What Every Not-for-Profit Leader Needs to Know about Social Impact Bonds

With results just in from Australia’s first Social Impact Bond, the proof is in the pudding that this new business model for social change deserves attention. As government purse strings tighten and philanthropic funds become increasingly competitive, Not-for-Profit leaders who understand this concept will have the edge in ensuring organisational sustainability in a tough climate. This article covers the nuts and bolts of how Social Impact Bonds work, their progress to date, and how to incorporate this mechanism into your funding model.

A New Business Model for Social Change

As mentioned in our recent whitepaper, NFP leaders often get distracted by their funding model, rather than focusing their attention on how to adapt their business model to create greater value to current and potential stakeholders. Get this “value” piece right and the funding model will follow. One of the benefits of the Social Impact Bond is that, by the very nature of its construction, it forces NFP service providers to design business models that deliver tangible, measurable value in order to ensure the funds flow in.

So how does it all work? In a nutshell:

1. Private sector absorbs risk by providing seed capital

2. Service delivery organisations run programs to deliver outcomes

3. Impact is quantified through a combined Economic / Social Return on Investment approach, demonstrating government saving

4. Government repays private sector, with interest

Social Impact Bonds

Hughes, J., Scherer. J (2014) Foundations for Social Impact Bonds: Social Finance

Social Impact Bonds: A Win Win Win situation

A quick “What’s In It For Me” precis demonstrates that Social Impact Bonds facilitate multiple benefits for multiple stakeholders:

1. Service providers: receive seed funding and have the flexibility to adapt their business models as data is received in an entrepreneurial manner (rather than with government funding which generally mandates that service provides not stray from the original submitted plan

2. Government: does not have to take the risk of investing in a program that does not yield results. If the program successful, government also saves significant dollars on high cost burdens to the system

3. Investors: are provided with an opportunity to invest in a social cause with the comfort of a level of accountability on the service provider. If the program is successful the investor receives a dollar return on their investment

4. Service Recipients: personally benefit from the program e.g. through mental health treatment, accommodation assistance etc

5. Society: enjoys a reduction in problem (e.g. decreased crime) and benefits from the rehabilitated recipient’s contribution to society (e.g. increase in productivity).

The Origin of the Social Impact Bond

March 2010 the first Social Impact Bond was launched, funding a service aiming to reduce prisoner recidivism. 3000 offenders from Peterborough prison were separated into three cohorts and all received the service claiming to reduce recidivism. The recidivism rate of each cohort was measured against similar groups that were not in the program. The deal was that if the recidivism rate of the selected cohorts had decreased by 10% then government would pay an outcome return to investors of 7.5%, with the potential to return up to 13% with increasingly reduced recidivism consistently across the three cohorts. For a comprehensive update on progress to date, watch this TEDx talk from Social Finance’s Toby Eccles.

The Latest on Social Impact Bonds In Australia

Named ‘Social Benefit Bond’s down under, the NSW government has entered into two contracts and other states have announced that they have been added as a strategic priority to the agenda. The first ($7 million) Social Benefit Bond is funding UnitingCare Burnside’s New Parent and Infant Network (Newpin) program– which promises investors a return if the number of children in foster care is reduced. The initiative involves working to restore children in foster care with their families and preventing at-risk children from entering care by educating parents about family environments. With positive evaluation outcomes, this month the bond made its first return to investors with a yield of 7.5%.

Read more here.

So how do I, as a NFP leader, go about establishing a Social Impact Bond?

There are a number of things that need to be considered when exploring whether a Social Impact Bond is an appropriate mechanism for funding your Not-for-Profit initiative. Key questions include:

  • Is the problem you’re addressing a significant cost to government?
  • Have you got the capability in house or engaged an external party to develop a Cost Benefit / Social Return on Investment framework and evaluation method?
  • Do you have a clearly defined strategic direction, business model, key performance indicators and correlating execution roadmap?

All of these components will help inform your pitch to government and investors. Finally, structural mechanisms such as the financial and legal requirements need to be addressed, but it is a waste of time to start with these, before determining the feasibility of using Social Impact Bonds at all. 

Social Impact Bonds provide an exciting opportunity in the realm of sustainable social business models. If you’d like to discuss this further, feel free to get in touch with one of the impact investing team members at Spark Strategy.

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