In recent months, there has been an increasing amount of discussion around social impact bonds (SIBs). Also known as Pay for Success (PFS) financing, social impact bonds are an emerging model of financing that connects government with private and philanthropic investors to fund social programs.
“In this model, an intermediary organization (sometimes described as a Social Impact Bond-Issuing Organization or SIBIO) raises capital from private investors to fund multi-year delivery of preventative or early intervention social service programs traditionally funded by government agencies on an annual basis. If social service providers are successful in achieving contractually agreed targets for performance and achievement outcome metrics, the government pays the investors, through the SIBIO, a return on their investment. This return on investment is funded from the savings produced in the population receiving the preventative or early intervention services by comparison to a defined population that has not. If the outcome targets are not achieved, the government does not pay.” [emphasis added]
Social impact bonds are starting to make their way to the U.S. and federal, state, and local governments are beginning to consider how they might be able to use Pay for Success financing to find solutions to a variety of social, economic, and environmental challenges. New York City will be one of the first test cases for SIBs in the U.S. with a program to lower recidivism rates among young male offender at Rikers Island. The program will be implemented by local nonprofits groups and funded by a $6.9 million dollar loan from Goldman Sachs. In order for Goldman Sachs to earn a return on its investment, recidivism rates must drop by at least 10 percent. In addition to the New York program, this year the federal government announced two Pay for Success pilot programs: the Department of Justice’s Second Chance Act program and the Department of Labor’s Pay for Success pilot projects.
Pay for success financing is certainly an intriguing concept that warrants the attention of our government leaders both for its potential to foster innovation and uncover solutions that work. But like so many new financing models, it is still too soon to gauge how and whether these financing models can be used to solve some of our most intractable community and economic development challenges like poverty reduction and job creation.
What experience do you have with social impact bonds? What do you think of SIBs as a community development finance tool? Are there challenges in your community where social impact bonds could help spur innovative and effective solutions?