Louise Savell, co-founder of U.K. nonprofit organization Social Finance, writes about the potential social impact bonds hold.
This is the story of how a 56-year-old ex-con in Peterborough, England, named Bryan, helped inspire an innovative new funding tool for the delivery of public services around the world.
The year was 2007 and prior arrests for public drunkenness had landed Bryan in prison, repeatedly. A judge ordered him to refrain from drinking in public; a simple directive that proved impossible to follow given that Bryan was both homeless and addicted to alcohol. Merely opening a can of beer on a street corner was enough to land Bryan behind bars. He became a regular at the Peterborough prison.
He was not alone. At the time, the national reoffending rates for offenders who had served prison sentences of under 12 months was around 60%. People like Bryan, on average, reoffended five times within a year of their release.
This revolving door was costing the government tens of millions of pounds a year. And there appeared to be no end in sight. No one in or out of government was responsible for supporting or monitoring this group of offenders to help them stay out of prison. They left prison with about £46 (US$ 64) in their pocket, often with nowhere to live, no job, and no family waiting for them.
At the time, my colleagues and I at Social Finance were in talks with the U.K. government about how it might close gaps in its delivery of social services and improve the quality of existing government services. We suggested that they could provide better support for people like Bryan by harnessing the skills and capacity of nonprofit organizations and other nongovernment service providers.
To do so efficiently and effectively, we needed to overcome two hurdles: nonprofits needed access to upfront funding to participate in this potential new market for service delivery; and government needed to structure contracts so that they paid for “outcomes” (reducing the reoffending behavior of Bryan and others) and not “outputs” (case workers checking a box that they had met with them each week).
With these goals in mind, we developed a new outcomes-based investment mechanism — impact bonds (known as pay for success contracts in the U.S.). Impact bonds are differentiated from other outcomes-based contracts (sometimes called results-based finance, pay for results, and pay for performance contracts) by the involvement of private investment that takes financial risk by pre-funding service delivery in the expectation that they will be repaid, with a risk premium, if and when better outcomes are achieved.
This is how impact bonds work: impact investors provide the risk capital to scale the work of high-quality service providers (who are often nonprofits). Governments (and/or philanthropic foundations) pay those investors based upon the achievement of predefined outcomes.
Over the past decade, more than 200 social impact bonds have been issued around the world. They have offered governments and philanthropists an innovative mechanism for improving a range of social outcomes from employment and child welfare to neonatal survival and sustainable housing.
Philanthropy can use such contracts to drive new models of social innovation for knotty social issues, to improve the efficiency of their grant-making by enabling adaptive delivery of services or to supercharge their impact investing portfolio by tying financial returns more tightly to results.
Here’s what you need to know about this increasingly popular tool:
Here’s how this played out with regard to Bryan and his fellow short-sentenced prisoners.
My organization, Social Finance, signed a contract with the U.K. Ministry of Justice to launch the first social impact bond in 2009. We agreed that we would be accountable for reducing the reoffending behavior of 3,000 male prisoners leaving Peterborough prison after a short prison term over a six-year period. We contracted with four nonprofit organizations: St Giles Trust, Ormiston Children and Families Trust, YMCA, and Sova, to deliver support services.
Case workers from these organizations worked with the former prisoners for up to one year following their release. The results were encouraging. Bryan, for one, was finally off the street and in transitional housing. Across the cohort of 3,000 former prisoners, we saw a 9% reduction in reoffending compared to a national control group — above the government’s target for the program of a 7.5% reduction in reconviction events.
As a result, our 10 U.K. foundation investors (including the Barrow Cadbury Trust, Esmée Fairbairn Foundation, and Friends Provident Foundation) who together committed £5m (US$ 7m) to this social impact bond, received their initial capital back plus a return of just over 3% per annum for the period of their investment.
Subsequent impact bonds have focused on a range of sectors including employment and skills, child and family welfare, homelessness and health. Of the 206 impact bonds launched worldwide to date, investor returns have varied in connection with outcomes risk, but a number have reported double-digit financial returns alongside substantial social impact — including improving the lives of millions of people like Bryan.
Around the world, outcomes-based approaches such as impact bonds are being used as a tool to deliver more impact per dollar spent.
In 2015, the Children’s Investment Fund Foundation acted as the outcomes funder (function one in The Impact Bonds Process graphic above) on the world’s first development impact bond in Rajasthan, India. The program aimed to get out-of-school girls into school and learning. A local nonprofit, Educate Girls, pre-financed with investment from the UBS Optimus Foundation, worked with 7,300 girls over three years. In their final year, the program delivered literacy and numeracy gains equivalent to almost an additional full year of instruction at matched control schools. The investor recouped its initial funding plus a return of 15%.
In 2019, the Stone Family Foundation used impact investment to pre-finance the delivery of sanitation services (function two in The Impact Bonds Process graphic above) by the nonprofit organization iDE in Cambodia. The ongoing Cambodia Rural Sanitation Development Impact Bond aims to bring sanitation to 1,600 villages and help Cambodia achieve the “open-defecation-free” designation by 2025. Just one year in, the program has already triggered more than US$ 3m in outcomes payments from the U.S. Agency for International Development by enabling access to sanitation for 89,000 people in 500 villages.
Since 2016, Fundación Corona alongside other foundations, invested in Colombia’s first impact bond focused on job training and employment support for unemployed adults in the cities of Bogotá, Cali and Pereira. But beyond that, the Fundación has sought to build the interest and capacity of both government and providers in outcomes-based contracts. The government of Colombia co-funded outcomes with the Inter-American Development Bank and the Swiss State Secretariat for Economic Affairs. Of the 1,855 young workers, women and ethnic minorities who received support, 46% were placed in a formal job, and 79% stayed in employment for at least three months. Investors received an internal rate of return of 8.2%. Government has incorporated learnings from the program to inform a second employment social impact bond targeting six-month job retention and is using the contracts to drive public sector learning around employment service costs, effectiveness, and success metrics.