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From potential to action:

Bringing social impact bonds to the US

Introduction

A bond is a debt investment in which an investor loans money to a bond issuer for a dened time

period at an agreed interest rate. Cities and states typically issue municipal bonds and similar debt

instruments to fund capital projects and manage ongoing nancing needs. These municipal bonds

are backed either by specic revenue streams (bonds issued to build a toll road, for example, are

repaid with toll revenue) or by the issuing governments general obligation and full taxing authority.

SIBs are not bonds or debt instruments but rather multistakeholder partnerships managed througha series of contracts. (In fact, the original notion was to call them social impact partnerships, not

bonds.) SIBs bear some resemblance to the multiyear contracts governments already enter into,

which are subject to annual budget appropriations. Without special legislative authority, the govern-

ments obligation to pay SIB investors will not be commensurate with its obligation to pay traditional

municipal bondholders.

The state of Minnesota recently introduced Human Capital Performance Bondsnow commonly

referred to as Minnesota Bonds or HUCAPsthat in some ways resemble traditional municipal

bonds and in other ways resemble SIBs. Minnesota Bonds are sold to private investors and backed

by annual appropriations from the state budget. Their proceeds are used to pay direct service

providers once these providers hit predened performance targets.

Mind the misnomer: A social impact bond is not a bond

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HOW DOES A SOCIALIMPACT BOND WORK?

Glossary of terms

Remedial services: Government programs that address negative social outcomes after theyve

occurred (e.g., incarceration for criminals, emergency room access for the chronically homeless).

Preventive interventions: Social service programs that focus on avoiding negative social outcomes

(e.g., alternatives to incarceration, permanent supportive housing for the chronically homeless).

Constituent treatment group: Those individuals who benet from the preventive intervention and

whose results are compared to others who did not receive similar services.

Evaluation adviser monitors

ongoing progress of the

preventive program, working

with the intermediary and service

providers to refine program

based on interim results

Intermediary raises capital from

investors; selects and manages

nonprofit direct service providers,

retains evaluation adviser and selects

independent assessor; and provides

overall SIB project management

Service providers receive

multiyear funding from

intermediary to deliverevidence-based preventive

programs to constituent

treatment group

Government currently

provides costly remedial

programs for constituents

Government contracts with intermediary

for delivery of preventive programs to

improve constituents lives, reducing

their demand for remedial programs

Investors provide up-frontcapital to intermediary to

pay for preventive programs;

investors are repaid their

capital plus a return only if

preventive programs meet

predetermined performance

targets

Independent assessor

determines if predetermined

performance targets are met; if

targets are achieved, government

repays investors with a return

and pays a success bonus to

intermediary and service providers

INVESTORS

GOVERNMENT

INDEPENDENT

ASSESSOR

NONPROFIT

SERVICE

PROVIDERS

EVALUATION

ADVISER

INTERMEDIARY

Preventive

programs

Remedial

programs

7

2 4

3

6

51CONSTITUENTS