Social Impact Bonds: Building a Financial Market for Social Outcomes
CEO and Co-founder, Social Finance
October 29, 2013
In the lead up to the 2013 Igniting Innovation Summit on Social Entrepreneurship, the Skoll World Forum is featuring the ideas and innovations of several speakers and delegates, all of whom are writing on entrepreneurial approaches and solutions to some of the world's most pressing social issues. Organized by the Harvard College Social Innovation Collaborative, the Summit takes place on November 9th at Harvard University. This special series is being syndicated to Forbes.
Senior Advisor, Northeastern University
Education and Social Innovation Director, Indiegogo
Founder and Chair, JP's Peace, Love & Happiness Foundation
Founder, The GameChangers
CEO and Co-founder, Social Finance
October 29, 2013
When Antoinette learned that she was pregnant, she was eighteen, unmarried, and scared. As a low-income, first-time mother, statistics suggested that she was at risk for preterm delivery, additional unplanned pregnancies, and poor health outcomes for herself and her baby. But Antoinette’s luck changed when she enrolled in a nurse home visiting program delivered by the Nurse-Family Partnership. The nurse assigned to Antoinette supported her through crises with her mother, her boyfriend, even her car – and the baby was born full-term, at a healthy eight pounds. By the time that Antoinette “graduated” from the nurse home visiting program two years later, the baby was developmentally on track and Antoinette was enrolling in college.
Antoinette was fortunate, but the vast majority of women in her position lack access to these services; Nurse-Family Partnership (NFP) is only able to serve 4% of the 850,000 low-income, first-time mothers across the country every year. Even though NFP and other high-performing providers have outstanding track records of delivering these interventions, existing government and philanthropic resources are inadequate to fund their expansion to meet societal demand.
In a time when these demands are rising but resources are increasingly constrained, Social Impact Bonds (SIBs) have the potential to create new opportunities. SIBs are a recent financing innovation in which investment capital is raised to expand effective social interventions like those of the NFP. The partners in a SIB – government, private investors, social service providers, and an intermediary like Social Finance – come together to generate social and economic value. Government only pays for successful, measurable outcomes (how many young mothers like Antoinette have healthy, full-term pregnancies, for example) and investors earn a financial return (stemming from public sector savings when fewer mothers have pre-term births). If the programs fail to achieve successful outcomes, government owes nothing.
SIBs are potentially instruments of great power; indeed, the core concept of SIBs – that investors benefit if and only if society benefits – is transformational. Moreover, SIBs drive government accountability by transferring the risk of failure to investors and by focusing attention on outcomes rather than outputs (how many people enroll in a program, for example) in public services. And SIBs are designed to direct resources to social interventions that are aimed at preventing problems from emerging rather than addressing the problems after they have emerged, embodying Benjamin Franklin’s maxim that an ounce of prevention is worth a pound of cure.
SIBs give new meaning to the principle of blended value. When people’s lives improve as a result of SIB-driven social interventions, this creates value for multiple stakeholders including government and investors, as well as society as a whole. Antoinette’s life improvement is a source of return to investors; investor capital is a source of life improvement for Antoinette.
This vision of creating a financial market for social outcomes is what compelled me to co-found Social Finance, Inc. in January 2011 to bring the SIB concept to the US. While there is much excitement and energy, even hype, around the SIB concept, there is only one full-fledged project on the ground to date, reflecting the many challenges to market takeoff. These challenges reflect early-mover costs in a new market – lack of legislative framework, contracting language, and risk assessment tools. Other challenges around SIBs are more structural, related to the complexity of managing a multi-stakeholder partnership while ensuring that the introduction of a profit motive into civil society work is a force for good, not a road to unintended consequences.
Thus the future of the SIB market is far from certain. But the experiment is worth pursuing, especially in a time of soaring need and eroding resources. Market participants will learn from every success and failure, refining the model in response to developments and learnings on the ground.
While not a panacea, multiple SIB projects are in the pipeline across the country, and experts estimate the US market could approach $300 million over the next two years. SIBs are multi-dimensional, complex, and challenging to implement — but so are the social problems that they are designed to tackle.