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Social Impact Bonds: An Explanation and a Call for Resources

June 30, 2014 | Jitinder Kohli, Director, Deloitte Consulting LLP, and David Rabinowitz, Management Consultant, Deloitte Consulting LLP

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A new normal exists in government: Everywhere in the world, government agencies have to do more with less. In order to cope, they are embracing increasing amounts of innovation. One such innovation is Social Impact Bonds (or SIBs); this idea that started less than five years ago seems to be spreading rapidly. Across the country, more than 25 SIB deals are under development or underway. Early experience of SIBs shows that they require intense activity to implement. Deals in Massachusetts, Michigan, New York, and Illinois have benefited from extensive technical assistance.

A new normal exists in government: Everywhere in the world, government agencies have to do more with less. In order to cope, they are embracing increasing amounts of innovation. One such innovation is Social Impact Bonds (or SIBs); this idea that started less than five years ago seems to be spreading rapidly. Across the country, more than 25 SIB deals are under development or underway. Early experience of SIBs shows that they require intense activity to implement. Deals in Massachusetts, Michigan, New York, and Illinois have benefited from extensive technical assistance. But as the concept takes off, the process needs to become easier—with “plug and play” tools to make SIBs easier to replicate.

What is a Social Impact Bond? Also called a Pay for Success Bond or Contract, a SIB, at its core, is a type of contract between an external organization and a government agency. While the external organization aims to reach a specific outcome, the government agency defines a social outcome (e.g., improvements in education) and promises to make a payment only if the outcome is achieved. The external organization needs funding to carry out the activities necessary to achieve the outcome and raises funds directly with outside investors (often foundations or socially conscious individual investors). The key difference from traditional government funding—and even other performance-based funding schemes—is that government payment only flows if outcomes are achieved. In addition, service providers have tremendous flexibility and autonomy in designing and managing activities.

The first SIBs in the United States mirrored early counterparts from the United Kingdom. In New York, a SIB was launched to help inmates released from Rikers Island, New York City’s main jail complex. This SIB closely mirrors one of the earliest deals at HMP Peterborough, a prison in England. Early indicators show that the Peterborough SIB is succeeding in reducing recidivism.

Now SIBs are being applied to other social issues. For example, in California, organizations in Fresno have launched one designed to reduce asthma among low-income children. This deal aims to offer in-home services to reduce exposure to smoke, pests, etc. If successful, the number of trips to the emergency room will decrease, and the model could be scaled to address the nationwide costs of asthma hospitalizations—which exceed $1 billion each year.

Right now, each SIB essentially reinvents the wheel. While the concept may seem straightforward, the decisions governmental agencies must make have not been faced before. The agencies need to set out very specific outcomes, know how to measure success (or failure), and set as few requirements to avoid adverse unintended consequences. Most critically, government agencies need to determine the outcome’s value—the price of the SIB must be more than the traditional cost of the intervention to motivate new approaches and participants. All of that is difficult, especially without a history of SIBs that can be replicated.

To grow deals successfully, we need a set of ready-to-go materials. Pre-set financial models can help agencies work through their own data to determine how to, for example, price a SIB. Practical guidebooks can lay out the steps to complete, the order in which to complete them, and who should be involved in various decisions. In general, the questions to answer when launching a SIB do not vary much from topic to topic or place to place. But with a SIB—as with any funding that puts taxpayer dollars at stake, especially when a new innovation is being tested—the details matter a great deal.

Jitinder Kohli is a director in the public sector strategy practice at Deloitte Consulting LLP and is also a senior fellow at the Center for American Progress. He has worked extensively with government leaders in the United States and beyond on how to deploy Social Impact Bonds. David Rabinowitz has supported federal and international government agencies and nonprofit organizations on issues of funding, designing, and scaling social services. He works extensively on addressing emerging public health challenges.