From: "Saved by Windows Internet Explorer 8" Subject: Social Impact Bonds: Lessons from the Field | Stanford Social Innovation Review Date: Mon, 6 Aug 2012 14:35:23 -0400 MIME-Version: 1.0 Content-Type: multipart/related; type="text/html"; boundary="----=_NextPart_000_0000_01CD73E0.B651B8D0" X-MimeOLE: Produced By Microsoft MimeOLE V6.1.7601.17609 This is a multi-part message in MIME format. ------=_NextPart_000_0000_01CD73E0.B651B8D0 Content-Type: text/html; charset="utf-8" Content-Transfer-Encoding: quoted-printable Content-Location: http://www.ssireview.org/blog/entry/social_impact_bonds_lessons_from_the_field =EF=BB=BF
In piloting social impact bonds, governments = have=20 already yielded some lessons from the field.
A year after the British Ministry of Justice piloted social impact = bonds to=20 reduce the 60 percent recidivism rate for the 3,000 criminal offenders = who=20 passed through the doors of a private prison in Peterborough, UK, the = innovative=20 funding mechanism captured the imagination of many social entrepreneurs. = These=20 bonds, also known as pay-for-success contracts, promise to transform the = relationship between governments, nonprofits, and funders. = =E2=80=9CSocial impact bonds=E2=80=9D=20 became one of the top=20 ten buzzwords of 2011. And local governments in England, Australia, = Canada,=20 and the US have started exploring these contracts. As state governments = at home=20 and abroad prepare to pilot these bonds next year, the processes have = already=20 yielded some lessons from the field.
The first lesson is that pay-for-success contacts may ultimately = encompass=20 several ways of engaging pure for-profit investors, impact investors, = and=20 foundations in producing social returns. Steve Rothschild, an Ashoka = Fellow and=20 CEO of Twin Cities RISE! has had some success in Minnesota with one form = of=20 pay-for-success contract, which he calls human capital performance = bonds. In=20 this mechanism, a state raises funds by issuing general obligation = bonds,=20 directs those funds to nonprofits that have generated positive social = outcomes=20 and created government savings, and uses cash unlocked by those savings = to repay=20 the bondholders. Because the full faith and credit of the state backs = these=20 bonds=E2=80=94and no state since World War I has defaulted on its bond = obligations=E2=80=94these=20 bonds will allow social entrepreneurs to access capital markets. = The $10=20 million designated toward human capital performance bonds in = Governor Mark=20 Dayton=E2=80=99s July 2011 budget made Minnesota the first=E2=80=94and = so far the only=E2=80=94state to=20 pass legislation on pay-for-success contracts.
Social Finance, Inc., in Massachusetts is exploring a different = approach to=20 engage capital markets. Like its sister organization in the UK, Social = Finance=20 might front working capital, raised from investors with a range of = risk-return=20 appetites, to nonprofits in return for a government promise to pay when = those=20 nonprofits achieve predetermined outcomes. Unlike the UK operation, = which=20 attracted only philanthropic investment for its Peterborough bond, = Social=20 Finance here might slice the expected revenue stream into t= ranches,=20 offer the lower-risk tranches to foundations, and pitch the premium = tranche to=20 investors with the highest appetite for return. (This idea might also = work for=20 UK=E2=80=99s second social impact bond, which plans to target troubled = families.)
The New South Wales (NSW) Government in Australia, which plans to = enter into=20 a social impact bond in late 2012 to address either recidivism or foster = care,=20 is exploring attracting for-profit investors by offering to share some = of the=20 bond=E2=80=99s downside risk=E2=80=94essentially buying the lowest = tranche of its own bond.
The second lesson is that the very process of implementing social = impact=20 bonds yields valuable returns for the government that engages in it. = Governments=20 that start thinking about how much return taxpayer dollars generate in = one area=20 may take that thinking to its other investments. The process of paying a = service=20 provider based on outcomes pushes the government to introduce data = monitoring=20 and evaluation systems above and beyond the ones it may be using today.=20 Monitoring systems that it needs to set up to track leading indicators, = as well=20 as final outcomes, may then be used to track outcomes for populations = not=20 engaged through the pay-for-performance contract. And evaluation systems = that=20 rigorously compare outcomes to counterfactual scenarios help push the=20 conversation around performance measurement.
The social impact bond is ultimately a learning tool for a society = that is=20 still discovering best practices. If governments already knew the most = efficient=20 uses of taxpayer money, they would not need to ask the service provider = to find=20 the best solution, as pay-for-success contracts do. And if service = providers=20 delivered known or similar outcomes, then delaying payment until we = observe=20 performance would be an unnecessary burden.
Therefore, perhaps the largest lesson, and greatest success, of this = young=20 innovation has been its ability to anchor the conversation of = governments,=20 social entrepreneurs, and impact investors around measurement, metrics, = and=20 outcomes. Nick Hurd, Britain=E2=80=99s Minister for Civil Society, recently=20 lamented the =E2=80=9Cmassive culture of risk aversion in the public = sector,=E2=80=9D that=20 his use of social impact bonds has revealed. Impact investors across the = board=20 are starting to hold their investments to more rigorous standards of = social=20 returns. And as governments innovate, they are rewriting the social = contact with=20 their citizens and businesses, as Westminster has=20 done this month.
The next half-dozen pay-for-success contracts that come online in = 2012-13=20 will expand the number of social services, types of investor, and bond=20 structures that will, in turn, increase the size and complexity of the = nascent=20 social impact bond market. And, as that market evolves, we will come = closer to=20 that transformational promise of a new social contract in which = taxpayers,=20 entrepreneurs, and governments hold each other accountable for = performance and=20 impact.
On January 18, the=20 Commonwealth of Massachusetts issued a series of requests for = proposals to=20 use pay-for-success contracting to address youth recidivism and chronic = homeless=20 in the state.
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BY steve = rothschild
thank you for including mention of the Human Capital Performance=20
Bond(HUCAP) in the article. However, there are a number of errors, =
some small=20
and some material, that need to be pointed out to insure =
accuracy:
In the=20
article it is stated that =E2=80=9CSteve Rothschild, CEO of Twin =
Cities RISE! =20
has had some success in Minnesota with one form of pay-for-success =
contract,=20
which he calls human capital performance bonds.=E2=80=9D In fact, =
while the HUCAP is=20
now a law it has not yet been implemented. We expect the pilot to get =
underway=20
within the month. Actually, Twin Cities RISE has had a separate pay =
for=20
performance contract with the state of Minnesota since 1997. it has =
been=20
hugely successful, with the state enjoying over a 600% return on its=20
investment.Those funds are not provided by a bond but rather by state =
funds.=20
The article states that the bond will be a general obligation bond =
when in=20
fact it will not and cannot for legal reasons. Rather it is expected =
to be a=20
state annual appropriation bond, which does not carry the same legal=20
obligations of a G.O., but nevertheless is accepted in the marketplace =
by=20
investors - albeit at a slightly higher interest rate.
While =
savings from=20
lower entitlement and corrections spending are likely to provide the =
greatest=20
economic value, the state will also bnefit from incremental sales, =
income and=20
property taxes as successful clients see their incomes increase from =
the=20
intervention of high performing social enterprises like workforce=20
programs.
Finally, I am the Chairman of Twin Cities RISE!, not its =
CEO; but=20
it was Invest In Outcomes(investinoutcomes.org) which developed and =
promoted=20
the Human Capital Performance Bond.
Sincerely,
Steve Rothschild
Founder and President, Invest in Outcomes
Founder and Chairman , =
Twin=20
Cities RISE!
BY Jason Burwen =
While I like the idea of pay-for-results, I wonder if this approach = will=20 produce perverse incentives of service organizations to go after the = =E2=80=9Cbest=E2=80=9D=20 clients in the service population. For example, if there=E2=80=99s an = organization=20 that works on recidivism that is in a pay-for-results contract, I can = imagine=20 they=E2=80=99d have a lot of pressure to avoid ever engaging clients = they deem at the=20 outset to be =E2=80=9Ctoo difficult.=E2=80=9D The contracting = incentives are well-intentioned,=20 but the organizations responding to them will have many reasons to = engage in=20 selection bias and artificially enhance their metrics. What do you=20 think?
BY Nicholas Gruen =
Thanks for the article, though, together with the optimism and = enthusiasm=20 for innovative approaches, I would have liked to have seen more = awareness of=20 the obvious risks - mentioned by the last commenter. It will be = interesting to=20 see how social impact bonds play out. They may offer substantial = impact and if=20 not perhaps at least insight. Let=E2=80=99s hope so.
But the perverse incentives problems will be = substantial.
BY Brian = O'Shaughnessy
Jason and Nicholas
Constructed properly, a social impact bond could actually have = imbedded=20 incentives to address the highest risk population because = =E2=80=94whether formerly=20 incarcerated, homeless or at risk youth=E2=80=94the highest risk = population costs the=20 most. Avoiding problems for one high risk individual can recoup = the=20 costs associated with 10 lower risk clients. While not every=20 governmental entity captures such detailed cost information, they = should and=20 SIBs may provide the motivation to do so in the future.
This is in fact what has happened in the UK where short term = offenders have=20 an extraordinary recidivism rate. Ultimately, much will depend = upon the=20 rigor with which the SIB intervention and terms are designed. = For the=20 integrity of the underlying investment and the efficacy of the SIB = concept, we=20 should hope that the first SIBs or pay-for-success programs are = properly=20 designed to address the =E2=80=9Cproblem=E2=80=9D and not general = ideas of cost. Viewed=20 as a political tool to reduce budget deficits, SIBs will fail. = Seen as a=20 tool to provide social services that truly address an issue they have=20 unlimited potential.
BY prakash
great post.
thanks
BY Thien = Nguyen-Trung
Michael, thanks for these lessons from the field!
I saw a very similar article like this (actualy several) and still = hold the=20 same opinion:
I suppose I should just get in line with all the others in the = industry who=20 are waiting finally, finally to hear about another case study than the = UK=20 prison example of social impact bonds being used.
I think here are some areas where we are not talking more openly = about the=20 real possibilities:
1) The big thing is the concept of =E2=80=9Cmoney for = impact=E2=80=9D
I think really what gets a bit downplayed in the many articles on = (the same=20 case of) SIBs is that it is rare to formally tie the performance of a = social=20 organizations (=E2=80=9Cimpact=E2=80=9D) to certain outcomes on a = financial instrument. If we=20 want to get excited about impact investing, we should get particularly = interested in financial instrument innovation that will map = lenders=E2=80=99=20 expectations to metrics which make sense for social organizations that = are=20 doing the borrowing. Instead, what we have nowadays is an attempt to = =E2=80=9Cfind=E2=80=9D=20 suitable organizations that fit the lenders expectations of firms from = which=20 they can make some money.
Thus, I would like to see more companies, together with impact = funders,=20 experimenting with instruments that are designed on a customized basis = around=20 what can be realistically expected from a social organization and try = to set=20 up realistic milestones. Most likely, this process will take = considerable=20 adjustment along the way to figure out a good balance so that = borrowing=20 organizations can be held to high impact expectations without breaking = their=20 backs a the same time.
And agreed with the readers above that obviously this cannot be = used for=20 all kinds of organizations to avoid odd incentives.
1) From Government to Companies
One interesting but yet-to-be-tested idea is how we can issue these = bonds=20 from social enterprises instead of governments. The amounts would be = clearly=20 smaller given limited financial capacity, but again, if a company IS=20 sustainably spinning off some cash or making revenue, perhaps we can = find a=20 way to let them access a new way of raising growth capital through new = instruments in between philanthropic grants and pure-play bonds.
I cannot wait for the first results to come in from impact = investors trying=20 this out with their star social enterprises.
Best,
Thien Nguyen-Trug
http://goodgeneration.org/
BY Rick Brush
UC Berkeley and Collective Health recently completed a white paper = on the=20 use of social impact bonds in health, commissioned by the California=20 Endowment. The paper is linked here: http://collectivehealth.word= press.com/2012/04/02/health-impact-investing-a-better-way-to-spend-2-6-tr= illion/