With the passage of the Bipartisan Budget Act of 2018, suddenly social impact bonds are all the rage. And for good reason — there’s a lot to like in these bonds. But what are social impact bonds, how do they work, and what changed recently to make them the new hot thing?
Social Impact Bonds
A social impact bond is a financial instrument similar to a regular bond. Investors loan money up front in hopes of receiving a return. In the case of social impact bonds, investors hope to achieve a positive societal change in addition to receiving a return on investment. Commonly, social impact bonds will invest in preventing a negative outcome, with the realized savings from not incurring that negative outcome returned to investors as the bond’s return. If the expected savings are not realized, the investors do not receive a return on their investment, making social impact bonds a riskier investment category than traditional bonds. Social impact bonds were introduced in the UK in 2010 and have since caught the interest of both government and private investors.
Social impact bonds have many attractive features. They spur innovation by providing funding for promising but unproven social programs, they allow investors to directly participate in improving communities and combating societal ills, and they match effective outcomes with financial return, thus avoiding public funding for programs which later prove to be unsuccessful.
So what changed to make social impact bonds the new buzzword? The Social Impact Partnerships to Pay for Results Act (SIPPRA), which was attached to the Bipartisan Budget Act of 2018, created a $100 million federal fund to invest in social impact projects (also known as Pay for Success or Pay for Results projects). Like other social impact bonds, SIPPRA mandates that taxpayer dollars can only be spent on social programs that achieve desired outcomes. Money is only paid out when desired outcomes are met and the payout cannot exceed the value realized from attaining the outcomes.
In terms of focus area, SIPPRA is more of a general purpose bond than a special purpose bond. The act casts a wide net in programs and objectives eligible for funding, including employment and workforce development, high school graduation, unplanned pregnancies, maternal and infant health, chronic disease, foster care, prison recidivism, homelessness, behavioral health and substance use disorders, veteran reintegration, early childhood education, and financial stability of low-income families. Part of the reason SIPPRA generates such excitement is because of the wide variety of program types eligible to participate in this new, innovative approach.
SIPPRA creates explicit incentives for close collaboration between government, social service providers, healthcare providers, community partnerships, and private investors. By working together in a collaborative environment toward shared goals, all constituencies can benefit from the social impact bond.
How it Works
- State and local governments are eligible to apply. The federal government is expected to begin accepting proposals in early 2019
- Proposals must state the desired objective, the program that will be used to obtain the objective, expected realized savings from attaining the objective, and evidence that the desired program approach has previously proven successful in similar situations
- The state or local government must submit a feasibility study that shows social service provider partners have the capacity needed to run the project, that social service provider partners have experience serving the target population, and that private investment partners are able to raise the necessary funds
- For accepted projects, the federal government funds an independent evaluation to track progress towards benchmarks and to validate that the desired outcomes are met before any payment is made
- If a state or local government achieves the desired outcomes, the federal government pays the state or local government and its investment partners a pre-negotiated amount. Assuming a fully successful program, the payment represents an amount that is less than the value of the outcomes to the federal government, but is more than the cost of implementation
With proposals expected to be accepted for review early next year, now is the time to prepare for a successful proposal. Community providers should work closely with state and local government entities to determine an objective, form a coalition of providers, and prepare for the feasibility study.
Look for more to come on SIPPRA and social impact bonds as this is a new development with exciting potential.