Expanding the Pie: Social Impact Bonds

Social Impact Bonds Overview

An emerging approach in the United States to support evidence-based social programs is social impact bonds, which we consider part of the larger impact investing sector. Social impact bonds provide investment capital to fund evidence-based social programs delivered by highly effective providers. In this model, as currently executed, government agencies agree to pay external organizations a pre-arranged sum, and they agree to return the investor’s principle, but only if the funded programs achieve predefined results and presumably create cost savings as well in order to fund the returns.

According to Social Finance, social impact bonds require interventions and programs that are evidence-based, provide sufficient net savings within a time horizon, and are replicable and scalable. Ultimately the financing vehicle attempts to bring new money to address and advance qualifying social outcomes – we consider this an ‘expanding the pie’ strategy and funding to be potentially additive to the work in Strive cradle to career communities.

Using Data to Make Decisions

Presently, we see preliminary alignment between the social impact bond concept and the work that happens in Strive Cradle to Career Communities. The initial component to the social impact bond financing model is the need for rigorous data. As the Strive Theory of Action asks for routine collection and analysis of key data points, we feel comfortable that our more advanced sites could be in a position to provide meaningful outcomes data necessary to support social impact bonds. We would expect that sites that have implemented a comprehensive data system and focused on student-level data would be particularly well-suited in this regard. However, there would be a significant lift to provide data in support of social impact bonds that may extend beyond current data practices in less mature cradle to career sites.

Saving Costs and Supporting Outcomes

The next criteria, demonstration of clear cost savings over a defined time horizon, suggests that the social impact bonds would have to be anchored around very specific and visible transition points in the cradle to career pipeline. Reasonably, we are looking at social outcomes that emerge within two years of intervention and can be affirmatively verified.

For example, for the social impact bond that is supporting early education in Salt Lake City, UT, the social outcome is reducing the number of children who are placed in special or remedial education based on their participation in the Utah High Quality Preschool Program[1]. At the time of their entry into school, investors will know how many students are and are not in special or remedial education and related cost savings to the public can immediately be calculated. In Strive communities, you could see a corollary to students at not only the school entry point but also those entering higher education without the need for remedial coursework and then demonstrate related public costs savings.  As currently constructed, social impact bonds do rely on a cost savings or cost avoidance model though an economic benefit or value creation model could be considerably more compelling to private investors.

Positioning to Scale

Finally, the scalability question for Strive relies heavily on our ability to align communities on a discrete set of materially similar outcomes, and as previously mentioned, have consistent and reliable data to provide the evidence base. As we look across our Network, sites in Sustaining and System Change are more likely candidates for this type of model if only based on their existing data collection processes and evidence-based provider base.

At the Strive Cradle to Career Network Convening in Dallas, TX, we will have some of the nation’s leading experts discussing social impact bonds and their potential application to cradle to career communities during the Lunch Plenary, “Social Impact Bonds: How Civic Infrastructure Helps Sites Get Ready for Creative Financing,” on Thursday, September 26, 2013. In addition to leaders from KnowledgeWorks, the Lumina Foundation, United Way Salt Lake City, and the U.S. Department of Education, executives from both Social Finance and Third Sector Capital Partners will join the conversation. We look forward to exploring this emerging financial model with our sites in a few weeks.