Impact Bonds

The term “Social Impact Bond”, or “SIB” has been used quite widely, and with a variety of different meanings. Although the detail of how a Social Impact Bond works can be quite complicated, the central idea is very simple. A SIB can be thought of as being just like a very simple company:

Let’s imagine a wholesaling company, Impact Ltd. that buys footballs from a factory and sells them to a shop. Impact Ltd. has just two contracts, one each with the factory and the buyer. With the factory, the contract says that Impact Ltd. will pay £1m at the start, and the factory will make as many footballs as it can with that £1m. The second contract is with the shop. This says that the shop will pay £1 for each football made.

In order for Impact Ltd. to start up, it needs £1m. It gets this from investors. In return, the investors will get back £1 for each football sold.

Once the two contracts have run their course, Impact Ltd. will be wound up.

If the factory makes fewer than a million footballs, then the investor ends up losing money; conversely if the factory makes more than a million footballs, the investor makes a profit.

In many ways, that is all a SIB is. Instead of making footballs, we may have a service delivery, for example reducing unnecessary A&E attendances from the current level, or a count of the number of days in which no “at risk” fish are landed at Torbay. In place of the football factory you have an organisation tasked with delivering an appropriate service to meet the set goals as best they can. And finally, in place of the shop we have a funder - often the government - but it could equally well be a goal-driven philanthropic organisation.

To date, all of the Social Impact Bonds which have been launched have had the public sector as the funder, either at a national or a local level. Several SIBs in development are looking to augment this with corporate funders.

Where the goals are Social, they are usually called Social Impact Bonds in the UK, and most other countries. In Australia they are more commonly known as Social Outcome Bonds or Social Benefit Bonds, and in the US they are sometimes referred to as Pay-for-Success Bonds.

By analogy, people also talk about Health Impact Bonds, Development Impact Bonds, Environmental Impact Bonds, etc.

Social Impact Bonds have a number of advantages for each of the actors involved. The main ones are: For public sector funders, they enable charities and mutuals to compete with the private sector in tendering for payment-by-results work.
For service delivery companies they enable an appropriate transfer of risk, working capital funding, and the ability to have much longer-term contract (typically around 3-6 years rather than the traditional 1-2 years).
For investors, there is the opportunity not just for an economic return, but also for a social return (known as a “double bottom line”.)

A summary of the Social Impact Bond market is available here.