By Lauren Kotkin, Exponent Philanthropy

Our thanks to Arabella Advisors’ Cynthia Muller, Senior Director, Impact Investing, for her help with this article. 

A social impact bond (SIB), also known as a pay for success contract or a social benefit bond, is a contract with the public sector in which a commitment is made to pay for improved social outcomes that result in public sector savings. First created in the United Kingdom in 2010, the SIB model is being replicated in more than five countries, including the United States.

In 2012, New York City became the first U.S. jurisdiction to launch a SIB. The $9.6 million project aims to reduce recidivism among young men exiting the Rikers Island prison facility and involves the participation of Goldman Sachs, Bloomberg Philanthropies, MDRC, Vera Institute, Osborne Association, and Friends of Island Academy. Since then, more than two dozen SIBs or pay for success contracts have launched or are in development.

A word on SIBs from one of the first U.S. nonprofits to participate

In short, a SIB is an investment tool that attempts to scale what works: philanthropy finds good ideas, government creates conditions for innovation, and investors scale ideas in the marketplace. If the program works, based on criteria determined in the deal’s contract, the investors get money back plus a return on investment (paid by government or its intermediary). If the program fails, government pays nothing, allowing government to invest only in programs that work. 

Who are the players?

Each deal is a cross-sector investment: public–private–nonprofit. It can’t work without any of the parties. According to this Center for American Progress fact sheet, these are the potential players:

• A government agency that defines the outcome
• An external organization that promises to deliver the outcome
• A beneficiary population who receives services
• Investors who fund the needed interventions upfront
• Service providers who perform the interventions

Because SIBs involve government with its many layers of accountability, deals often take up to one year or more to put into place. Legislation is even needed in some states for this type of partnership, so, to be involved in SIBs, you’ll need patience. Also, as of now in the United States, only certain types of investors (e.g., qualified investors) may put money into SIBs.

Can you apply SIBs to any social issue?

After some research, Social Finance US determined that not every social issue is scalable with an SIB. Some “SIB-able” issues, ones that you can easily apply the SIB model to, include recidivism, juvenile justice, child welfare, early childhood education, and veterans’ issues (specifically employment).

Do SIBs work to solve the social problems?

We don’t know yet. So far, there are no metrics on deals in the works, but we can expect them as deals expire in the coming years.   

Who leads the SIB field? 

Right now, according to Tracy Palandjian at Social Finance US, the SIB market is the free market at work. There are limited restrictions to allow the financial markets to solve social problems creatively, and there isn’t a single place a funder can go to find all SIB deals underway or being investigated.

That said, there are a few well-respected groups actively engaging in transactions:

• Nonprofit Finance Fund
• Social Finance US – Its British arm launched the first SIB in 2010.
• Third Sector
• White House Social Innovation Fund

Also, a new SIB lab at Harvard’s Kennedy School helps with the technical side of SIBs.

To learn more, start with Nonprofit Finance Fund, the only organization that provides explicit education on SIBs, including resources for those new to the model.

In the news

Can Social-Impact Bonds Really Have Big Impact? (Chronicle of Philanthropy subscribers)
Oregon, Washington Programs Win Funds to Study Pay for Success
London Theater Pioneering Social-Impact Bonds for Culture

Senior Program Director Lauren Kotkin plans a range of educational programs for the Exponent Philanthropy community, including conferences, webinars, and conference calls. She also dedicates a portion of her time to managing our resources on investments. Previously, she worked at the Council on Foundations in the Family Foundation Services department. Lauren holds an undergraduate degree from Duke University and an M.Ed. from Lesley University.