Social Impact Bonds / Pay-for-Success Contracts

As countries around the world spend time and resources getting serious about how private investors can tackle deep-rooted societal issues, which usually become the first to fall victim to government program cuts, they are coming up with some innovative ideas. One in particular is known as social impact bonds, or pay-for-success contracts as they are commonly known in the U.S. Social impact bonds or pay-for-success contracts (SIB/PFS contracts) are based on a commitment from government to use a portion of the savings that result from improved social outcomes to reward non-government, private individuals and venture capital investors who fund the early intervention activities. Ironically, implementing more projects like our award-winning Redirection project can provide the exact results conceptualized through the social impact bond/pay-for-success model.


Source: J. Liebman. Social Impact Bonds: A promising new financing model to accelerate social innovation and improve government performance, Feb. 2011. pg. 11.

A leader in the conversation about social impact bonds is Social Finance LTD. In their September 2010 report, titled Social Impact Bonds Unlocking investment in rehabilitation, social impact bonds 'seeks to drive significant non-government investment into addressing the causes of deep-rooted social problems with returns generated from a proportion of the related reduction in spending on acute services. The ambition is to create positive government spending cycles that enable significant tax payer savings through improved social outcomes.'

EBA's Redirection project in Florida offers an ideal template for application of this creative approach to financing government services. Recently noted in a report from the Southern Poverty Law Center and Florida's Tax Watch organization, Redirection is a project that produces better outcomes than incarceration at significantly less cost, saving the state more than $170 million since its inception while improving public safety. Together with Steve Aos's groundbreaking work, tying high quality implementation of certain top tier programs to a specific return on investment can provide the basis for a private sector investment opportunity.

For example, with EBA's performance-based contracts, if a private investor wanted to fund the early intervention activities of a project like Redirection with the social bond structure, the government would use a proportion of the savings that result from improved social outcomes to reward the investors. Everyone wins with better outcomes for the youth and families served, government systems and taxpayers who traditionally bear the responsibilities and costs and the private investors who carry the initial financial risk.

The potential range of applications for social impact bonds/pay-for-success contracts are still being examined, however the Social Finance Group believes that this approach is broad enough to enable change in four key ways, including:

• Unlocking an unprecedented flow of social finance
• Creating an 'evidence incentive'
• Creating an 'innovative incentive'
• Changing the role of government

While this area is still being explored, it is becoming clear that financial and social goals need not be mutually exclusive. If we can break through traditional boundaries of "socially responsible investment" and implement properly with integrity and efficiency, this exciting and innovative concept of impact investing has the potential to completely change our definition of 'public-private partnerships.'