In the autumn of 2010, the first social impact partnership contract was launched by Social Finance, Ltd. in England as a means to reduce recidivism among offenders from the Peterborough Prison. Since then, Social Finance was launched in Boston to support the development of social impact partnerships in the United States, and numerous states and cities have efforts underway to implement these innovative financial instruments that connect the social sector to the capital markets and generate both beneficial social outcomes and financial returns. As Linda Gibbs, deputy mayor of New York City, describes:
Social impact bonds increase the opportunity for social policy to evolve because they are designed to raise private money to support programs and services that advance the public good and help move the government towards outcome-based contracts.
This novel approach to addressing complex social problems just may be the way to create real impact that has been illusive for many approaches in the past.
How Do Social Impact Partnerships Work?
The social impact partnership approach creates a new kind of relationship between investors, non-profits, governments, and intermediary organizations that facilitate these partnerships. The social impact partnership approach raises private investment capital to fund prevention and early intervention programs that reduce the need for expensive crisis responses and safety-net services. The government repays investors if the interventions improve agreed upon metrics of social impact, such as reducing homelessness or the number of repeat offenders in the criminal justice system (See www.socialfinanceus.org for a white paper on the subject. The projects on which these partners collaborate would be of moderate duration and would likely be an expansion of a successful program in those cases where the organization running that program does not have the financial resources to increase the number of individuals it currently serves.
Prior to the launch of such a project, these partners agree on the specific outcomes that they are seeking to achieve. For example, they could agree to achieve a 10 percent increase in employment rates of structurally unemployed individuals over a five-year period. If the project meets that outcome, then the government repays investors their principal plus a rate of return. For example, if a job-training project leads to having structurally unemployed individuals find jobs and maintain those jobs for a stated period, the government unit would agree to pay investors, drawing upon government savings accrued as a result of these successful social outcomes.
Who Does What?
In a social impact partnership arrangement, the government plays the role of "outcome payer," or the organization repaying investors upon the success of a project. Contracting with an intermediary organization to develop and manage the contract for the social impact partnership, the government agrees to pay investors back their principal and a rate of return if the project achieves the desired outcomes. This role could also be played by a foundation or corporation but normally is not because the investor may not have the expertise to manage the contract. In cases where the government is the "outcome payer," the nature of the agreement would likely take legislative authorization.
Investors provide the working capital required for the project, transferring funds through the intermediary to pay nonprofit service providers and cover the costs of intermediation and validation. Investors might include philanthropic foundations, banks with Community Reinvestment Act requirements, high net worth individuals, and eventually pension funds or other institutional investors.
In addition to structuring the financing and raising the capital, the intermediary contracts with nonprofits, provides them with funding to deliver services, and supports these organizations with data-driven support that helps achieve the desired outcomes. The intermediary normally would have philanthropic or nonprofit networks with experience in programmatic and financing experience.
While the intermediary supports its nonprofit partners in managing performance throughout the project, an independent validator determines whether the project met its predefined outcomes and whether payment will be made.
Greater accountability is expected to occur through the negotiation process between stakeholders. Impact measures will be better defined in the contract for the benefit of all the stakeholders. The funding government unit will want to ensure that it is experiencing reduced costs so it will want to define the project improvement metrics in terms that indicate real impact on the problem. Only in defining the proposed impact appropriately will the government unit protect itself from increasing costs rather than the decreasing of costs associated with the achievement of successful social outcomes. Investors have an interest in specific and achievable social outcomes, as their payment is dependent upon them. This structure allows nonprofit providers to focus on tracking their performance and managing their organizations to achieve the desired outcomes. Intermediary organizations have the resources and tools to assist their nonprofit partners in assessing progress and managing the effort to success.
One of the benefits of the using social impact investing is that it should be self-regulating. The different stakeholders have a clear vested interest is defining outcome in ways that are real and will have an effect on a community. If a nonprofit, during the project, learns that it is only providing part of what is needed to reach the goal, then it will be motivated to better define is scope of activities in order to reach the impact metric. For example, let's say the nonprofit organization that does job skills training for previously incarcerated individuals discovers that other needs have to be met such as providing for the family while the individual is going through training, medical care for bad teeth, providing appropriate clothes and transportation to the interview location. For the nonprofit to meet the desired metrics, it may have to increase its scope and provide for the larger needs of the individual to keep these other disruptors from keeping the organization from reaching the desire metric. As Brenda Palms-Barber, CEO of the North Lawndale Employment Network and Sweet Beginnings (a Chicago-west side program) said they had to expand their services to residents in order to meet their full needs in order that her organization could have an even larger impact on the residents of the community.
What of the investors, how will they help improve the accountability of what they are funding? Many foundations are frustrated with the difficulty of defining and seeing the impact of their grants. The use of social impact investing helps them to better define the impact metrics, as this is done in the negotiation process. In addition, these grants become investments with the expectations of return upon success. This will enable the foundation to fund additional projects and help its overall impact of its programs on society.
And the Potential Down Side?
Detractors to social impact investing say it is difficult to determine social impact. Supports of the approach would agree, but retort with at least there is a better effort to determine social impact in these programs between all the stakeholders rather than some programs that seem to assess activities rather than impact. For example, the health care facility that defines its performance on how many procedures it has performed on patients rather than having a measure that assesses the quality of health of its target population. With better assessments of impact, behaviors become more directed to focusing on those activities that will be correlated with impacts rather than tangential activities.
A second major concern is that funding will gravitate to the easier-to-measure, more successful programs. That seems to be a fair assumption as a foundation would be more inclined to support those programs that will return their money with less risk. However, having a return on their investment will enable the organization to reinvest in another project and another. Successful experience of social impact investing may lead to developing more focused approaches to solving other critical social issues that will lead to more pronounced impacts making the approach to improving social welfare more effective and efficient.
While the track record in using social impact partnerships is rather short, given their derivation only a few years ago, there seems to be great potential in the approach to help address some of the more vexing problems of society. It is not easy to develop a working relationship between investors, nonprofits, and related government funding bodies, but there is potential here to create the kind of partnerships that are needed to make a difference.