Social Impact Bonds

Laura Callanan
Consultant, McKinsey & Company Inc.

social impact bonds

From Potential to Action: Bringing Social Impact Bonds to the US

In 2011, almost 50 years after President Johnson declared a “War on Poverty,” the Census Bureau reported 46 million Americans living below the poverty line. That people are still struggling suggests solutions are not reaching everyone who needs them. Enter the Social Impact Bond (SIB), a new approach to help scale proven solutions to social problems.

Although currently piloted in only one site, the Social Impact Bond is generating a great deal of interest. For that reason, McKinsey & Company recently reviewed this new approach. Our upcoming report, From Potential to Action: Bringing Social Impact Bonds to the US will be released later this Spring.

What is a SIB?

Social Impact Bonds are not a debt investment despite their name. SIBs are a multi-stakeholder partnership that can help government transition from existing remedial programs to higher-impact, lower-cost preventive solutions. Structured as a pay for performance contract, SIBs shift the financial risk of implementing a proven, alternative program from government to investors. This allows government to bring alternative social programs online while keeping existing programs stay in place. The new program is selected to deliver taxpayer benefits and broader benefits to society such that government will eventually transition from existing remedial programs over time.

Working closely with government, an intermediary raises capital from socially-minded investors, selects the service provider and the program intervention, contracts with government, partners with an evaluation advisor to monitor and analyze interim results, and works with an independent evaluator to set and measure performance targets. If pre-set performance targets are achieved, the government pays the intermediary an agreed amount representing a return to investors plus a bonus for the intermediary and service provider.

Benefits of SIBs

We see SIBs as offering three major benefits:

A Tool for Scaling: SIBs fill a critical void, structuring the critical handoff between philanthropy (the risk capital of social innovation) and government (the scale-up capital of social innovation) to bring evidence-based interventions to more people. SIBs do this by effectively aligning incentives among a broad set of stakeholders and shifting financial risk away from government.

Support for Government Performance Transformation: SIBs help government move toward paying for results rather than paying for activities, and reallocate resources from remediation to prevention.

A Reward for Investing in What Works: By funding evidence-based programs, SIBs reward the investment in assessment and the focus on managing to outcomes many nonprofits, foundations and others have made.

SIBs Catalyzing Change

It is important to remember that SIBs are simply a tool to shift the system to work better for people. Whether or not SIBs themselves become a popular approach to scaling interventions, they have generated enthusiasm for finding new ways to address persistent social problems. The model’s basic tenets—increased multi-stakeholder collaboration, focus on results, and alignment of incentives—are key to addressing myriad social sector challenges. If SIBs galvanize a new wave of innovation, their impact will be truly significant.

Questions

What have you encountered as the biggest barriers to scaling?
What are other ways government can support scaling social change?
In addition to collaboration, focus on results, and alignment of incentives, what else do you think contributes to social change?

Join Laura Callanan, with the Social Sector Office of McKinsey & Co, in the conversation.

Cathy Clark

Exciting and Risky

Great post, Laura. Social impact bonds are both exciting and worrisome, so you hit on a great topic for discussion. One of the worries I have is that there are really very few programs that we’ve seen in the case literature on scaling that can be replicated across organizations without significant local experimentation and adaptation. And most of the SIB activity envisioned in the US seems to assume that cross-organizational replication is pretty straightforward. And with the potential for big cash, it seems like the incentives to take the money and then ask all the hard questions is pretty great. I’d like to see a range of SIB pilot tests that each concentrate on a few questions we have: variations is size, replication strategy, different kinds of intermediaries, etc. If we can just hold back our American enthusiasm to do it all at once, I think this might be a very exciting instrument to help truly drive effective outcomes in the social sector. But we need to see how it really works in practice.
- Laura Callanan
  
  Exciting and Risky
  
  Hi Cathy — Thanks for writing! You are so right that there are a number of social sector problems which we faced before SIBs — and which SIBs are not designed specifically to address. Scaling well is one of them. So is cost-effective and relevant social impact assessment. And — as folks like David Hunter and Patti Patrizi often remind us — let’s not forget simple, effective execution.
Jeff Mowatt

The barrier of corruption

Laurie, Coincidentally, it was the matter of poverty in America, which drew me in to the world of social enterprise in 2003 He was fasting for economic rights in NC, at the same time his senator, John Edwards, was delivering his Two Americas pitch. It led to us setting up as a business in the UK with a social objective, a form now described as ‘Fourth Sector’.

Our focus then was poverty in the UK and the approach proposed, a national scale initiative to stimulate local economies was based on the success of an earlier project in Russia, tackling poverty thru micro-enterprise development.

http://www.ecademy.com/node.php?id=174452

Failing to find investment, led us back to Ukraine and recently re-published interview from 2006, describes our aims to leverage investment, for a primary goal of placing all children in family homes. As you may read from my notes, our own government was not on our side.

http://world.maidan.org.ua/…o-invest-the-rest-of-my-lfe

New financial instruments may go some way to support innovation, but I suspect it will not be available, or in time to address problems that social enterprise, in general, tends to skirt around.
- Jeff Mowatt
  
  The barrier of corruption
  
  Sorry, that should have read ‘Laura’.
- Laura Callanan
  
  The barrier of corruption
  
  Thanks, Jeff — one of the things that attracts me most to SIBs is that they are not so much a "new financial instrument" as they are old fashioned cooperation among like-minded stakeholders bringing different skills and resrouces to bear on a problem.
Thien Nguyen-Trung

Why do SIB have to = Government?

A friend and I have tinkered and pondered SIB structures for several years now and I was happy to see Social Finance UK finally making something like this a reality finally. However, I am still wondering why everyone keeps talking about SIBs only in the context of governments and intermediaries.

Why is it not possible or interesting to discuss SIBs closer to a bond-like instrument with the difference of making a social enterprise the issuer accountable for its own performance goals? This was in fact what we had contemplated originally to bring more pay for performance to the SE sector.

Of course, the tricky part of this is to make sure that the conditions for payout are structured in a way to not blow up the SE when payment is due. One way we envisioned this was through an option to defer the payment if certain impact goals were achieved. If this continues over time, in effect what can be achieved is a quasi-perpetuity instrument that in the end may become almost philanthropic in nature essentially, that is, free money for the SE in return for continued impact "performance".

Again, people have been for and against SIBs in their current form, especially with heightened sensitivity as far as taxpayer dollars are concerned. But once you bring this to the private sector and ask impact investors to try out one of these SIBs issued by SEs, perhaps we may find a new avenue to experiment and innovate the pay-for-impact model in a way that has not been done previously, at least to my knowledge.

I also commented on this in response to a recent SSIR blog post:

http://www.ssireview.org/…/social_impact_bonds_lessons_from_the_field

Looking forward to see what will come out next and would be happy to discuss this idea further with anyone interested (drop me a line at my blog).

Best,

Thien

Editor, GoodGeneration.org
- Jeff Mowatt
  
  Why do SIB have to = Government?
  
  Hello again Thien, We seem to be on much the same wavelength. I noted from the SSIR report that there’s potential application to foster care. This is the example I want to offer.
  
  The starting point is a business with a primary social objective, with a call for government to take it on board:
  
  "Traditional capitalism is an insufficient economic model allowing monetary outcomes as the bottom line with little regard to social needs. Bottom line must be taken one step further by at least some companies, past profit, to people. How profits are used is equally as important as creation of profits. Where profits can be brought to bear by willing individuals and companies to social benefit, so much the better. Moreover, this activity must be recognized and supported at government policy level as a badly needed, essential, and entirely legitimate enterprise activity."
  
  Then we identify the problem and cause. Children in institutions where profits are maximised by minimising care, in other words RICO operations. Research shows that it actually costs more to maintain these conditions, than place children in a loving family home. We identify the costs and potential sources of funding. The issue is explored in full public view prior to a formal strategy proposal:
  
  http://world.maidanua.org/…/ukraine-death-camps-for-children
  
  What was suggested subsequently, was the application of business for social purpose as part a ‘nil overall cost’ component mix. Clearly there was a role for finance, which was sought from US government, with an argument weighing the current cost of war in Iraq, 1.5 billion dollars, with the cost of the project over 5 years.
  
  Where were the social impact investors?
- Laura Callanan
  
  Why do SIB have to = Government?
  
  Hi Thien — I have really be fascinated by the SIBs discussion and the willingness and push to innovate on a structure that is not even "established". Our appetite and capacity for stretching the boundaries is certainly ramping up. I think the points you raise only serve to remind us that some of the more traditional structures — like the old fashioned grant, or seed stage high risk equity — have a solid place in the social sector. I see no reason to believe that every problem we face should now be addressed by some form of a SIB. Though I am excited that SIBs are here to help us fill some gaps which existing structures havent solved — especially around the hand off from philanthropy to government when it comes to scaling, and the right kind of scaling for behavior change interventions which market-like approaches are not well-suited to support. Thanks for your thoughts!
Kristin Giantris

Ever evolving

Thanks for continuing to facilitate this dialogue, Laura. I think it’s really interesting to hear how varied the models can be in the innovative financing space and how SIB and Pay For Success models more broadly might evolve. I wanted to specifically pick up on Cathy’s earlier point about wanting to see pilots that "test out" different approaches to these models. In NFF’s discussions across the US, we are seeing this diversity of approach emerging organically and being driven by the fact pattern on the ground, depending on geographies and the stakeholders who are doing the early thinking and mobilizing. Hopefully, we’ll see a number of transactions in the US over the next 12-18 months that will gives us that diversity of structure and approach that will allow for an adaptive Pay For Success market to develop. NFF will continue to keep track of all developments on the Pay For Success Learning Hub (payforsuccess.org).
- Laura Callanan
  
  Ever evolving
  
  Hi Kristin — We will definitely need a range of proof points on SIBs to know how this approach works and whether it deserves to be scaled. For example, we will want to see how SIBs work in a variety of cities and states, and in different program areas. We will want to see SIB-suppoterd programs delievering outcomes, governments paying investors back based on those outcomes, and government spending on remedial programs go down as preventative programs are succesfully scaled using SIBs. We will also want to see the pool of investors backing SIBs extend beyond a few national foundations and philanthropists. All of this will help us realize where the SIB approach can add value against the bigger goal of delivering more positive social outcomes for more people who need them
Wendy McClanahan

Supporting Pay-for-Success Pilots

Thanks for highlighting such a promising approach. At P/PV, we have great hopes for the success of SIBs and the Pay-for-Success prisoner reentry pilot at the Dept. of Justice (DOJ). But our experience—including deep engagement with over 330 workforce providers through our Benchmarking Project—suggests that for participating nonprofits to meet benchmarks, attention needs to be paid not only on measuring program impacts, but on providing agencies with performance management supports—supports which have been historically under-funded and under-attended to by funders and program alike. If grantees in this pilot are to perform well, they need to get back to the basics, so to speak, of focusing on things like enrolling the right participants, delivering services with quality, and using real time data to make real time program adjustments. And DOJ will also need to assure that appropriate performance targets are set—ones that are grounded in the realities of the context, informed by research, and guided by the agencies actually doing the work. See my recent testimony to Congress on Pay-for-Success for more information about this topic and how to bridge these gaps: http://www.ppv.org/ppv/pdf_uploads/576_publication.pdf
- Laura Callanan
  
  Supporting Pay-for-Success Pilots
  
  Thanks, Wendy. SIBs are not a magic bulet for getting implementation right. Absolutely agree. All the challeneges the social sector faced before we had SIBs — how to assess social change programs and build evidence of what works, how to replicate and adapt programs to new communities and geographies, how to ensure deep expertise and capacity in a funding environment short on general operating support — we will still face with SIBs. While there is a much more robust dialogue around assessment and indicators today that 10 years ago — and while the presence of SIBs and similar pay for performance approaches will likely encourage more thinking about how to measure well – it will certainly be a challenge in the short term.
Rick Brush

Health impact bonds – market-based approach

Thanks to Laura and all for a great dialogue here! We’re pursuing the use of Health Impact Bonds to finance "upstream" health interventions that reduce "downstream" costs; investments are returned through a share of savings achieved by public and private insurance providers, employers, and other health care stakeholders. We see strong market potential, and, more important, a re-alignment of financial incentives toward prevention and health promotion. We’d welcome thoughts on our recent paper, co-authored with UC Berkeley and commissioned by the California Endowment: http://collectivehealth.wordpress.com/…/.