Social Impact Bonds

 A post by James V. Toscano

A new report sponsored by the Rockefeller Foundation, A New Tool for Scaling Impact: How Social Impact Bonds Can Mobilize Private Capital To Advance Social Good, gives an interesting boost to the British idea of infusing private capital into projects that have a societal return, with repayment based on the success of the project.

In the introduction to the report, Judith Rodin, Rockefeller Foundation president states:

“Social Impact Bonds have the potential to substantially transform the social sector, support poor and vulnerable communities, and create new financial flows for human service delivery by offering an innovative way to scale what works and break the cyclical need for crisis-driven services.”

English Pilot

Through Social Impact Ltd. in England, Rockefeller has invested in a pilot project to reduce prison recidivism in Peterborough. A sister organization in the US is working with the State of Massachusetts, which, in January of this year, sent out an RFP for private financing to support homeless adults and work with those leaving the juvenile justice system, with pay-back based on performance. According to the CEO of the US group,

“The Commonwealth’s pioneering efforts stand to validate the potential of Social Impact Bonds: to improve social outcomes at reduced taxpayer expense, transfer performance risk from government to investors who might be more able to price and bear it, and reward high-performing nonprofits with long-term growth capital to scale proven innovations.”

President Obama is encouraged by the concept and has proposed setting aside $100 million in his recent budget message to Congress for Social Impact bonding. A number of economists have also endorsed the idea. Certainly, nonprofit organizations continuously hamstrung by resource limitations, even for programs with proven track records, see this as another way to do their work. And, at least some parts of government see this as a way of increasing private-pubic cooperation in a win-win way.

The Players, the Win-Wins

The report demonstrates the advantages in this way:

Nonprofits:

• Access to growth capital to scale up operations
• Access to a stable and predictable revenue stream without labor-intensive fundraising
• Facilitated coordination with organizations working on overlapping  problem

Investors

• Achievement of financial returns and social impact
• Participation in a new asset class with portfolio diversification benefits

Communities

• Access to an increased supply of effective social services
• Reduction in the need for crisis-driven interventions

Government

• Accountability for taxpayer funds
• Reduction in the need for costly downstream remediation
• Increased supply of effective services for citizens without financial risk

Yes, But?

The obvious issues first surround choice of problem and the nature of upstream prevention and then go to the conditions for investment: credit worthiness of the recipient; interest rate for return on investment capital; agreement of what empirical measures to be achieved constitute success; sufficient time to achieve such results; levels of intervention by government and investors in the project, etc.

Will social impact investors pick the low hanging fruit or the intractable problems. Will they seek the most endemic problems? Will they willing to wait for a ten or, even 20 year payback? What type of return would they seek? Would the government in office redeem the promises of a prior regime?

The report suggests that, given the above complexities, an intermediary institution needs to be in place to issue the bonds, to negotiate all of the contracts up front taking in the various conditions surrounding the subject of the work and to provide monitoring and oversight throughout the life of the project, ensuring that no stone is left unturned.

Buried in the report is also the major role expected of foundations as investors to get this concept started and, perhaps, a shifting role to that of payer in the future.

Nevertheless, why not try using social impact bonds? If the investors are there and the payer doesn’t default, and most important, there is public benefit, why not? The ability to capitalize a sound program, bring it up to larger scale and provide social benefit, in the words of that wise philosopher-king, Tom Lehrer, ultimately will be “doing well by doing good.”

What do you think?

Copyright 2012 The Good Counsel, division of Toscano Advisors, LLC. May be duplicated with citation.

---