Could Social Impact Bonds Be the New Form of "Business as Unusual" that is Needed? An Analysis of this New Financial Instrument

By: Sunita Grote, INSEAD MBA (13D), bio below

 Social Impact Bonds (SIBs) have received significant attention since the launch of the first SIB in Peterborough (UK) in 2010. Over the years, a significant number of SIBs have been launched, mainly in the US and the UK, aiming to address a range of social issues including recidivism, employment and childhood asthma. Though the jury is still out on the SIB’s actual effectiveness in achieving social outcomes, initial reviews of the Peterborough SIB showed promising results (formal evaluation results are expected in April 2014) and the model has received considerable political and financial support.

The SIB model’s value lies in leveraging the resources and strengths of various players to achieve social impact. Private investors provide upfront capital to finance social interventions. If the interventions achieve their desired social outcome, governments return the investment (plus interest) to private investors. Governments therefore provide financial resources only for interventions that have proven impact. In Development Impact Bond (DIBs), development agencies, rather than governments, are the ultimate outcome payers.

The world is currently busy defining the next set of goals for sustainable development for the world after 2015. The Millennium Development Goals, set in 2000 to guide the world’s political and financial support for development are approaching their deadline and have shown varied levels of success. Progress on tricky – and at times controversial – areas remains a far cry from where it should be. Financial resources are lacking in quantity, quality and focus. What is needed? We need more of the things that we know work – including foreign aid (contrary to what we were told at INSEAD, development aid and government-led efforts have worked- even Bill Gates agrees!) – but also business as unusual, new partnerships, resources from new sources, innovative approaches. Could Social Impact Bonds be business as unusual that is needed?

The answer is an unequivocal ‘maybe, it depends’. 

While SIBs have the advantage of bringing new partners to the table and mobilizing capital from new sources, the partnership does not in the long-term increase the size of the pie of overall available resources. Governments (or development partners in the case of a DIB) still have to ultimately cover the costs of the interventions, if they were proven to have achieved social outcomes. For some emerging markets the provision of upfront capital by private investors will still be of interest however, as they expect domestic resources to be more readily available in the medium-term. However, is capital through a SIB really that attractive to governments? The Peterborough SIB could ultimately cost government upto 13% in interest – a sizeable cost compared to 1% or less interest for World Bank IBRD loans available to low-income countries.

SIBs do not address questions of long-term sustainability since a one-off payment by government does not guarantee a long-term, continuous investment in any particular social issue or intervention. What happens after the end of the SIB is the question that remains, since the partnership itself does not necessarily catalyze systemic changes in policies, public budget allocations or private investment practices that will lead to sustainable responses. Providers still remain dependent on further injections of external financing after the SIB has ended.

Political, legal and social barriers rather than a sound evidence base often shape the amount and allocation of resources for social issues. HIV and women’s health are known examples of sectors in which financial investments often follow ideology rather than evidence. Since the government would ultimately still be required to pay for the outcomes, political support is still required to use SIBs to scale up a particular intervention. Private investors have concerns related to their own brand image. SIBs therefore potentially skew investments to issues that are considered less controversial and less complex, focusing on low-hanging fruit and reinforcing neglect of more complicated social outcomes.

In order to leverage the potential that SIBs could bring for sustainable development, it is critical to build in some safeguards to ensure impact. In order to achieve and sustain any outcomes achieved, the SIB must be well integrated with other ongoing efforts by the public, private and civil society sector. Social outcomes in one area (e.g. increased access to primary education) cannot be sustained without outcomes in others (e.g. improved maternal health through family planning and broader health services). Any outcomes achieved under a SIB of limited duration could therefore be lost, if the model is not tied in with other stakeholders and interventions. Engagement with the larger field of players, building partnerships beyond the SIB will be critical to leverage long-term social change. Last but not least, any attempts at designing and implementing a SIB must absolutely be conducted in close collaboration with the communities who will ultimately benefit and who will drive social progress.

Sunita Grote has ten years international experience working on HIV and health issues in developing countries. While at INSEAD (MBA ’13D), Sunita conducted an ISP assessing the potential of SIBs for the response to HIV in emerging markets. She now advises organizations in social impact on financial sustainability including the use of social finance and entrepreneurship.