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GOVERNMENT

Social Impact Bonds: Lessons from the Fieldn piloting social impact bonds, governments have already yielded some lessons from the field.

By Michael Belinsky | 7 | Jan. 23, 2012

year after the British Ministry of Justice piloted social impact bonds to reduce the 60 percent

recidivism rate for the 3,000 criminal offenders who passed through the doors of a private prison iPeterborough, UK, the innovative funding mechanism captured the imagination of many social

entrepreneurs. These bonds, also known as pay-for-success contracts, promise to transform the relations

between governments, nonprofits, and funders. Social impact bonds became one of the top ten

buzzwords of 2011. And local governments in England, Australia, Canada, and the US have started

exploring these contracts. As state governments at home and abroad prepare to pilot these bonds next ye

he processes have already yielded some lessons from the field.

The first lesson is that pay-for-success contacts may ultimately encompass several ways of engaging pure

for-profit investors, impact investors, and foundations in producing social returns. Steve Rothschild, an

Ashoka Fellow and CEO of Twin Cities RISE! has had some success in Minnesota with one form of p

for-success contract, which he calls human capital performance bonds. In this mechanism, a state raises

funds by issuing general obligation bonds, directs those funds to nonprofits that have generated positive

ocial outcomes and created government savings, and uses cash unlocked by those savings to repay the

bondholders. Because the full faith and credit of the state backs these bondsand no state since World

War I has defaulted on its bond obligationsthese bonds will allow social entrepreneurs to access capita

markets. The $10 million designated toward human capital performance bonds in Governor Mark

Daytons July 2011 budget made Minnesota the firstand so far the onlystate to pass legislation on pfor-success contracts.

Social Finance, Inc., in Massachusetts is exploring a different approach to engage capital markets. Like i

ister organization in the UK, Social Finance might front working capital, raised from investors with a

ange of risk-return appetites, to nonprofits in return for a government promise to pay when those

nonprofits achieve predetermined outcomes. Unlike the UK operation, which attracted only philanthrop

http://www.house.leg.state.mn.us/hinfo/sessiondaily.asp?storyid=2553http://philanthropy.com/article/Philanthropy-Buzzwords-of-2011/130151/http://philanthropy.com/article/Philanthropy-Buzzwords-of-2011/130151/http://philanthropy.com/article/Philanthropy-Buzzwords-of-2011/130151/http://www.ssireview.org/blog/entry/social_impact_bonds_lessons_from_the_field#bio-footerhttp://www.ssireview.org/blog/entry/social_impact_bonds_lessons_from_the_field#commentshttp://www.ssireview.org/blog/category/governmenthttp://www.ssireview.org/http://www.ssireview.org/http://www.ssireview.org/http://www.ssireview.org/http://www.ssireview.org/http://www.ssireview.org/http://www.house.leg.state.mn.us/hinfo/sessiondaily.asp?storyid=2553http://philanthropy.com/article/Philanthropy-Buzzwords-of-2011/130151/http://www.socialfinance.org.uk/work/sibshttp://www.ssireview.org/blog/entry/social_impact_bonds_lessons_from_the_field#commentshttp://www.ssireview.org/blog/entry/social_impact_bonds_lessons_from_the_field#bio-footerhttp://www.ssireview.org/blog/category/governmenthttp://www.ssireview.org/

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nvestment for its Peterborough bond, Social Finance here might slice the expected revenue stream into

ranches, offer the lower-risk tranches to foundations, and pitch the premium tranche to investors with t

highest appetite for return. (This idea might also work for UKs second social impact bond, which plans

arget troubled families.)

The New South Wales (NSW) Government in Australia, which plans to enter into a social impact bon

n late 2012 to address either recidivism or foster care, is exploring attracting for-profit investors byoffering to share some of the bonds downside riskessentially buying the lowest tranche of its own bon

The second lesson is that the very process of implementing social impact bonds yields valuable returns fo

he government that engages in it. Governments that start thinking about how much return taxpayer dol

generate in one area may take that thinking to its other investments. The process of paying a service

provider based on outcomes pushes the government to introduce data monitoring and evaluation system

above and beyond the ones it may be using today. Monitoring systems that it needs to set up to track

eading indicators, as well as final outcomes, may then be used to track outcomes for populations not

engaged through the pay-for-performance contract. And evaluation systems that rigorously compare

outcomes to counterfactual scenarios help push the conversation around performance measurement.

The social impact bond is ultimately a learning tool for a society that is still discovering best practices. If

governments already knew the most efficient uses of taxpayer money, they would not need to ask the serv

provider to find the best solution, as pay-for-success contracts do. And if service providers delivered kno

or similar outcomes, then delaying payment until we observe performance would be an unnecessary

burden.

Therefore, perhaps the largest lesson, and greatest success, of this young innovation has been its ability to

anchor the conversation of governments, social entrepreneurs, and impact investors around measuremen

metrics, and outcomes. Nick Hurd, Britains Minister for Civil Society, recently lamented the massive

culture of risk aversion in the public sector, that his use of social impact bonds has revealed. Impact

nvestors across the board are starting to hold their investments to more rigorous standards of social retur

And as governments innovate, they are rewriting the social contact with their citizens and businesses, as

Westminster has done this month.

The next half-dozen pay-for-success contracts that come online in 2012-13 will expand the number ofocial services, types of investor, and bond structures that will, in turn, increase the size and complexity o

he nascent social impact bond market. And, as that market evolves, we will come closer to that

ransformational promise of a new social contract in which taxpayers, entrepreneurs, and governments ho

each other accountable for performance and impact.

Update: On January 18, the Commonwealth of Massachusetts issued a series of requests for proposals to

http://www.mass.gov/anf/press-releases/ma-first-to-pursue-pay-for-success-contracts.htmlhttp://www.guardian.co.uk/local-government-network/2011/dec/12/westminster-council-civic-contract-summary?newsfeed=truehttp://www.thirdsector.co.uk/go/news/article/1106127/nick-hurd-says-government-needs-simplify-impact-measurement/http://www.investopedia.com/terms/t/tranches.asp#axzz1j5fYfgWN

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use pay-for-success contracting to address youth recidivism and chronic homeless in the state.

Read the follow-up article, "Social Impact Bonds: Lessons from the Field"

Michael Belinsky is a student at the Harvard Kennedy School of Governm

He is an advisor on social impact bonds to the Commonwealth of

Massachusetts, a teaching fellow at Harvard Business School, and a forme

consultant. Michael holds an AB in economics and government from

Dartmouth.

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