September 11, 2014
Despite its name, a social impact bond (SIB) is not a debt instrument and does not require a government to issue debt. Rather, an SIB is a social impact financing arrangement whereby funds are raised from private sector investors to provide social service agencies the funding necessary to deliver their services. The government enters into a contract with a private sector entity working as an intermediary and the private sector entity’s chosen social service providers. The private sector entity assumes the performance risk of the social services program and is repaid entirely or almost entirely based upon achieving performance or outcome targets. Payments typically increase for results that surpass the agreed upon target outcome, up to an agreed upon maximum amount.
History of Social Impact Bonds
The United Kingdom (U.K.) Ministry for Justice, influenced by the fact that 60% of short-sentenced prisoners re-offend within a year of release and the belief that rehabilitation services could bring down the recidivism rate and save the government money, issued the first social impact bond in 2010 when it contracted with Social Finance U.K. to provide services to reduce recidivism by prisoners in Peterborough, England. Social Finance raised $8 million from social investors to provide funding to a social service agency, the St. Giles Trust, which was hired to deliver services to 3,000 male prisoners serving short sentences. The U.K. Department of Justice will repay the investment by Social Finance U.K. only if the reoffending rate of the treated prisoners falls by a minimum of 7.5% by 2016 as compared to that of a comparison group of prisoners at other prisons not receiving the services. Results as of August 2014 demonstrate an 8.4% reduction in reoffending compared to a national baseline. As such, Social Finance U.K. investors are likely looking to receive a positive return, including the return of capital funds, on their investment as early as in 2016.
Social Impact Bonds and Illinois
Since the inception of the social impact bond in the U.K. in 2010, states like New York, Massachusetts and even Illinois have begun to utilize this social impact targeted financing to fund a variety of social service interventions. In early 2013, Governor Pat Quinn launched a Pay for Success initiative in Illinois, “aiming to provide critical resources to address community needs while decreasing long-term negative outcomes that are costly for taxpayers.” Later that year, Governor Quinn issued an RFP from organizations that wished to enter into a SIB, or Pay for Success contract with the State across two issue areas:
(1) Increasing placement stability and reducing recidivism for dually involved youth, or those youth involved in both the child welfare and juvenile justice systems in Illinois; and
(2) Increasing educational attainment and employment opportunities for dually involved youth upon returning to their communities.
The first contract awarded under the SIB initiative went to One Hope United, in partnership with its umbrella organization, the Conscience Community Network (CCN). The CCN is a collaboration of seven child and juvenile welfare providers. In its winning proposal, One Hope United proposed a project based on the Crossover Youth Practice Model, a set of research-backed, proven interventions targeted at dually involved youth. Third Sector Capital Partners, a nonprofit advisory firm that collaborates with government, funders and providers to address social need through social innovation funding, will provide financial advisory services to CCN. The Harvard Kennedy School of Government’s Social Impact Bond Technical Assistance Lab (SIB Lab), in conjunction with the Rockefeller Foundation, received a grant from the Aurora-based Dunham Fund to support the initiative in Illinois. The program will serve approximately 800 youth cared for by Illinois’ Department of Children and Family Services with current or prior justice system involvement by targeting an improvement in placement outcomes and reduction in recidivism through evidence-based community-centered alternatives to institutional care.
According to a press release issued in May, the Governor’s Office of Management and Budget will be entering into negotiations with One Hope United regarding the contract specifics in the near future.