I recently read about Social Impact Bonds (SIBs) and as a long-time professional in public finance found them to be an interesting mechanism for financing social projects. SIBs are not like traditional debt instruments where debt service is paid at regular intervals (usually semiannually) from the pledged revenues of a borrower; rather, payments on SIBs are made only if and when certain performance targets are met. Briefly, the financing structure is as follows: a government agency contracts with a private-sector intermediary to buy certain social services, and the intermediary gets paid when certain performance targets are achieved and verified by an independent evaluator. The payments are made in part from the cost savings of the project. These payments are also used to repay the investors’ principal, plus a return for bearing the financial risk of the SIBs.
According to a recent Governing Magazine newsletter, “Last year, the first SIB in the U.S. was signed: A $9.6 million loan to an evidence-based program for young adults in New York City’s Rikers Island Correctional Facility. The program — the Adolescent Behavioral Learning Experience (ABLE) — teaches young inmates skills and counsels them on personal responsibility in an effort to reduce recidivism. Goldman Sachs provided the financing; Bloomberg Philanthropies put up money for an initial grant; and MDRC, a nonprofit agency, is overseeing its implementation. If recidivism among those in the program is reduced by 10 percent, the government saves enough money to pay back the investor’s principal. If the reductions are higher than 10 percent, investors start to make money.”
Part financial investment and part philanthropy, SIBs may be attractive to foundations, financial institutions, and pension funds.
For more information on SIBs, social innovation funds, and impact investing, I suggest reading “Social Finance: A Primer, Understanding Innovation Funds, Impact Bonds, and Impact Investing” by Sonal Shah and Krista Costa. The following is the link to this document:
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