Around the world, private capital is solving public problems

The first ever Social Impact Bond (“SIB”) was introduced in the United Kingdom when private investors funded an initiative aimed at reducing recidivism among inmates released from Peterborough prison.

Since its inception, it has achieved a rate of return of over 3 percent, while reducing recidivism rates by 9 percent. The financial return was contingent upon meeting a 7.5 percent reduction target set by the Ministry of Justice, which was exceeded.  Today, there are approximately 89 SIBs in 19 countries addressing an increasing array of social issue.

{mosads}SIBs are a financing tool in which governments contract with private entities to produce measurable results in areas such as criminal justice, substance abuse, early childhood development, homelessness, workforce development, and public health. Start-up capital is raised from investors, frequently with backing from foundations. But a financial return is only secured if a predetermined set of objectives are realized. In other words, if an initiative fails to meet its targets the loss is absorbed by investors not taxpayers.  Under this “pay for success” model, governments only pay if and when certain goals are achieved.    

The idea is to save governments money by leveraging private sector resources and liquidity to achieve positive results. Only then will a portion of the savings generated be used to pay back investors who have a vested interest to implement best practices and the most effective programs.  Georgia Keohane, author of Capital and The Common Good, points out that Social Impact Bonding is more accurately characterized as an equity investment. The rate of return is based upon the level of success.  

Keohane further notes that the lessons learned pertain more to good governance then finance. SIBs allow for the development of evidence-based policies whereby initiatives are evaluated by specific performance measures. The financial value of SIBs includes preventive costs made possible through favorable outcomes such as reduced levels of incarceration or improved public health.  Indeed, SIBs are particularly useful in monetizing the value of prevention and the stream of savings provided; something often neglected by more traditional government policy.             

Approximately 16 SIBs have been initiated in the United States.  For example, in March, Massachusetts launched the nation’s first workforce development SIB, raising $12.4 million to provide language and vocational training for immigrants. The financial return to the investor is contingent on factors such as job placement and transition to higher education. A Nurse-Family Partnership SIB in South Carolina finances services to low-income participants to reduce pre-term births and infant hospitalization usage. SIBs have also been developed in Oklahoma, Utah, Connecticut, Denver, Ohio, Chicago, California, New York State and New York City.  

The SIB model is even being applied to the environment. Last year, the D.C. Water and Sewer Authority launched the nation’s first environmental impact bond to manage stormwater runoff and improve the District’s water supply.  Financial returns are dependent on the volume of stormwater reduction. With support from the Rockefeller and Packard Foundations, the Blue Forest Conservation is developing a Forest Resilience Bond to incentivize restoration. Based on the project’s success in preventing wildfires, investors would be paid by the following beneficiaries: The United States Forest Service, electric utilities, water utilities, and state and local governments.      

Development Impact Bonds are another SIB variation used to raise investment capital to improve conditions in developing countries. In 2015, The Educate Girls Impact Bond was launched in India to enroll girls into primary education and improve educational outcomes for boys and girls in English, Hindu and mathematics. In the first two years of this three year program investors have already recouped 76 percent of their investment. Another DIB, The Cameroon Cataract Development Impact Loan, was recently announced and aims to prevent blindness by providing up to 18,000 cataract surgeries in Cameroon.                 

It is too early to gauge the long term impact of SIBs, but they represent an innovative business model that incentivizes private capital to solve public problems. They facilitate much needed sources of revenue and demonstrate a promising method of helping marginalized populations by encouraging investment in preventive programs.  While SIBs may not always succeed, their use is continuing to grow and will teach us more about policy implementation to address complex challenges.      

Douglas Singleterry is Counsel at Vasios, Kelly & Strollo and co-author of New Jersey Uniform Commercial Code. He has served on the North Plainfield Borough Council since 2005.

Zenon Christodoulou holds a master’s degree in international finance and doctorate in organizational behavior. He is a management consultant and adjunct professor at William Paterson University’s Cotsakos School of Business.