SIBs: the newest arrow in the SRI quiver

Social Finance in the UK, an SIB pioneer, defines ‘Social Impact Bond’ as “a financial vehicle that brings in non-government investment to pay for services which, if successful, deliver both social value and public sector cost savings. Investors receive a financial return from a proportion of the cost savings delivered.”

In an SIPC webinar today, Christian Novak of Frontier Market Advisors Inc. provided an introduction to Social Impact Bonds. He began by outlining some benefits of SIBs - risk is transferred from the government to private investors, they ensure that outcomes are the primary focus of the program and can maximize use of government funds.

He then provided two examples of SIBs, Peterborough Prison in the UK, and Rikers Island jail in New York City. The Peterborough SIB was launched in 2010 and has a goal of reducing recidivism rates by 7.5% or more compared to a control group of short sentence prisoners in the UK. It is a multi-stakeholder initiative with 17 investors and at least 3 social service organizations involved.

In Rikers Island, the sole investor is Goldman Sachs (!!?!), and once again the goal is to reduce recidivism, but here by 10% or more. In a twist, although Goldman Sachs is putting up 9.6 million dollars, it only stands to lose 25% of it (2.4 million) if outcomes are not reached, as Mayor Michael Bloomberg’s personal foundation is providing a guarantee for the balance. If SIBs are a ‘merger of profit and social progress’ as described by Mr. Novak, we can see whose interest is profit and whose is social progress…

Some of the risks of SIBs enumerated by Mr. Novak are performance risks, structural risk, government risk and reputational risk, particularly as SIBS are very visible transactions and the ‘financialization’ of the social sector remains controversial. Challenges facing SIBs are creating easily and accurately measurable metrics, linking metrics to measurable savings, the development and selection of intermediaries, establishing appropriate legal and regulatory frameworks, broadening investor participation and perhaps eventually creating a liquid secondary market for SIBs.


Read Deloitte’s report Paying for outcomes Solving complex societal issues through Social Impact Bonds

Check out social finance for more about what’s happening in Canada.