Social Impact Bonds
Description
By Jonathan Wade:
"Social Impact Bonds are a concept imported from the UK, and are a part of the Big Society Conservative government policy. They are, in effect, a promise from government to pay only for activities that lead to social improvement. Under this mechanism, an independent third party organization secures private money based upon a contract it negotiates with the government. This money is then made available to social enterprises (or other organizations set up for a social purpose) that promise to address the social needs stipulated in the government contract. (i.e. improve society in some way.) If the social enterprise can document their success, then the government will reimburse the investors, offering a financial return related to the degree of success achieved.
To our knowledge, this concept has only one successful operating example (in the UK), where government wants to reduce recidivism rates of released offenders. The government has offered to provide investors with a 7.5-13% rate of return if their money is used by a consortium of organizations to run programs that reduce the rate of recidivism by not less than 7.5% in six years.
Social Impact Bonds are without question an innovative tool to leverage public and private support for social improvement. In principle, it rewards only the successful organizations, and punishes those who don’t demonstrate results—which is a very entrepreneurial concept. However, it is a challenging source of financing because it only pays out AFTER the work is done, and all the risk is borne by the investor for programs and social enterprises over which they very likely have no direct control.
There is also another challenge for social enterprises seeking to benefit from Social Impact Bonds: they need to demonstrate success. Admittedly, there are many advances in how to measure and attribute social improvement to a single enterprise. However, social impact measurement remains an inexact science, and varies widely for different target populations. There is a very compelling article from the UK published recently that documents many of these challenges and warns UK based organizations to know when not to agree to this arrangement." (http://cised.ca/social-impact-bonds-vs-community-bonds-what-is-the-difference/)