At present, US SIB backers are focused on opportunities to provide assistance to the chronically homeless, juvenile and adult offenders, and low income senior citizens.  But, they acknowledge that a wider range of focus areas is feasible. The US is not alone in this work, as Australia, Canada, and host of other nations are also investigating SIBs as an investment model.

SIBs work in a straightforward manner.  A private investor invests funds in a non-profit which in turn provides a service that generates social benefits.  If the promised social benefits occur, the government repays the investors (hopefully with interest and/or profit).  If the benefits don’t occur, the investor receives no payout.  At Rikers Island, the plan is structured as follows:   If the programs succeed in reducing recidivism rates by ten percent, investors are repaid their entire up-front investment.  If rates are cut even further, they have access to as much as $2.1 million in profits.  If more teens become repeat offenders, investors take a haircut, and can lose as much $2.4 million. 

Why SIBs?

SIBs are gaining great interest, because they offer the potential of a win-win-win situation, helping government agencies, their customers, and investors along the way.  The potential benefits include:

  • Increased resources for non-profits, government programs, and social service agencies
  • Incentives to innovate as new players and new investors enter the market and test new approaches to long-standing social problems
  • Improved efficiency as investors press service providers to provide value for money
  • Increased transparency and accountability as service providers and investors must agree on clear and measure performance outcomes and impact measures.  

From Social Impact Bonds to Development Impact Bonds

At present, most existing SIB projects are focused on social service programs that target highly vulnerable populations.   Meanwhile, a number of promising research efforts are examining the potential of development impact bonds (DIBs), which apply the SIB concept to international development programs.   While the work is ongoing, the current consensus appears to be that DIBs could help attract new private investors to the international development field and build on promising approaches such as the current commitments to results-based aid and emerging funding platforms like Kiva and Global Giving.

As these efforts go forward, we need a parallel effort to examine the potential for SIBs to support US economic, community, and workforce development programs.  This effort will require much more than just a simple assessment of whether DIBs are a good thing.   It will also require that US program managers rethink how they work and commit to some major changes in how we do businesses.   While not an exhaustive list, the following steps are among those that would be required. 

  1. Commit to real transparency about program operations and budgets so that investors can monitor funds and their use.
  2. Commit to real public-private partnerships where outside investors share in program management and implementation as opposed to operating as passive investors.
  3. Commit to clear and consistent performance measurements so that program outcomes can be effectively assessed.  This will require strong baseline data on what’s happening now so that investors can assess how future investments will fare in relation to past performance.
  4. Commit to rigorous outside evaluation of these performance measures to ensure accountability and impact. 

Not all programs or types of programs are ready for this kind of in-depth scrutiny and rigorous assessment.  But, many parts of the workforce and economic development world could get there very soon.  For example, in the fields of workforce development and small business development, relatively clear and transparent metrics (such as job placements or new firm creation) are in place and could be used as part of an impact bond model.           

Regardless of what happens with the November elections, the prospects for major new funding of economic development from traditional sources, such as Federal agencies, are not bright.  We need to look for new tools and new financing models. Social impact bonds can and should be part of this ongoing discussion.

What’s New at EntreWorks Consulting?

We’ve had a busy and productive summer which has included kicking off several new projects.  Many of these efforts will be managed with our long-time collaborators at the Center for Regional Economic Competitiveness. This fall, we’re jumping in to new work for the Northeast Pennsylvania Alliance, the Northwest Pennsylvania Regional Planning and Development Commission, the Appalachian Regional Commission, and the MIT Enterprise Forum.

We continue to provide more regular news and updates at the EntreWorks blog at http://entreworks.net/blog.  Recent postings have included updates on the Farm bill, new data on younger workers, and discussions on how to measure the intangible economy.  You can also access blog updates at our Facebook page.

In addition, we’ve got several speaking opportunities lined up this fall.   In October, Erik Pages will be speaking at the Northeastern Economic Developers Association annual meeting in Hartford, and at the annual Global Consortium of Entrepreneurship Centers conference at Washington DC’s Georgetown University.   Hope to see you on the road!