Social Impact Bonds
 

What is a social impact bond?

A social impact bond (SIB) is an innovative tool for funding social services. Under a SIB, the government partners with a service provider to run a program. The government and the service provider identify the program's intended social benefits and set targets for each outcome. One or more investors lend money to cover the program's costs. If the program achieves its targets, the government pays investors back, sometimes with interest. If the program does not meet its targets, investors may not receive their full reimbursement.

Most SIBs include a partnership between government, a service provider, one or more investors, an intermediary and an evaluator.

SIBs are designed to enhance and add to services provided to address social problems and improve conditions for vulnerable people. They do not replace or cut existing services.

Investors are attracted to SIBs because it aligns with their corporate social responsibility, and may improve their business profile while promoting sector development. These benefits not only enhance the firm's success but they can also contribute to broad-based economic gains. Investors also have the potential to gain a return on investment, depending on the project scope.

The government's role: The government, alongside stakeholders, identifies the social problem that they hope to improve with a SIB, the innovative social program the SIB will fund and the service provider that will deliver the program. The government and the service provider select outcomes that will measure the program's performance. The government pays investors based on the program results.

The service provider's role: The service provider designs and delivers the program. It works alongside the government to identify outcomes that will deliver a lasting change to the lives of program participants. It collects data to track its progress on those outcomes.

The investors' role: The investors lend money to the service provider. The loan covers the costs of the program. If the program succeeds, the government will pay the investors a return. If the program fails, the investors will lose their money. The service provider does not put any of its money at risk.

The evaluator's role: The evaluator advises on how to evaluate the program. It checks, verifies and tests the results reported by the service provider.

The intermediary's role: The intermediary finds partners to fill each SIB role. It helps to choose outcomes, set targets and otherwise design the SIB. The intermediary may sit on the project board to advise during program delivery.

The diagram below describes the relationships between the main SIB actors.

Diagram of the SIB process