Exploring Social Impact Bonds

January 24, 2014

As budget writers continue to face growing demands for increased spending with limited resources, alternative ways of delivering services are being explored. One potential option worthy of consideration are "Social Impact Bonds," or pay-for-performance contracts with non-profits/private businesses to help deliver certain social programs. This relatively new method of service delivery is now getting attention in Washington with the introduction of HB 2337: Concerning public-private financing for prevention-focused social services and health care services.

According to the intent section for HB 2337 (in-part):

The legislature finds that there are many prevention-focused social service programs and services for health care that demonstrably result in positive impacts for individuals and families that are cost-beneficial and that efficiently utilize government resources. However, because government resources are limited, the state is often unable to fund these programs or services. 

The legislature also finds that new, innovative financing models, such as social impact bonds, are emerging, and these new models allow the upfront investment of funds from nongovernment entities. These upfront investments provide financing needed to provide prevention-focused programs and services. These new, innovative financing models provide an opportunity for governments to shift away from a model of paying service providers for a defined quantity of services to a model where providers are paid only upon the successful achievement of agreed-upon financial and social outcomes.

So what exactly is a Social Impact Bond? Here is how the Reason Foundation describes them:

Under a prototypical social impact bond, private philanthropic groups and other financiers fund social service interventions to be delivered by nonprofits and other nongovernmental organizations on behalf of governments under a pay-for-success contract model. If the privately financed interventions improve social outcomes and save public funds—essentially by getting better results than existing government social programs—investors would receive success payments from government that generate a return on investment. If outcomes do not improve, government doesn’t pay, placing the focus squarely on implementing evidence-based practices that deliver results, lest investors risk their investments.

It is important to note that the term 'social impact bond' is somewhat misleading, as these programs are not typically derived from government-issued bonds; rather, they are performance-based contracts in which private investors provide upfront capital to launch the programs, with costs recouped later via a government success payment only if pre-determined outcome targets are met.

Wisely realizing the impact of Social Impact Bonds is still emerging, the sponsors of HB 2337 set up a steering committee to recommend a pilot project to determine if this type of public/private pay-for-performance model will work in Washington.

Should the Legislature decide to move forward with HB 2337 it will not have to start from scratch. The Harvard John F. Kennedy School of Government has created this primer: Social Impact Bonds: A Guide for State and Local Governments.

As noted in the Harvard Kennedy School publication:

The social impact bond model is a promising new approach that combines performance-based payments and market discipline. It has the potential to improve results, overcome barriers to social innovation, and encourage investments in cost-saving preventative services. It does this by ensuring that public funding goes only to those interventions that are clearly demonstrating their impact through rigorous outcome-based performance measures, transferring the risk of program failure to the private sector, and providing an effective springboard from which state and local governments can determine which interventions work and then scale up successful innovations . . . If the intermediary fails to achieve the minimum target, the government does not pay.

The careful approach proposed by HB 2337 looks to be a good way for Washington to explore whether Social Impact Bonds have the potential to deliver certain social services on cost effective basis using pay-for-performance contracts with non-profits and private businesses.

Update (1/27)

Here is video of WPC's testimony on HB 2337.

Under a prototypical social impact bond, private philanthropic groups and other financiers fund social service interventions to be delivered by nonprofits and other nongovernmental organizations on behalf of governments under a pay-for-success contract model. If the privately financed interventions improve social outcomes and save public funds—essentially by getting better results than existing government social programs—investors would receive success payments from government that generate a return on investment. If outcomes do not improve, government doesn’t pay, placing the focus squarely on implementing evidence-based practices that deliver results, lest investors risk their investments. - See more at: http://reason.org/news/show/social-impact-bond-initiatives#sthash.rRp1cMKv.dpuf
Under a prototypical social impact bond, private philanthropic groups and other financiers fund social service interventions to be delivered by nonprofits and other nongovernmental organizations on behalf of governments under a pay-for-success contract model. If the privately financed interventions improve social outcomes and save public funds—essentially by getting better results than existing government social programs—investors would receive success payments from government that generate a return on investment. If outcomes do not improve, government doesn’t pay, placing the focus squarely on implementing evidence-based practices that deliver results, lest investors risk their investments. - See more at: http://reason.org/news/show/social-impact-bond-initiatives#sthash.rRp1cMKv.dpuf