Social Impact Bonds – An Innovative New Funding Stream

Social Impact Bonds – An Innovative New Funding Stream

Social Impact Bonds

Social Impact Bonds (SIBs) – also known as “social innovation financing” or “pay for success” – raise investment to help alleviate social problems. SIBs are contracts between the government and social service providers in which the government pays for outcomes that result in government savings. To get up-front funding, the service providers raise capital from investors.

If the project meets its goals and objectives, the government repays the investors with returns based on the savings the government accrues as a result of the program’s success.

SIBs allow governments to fund creative interventions and programs that address unmet needs of the most vulnerable in our society without risking taxpayer dollars. Since programs are funded by non-governmental investors, taxpayer dollars are only used to repay investors when the program is successful.

For example, a successful inmate rehabilitation program has the potential to produce significant savings in the arena of corrections. If the SIB program proves that it has prevented recidivism, that cost savings is paid back to the investors. If it doesn’t, investors don’t get anything from the government.

Since evaluating the success of SIBs is at the core of this model of funding services, program evaluation is critical to any SIB.

Do you want to take advantage of the new funding opportunitites SIBs have created? Check out our 3-part webinar series, Building a SIB-Ready Sector.

Chicago Public Schools and Goldman Sachs: An Example of a SIB at Work

On October 7, 2014, Chicago Mayor Rahm Emanuel, Chicago Public Schools, and Goldman Sachs announced the launch of a social impact bond to fund pre-kindergarten education for 2,620 Chicago public school children during the next four years.

This $16.9 million SIB supports low-income families living in communities without publicly funded high-quality pre-K education and is meant to increase students’ readiness for kindergarten, improve literacy, and lower the need for special-education programs. Research has shown that access to quality early educational programs directly impacts the success of students in elementary school and beyond. The bond was structured to ensure that its lenders are only repaid if students realize positive academic results.

Many people in the educational and finance worlds saw this SIB, the fifth in the United States, as a way to solve one of Chicago’s most pressing problems with a unique solution. Andrea Phillips, Vice President of the urban investment group at Goldman Sachs, said “Innovative models like social impact bonds and Pay for Success programs allow the private sector to provide the capital needed to expand successful initiatives in our cities and communities, shifting the risk of achieving targeted outcomes away from the taxpayer and enabling governments to pay only for what works.”

So far, the experiment with SIBs seems to be paying dividends, both to program participants and investors. Private investors who are paying $16.6 million for the four-year preschool expansion are now assured a $500,000 “success payment” for the initial outcomes. The total payout to investors could eventually more than double their original investment.

How To Know If Your Organization is Ready for Pay for Success Funding

There are a number of considerations to look at when gauging whether your program might be prepared for SIBs.

  • You need the organizational capacity for the extensive data gathering and evaluation necessary to show the positive outcomes that result in payment for your investors.
  • You also need to have a track record of high fidelity in your service delivery.
  • Lastly, you should have had a number of high-quality impact evaluations under your belt.
  • You need to have a documented need in the form of a large number of target clients who are underserved and who will cost the government significantly without your intervention.

While this kind of funding model is not yet the norm, evaluation is increasingly important in all funding streams. If your organization is still trying to formulate a rock-solid evaluation strategy, Social Solutions can help. Contact one of our solutions specialists to find out more about scaling your data capacity, showing your results and conducting evaluations.

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