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Choosing social impact bonds: A practitioner’s guide

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Drawing on lessons learned from existing Social Impact Bonds (SIBs), this report identifies design features that practitioners can use to increase the likelihood of future SIBs delivering the desired social outcomes.

Around the world, communities are seeking ways to improve the lives of disadvantaged individuals. Given access to a market of appropriate goods and services, many people can lift themselves out of hardship. The growing range of impactdriven organisations selling directly to customers is a key part of the solution. These organisations see a market opportunity to create value for disadvantaged customers – and to be rewarded for that value. They respond by harnessing the power of entrepreneurship, supported by growth capital, to come up with new interventions, find better ways of delivering existing ones, or simply scale up what works. Yet there remain many individuals whose circumstances mean that their life chances remain stubbornly poor, with high costs to society.

These individuals are typically given support by donors (whether foundations or corporations) or by governments, who either deliver services directly or commission other delivery partners to do so. Traditionally, both governments and donors have structured contracts with delivery partners so that they pay for a set of predefined activities that they believe will lead to their desired outcomes. This ‘fee for service’ approach does not incentivise delivery partners to innovate if the pre-defined service is not delivering the intended social outcomes, nor to strive for better outcomes than expected so may not trigger an entrepreneurial response. It also risks a high cost of failure: governments or donors can incur significant cost even when there is little or no benefit for the vulnerable individuals they are seeking to help.

Against this backdrop, three major trends are developing. First, governments and donors, in light of increasingly strained budgets, are searching for how to deliver better outcomes for beneficiaries using the same or fewer resources. Second, effective impact-driven organisations, whether lacking revenue for proven interventions, or seeking capital to test new innovations, are increasingly seeking creative ways to grow their impact. Third, there is an expanding pool of investors looking to harness the power of entrepreneurship to address some of our toughest social issues. Social impact bonds (SIBs) uniquely draw together these trends, offering the potential for each party to achieve their goal and, most importantly, for vulnerable individuals to see better outcomes.

By using carefully designed contracts to ensure that governments or donors pay only for successful outcomes, SIBs trigger impactdriven organisations to behave as they would if selling directly to consumers: to enable creativity, supported by growth capital, to come up with new interventions, find better ways of delivering existing ones, or scale up what works.

This approach is full of promise but it can require a behavioural shift: SIBs ask governments and donors to focus on defining and costing their desired social outcomes, rather than managing the delivery of activities; they ask impact-driven organisations to have their impact performance more heavily scrutinised upfront and rewarded later, rather than vice versa; and they ask investors to calculate the risk that an impact-driven organisation can deliver specific social outcomes for a defined cohort of individuals over a set timeline.

Given these required shifts in behaviour (and contract design), it is perhaps no surprise that some of the 26 pioneering SIBs already operating globally have been neither quick nor straightforward to set up. This need not remain the case. With nearly 100 more SIBs already under development, now is an important moment to learn from those who have designed, financed and are running SIBs. Despite their wide-ranging scope, size and shape, the SIBs operating today have revealed many of the same insights, especially as we compare notes across the world. In this report, we bring that learning together, offering a practitioner’s guide that aims to clarify the full value a SIB could bring.

In Section 1, we present a framework for describing the benefits that SIBs can offer to each party involved. Drawing on this framework, Section 2 presents a series of design features that practitioners have already learned can increase the likelihood that these benefits will be achieved. Section 3 finishes by bringing these design features together into a checklist for each party. We follow each checklist with observations about the underlying behaviours that will best underpin these recommendations.

In the light of significant global momentum, this report aims to cut through some of the complexity surrounding SIBs to provide a timely guide to help all parties involved set themselves up for success.

Last updated | 
17 October 2014