Social Impact Bonds

A Social Impact Bond (SIB) is a form of outcomes-based contract that usually involves three parties, namely a public sector authority, an NGO service provider and private and institutional investors.

The public sector authority contracts with the service provider to deliver a service – usually directed at ameliorating a complex social problem – while the investors provide the upfront working capital to the service provider to deliver their program. If this program achieves the pre-agreed outcomes, then the public sector authority pays back the investors their capital along with the agreed return.

An ‘outcome’ is a narrowly defined and empirically observable result of a social intervention. In an SIB, the outcome needs to be set relative to a specific population over a defined period of time and against an historical benchmark, average or trend. An outcome by definition involves making a real improvement in people’s lives.

While SIBs can vary substantially in their detailed design, structure and operation, for them to work, the following conditions must be present:

  • The service or program must be directed at a social problem which the government is vitally interested in solving or ameliorating
  • The methodology of the program must be proven, documented and replicable, must be directly relevant to the problem which the government authority seeks to address and the outcomes of intervention must be statistically measurable
  • Success over time by the program must result in actual savings to the government authority
  • The NGO concerned must be credible and must have sound financial management practices and the capacity to undertake outcome measurement. They must have proven or promising service models that have capacity to operate at scale if adequately resourced
  • There must be experienced, independent and well-resources intermediaries available to act as ‘managers’ of negotiations between government authorities and investors and to monitor performance reporting during the life of the bond and the sharing of savings by the government authority
  • There must be investors prepared to support the bond issue.

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