SIB Mechanics
4 September 2018 at 5:36 pm
With a recent estimate of some 108 social impact bonds globally worth US$400 million (A$537 million), including nine in Australia, Kyrn Stevens outlines how they work.
Social impact bonds (SIBs) are transactions where investors provide funds for an intervention that might save government money, where the government then uses those savings to repay the investor’s original investment and a dividend.
They are known as SIBs or Social Benefit Bonds in Australia and Pay-for-Success in the United States.
They differ from impact investing by directly involving government and are not bonds in traditional sense, which are a debt security, where the issuer owes the holders a debt and pays them interest and/or the principal at a later date (the maturity date).
SIBs are also characterised by finance being provided up front, impact bond returns tied to results/outcomes rather than outputs such as services delivered, and, a focus on social outcomes rather than physical infrastructure.
Two types
There are two main types of SIBs, one where the outcome funder (government) holds a contract with an intermediary or a special purpose vehicle (perhaps investor-controlled), and one where the service provider contracts directly with the outcome funder.
An intermediary might coordinate the bond, structure the deal and manage the bond’s performance.
The use of intermediaries is found to be beneficial by practitioners and researchers alike, but service providers with strong administration structures and quality/data collection and analysis capacity might be well positioned for a direct investment model.
Strong organisational governance and a track record or culture of monitoring and review would also support direct investment.
Independent evaluators, on the other hand, are essential to measure the environmental or social outcomes agreed for the transaction.
There is a broad four-step process for SIBs, which may also be applicable to other types of outcomes-based/pay-for-performance funding programs.
Firstly is the feasibility study to identify the social issue and bond criteria, potential savings to government, undertaking a pilot project if required, and, gather and analyse data.
Once the feasibility is proven, the transaction needs to be structured including agreeing program results and details, sourcing a service provider, securing capital, devising contracts, establishing a governance structure.
The implementation stage involves providing the service/s, managing performance, reviews, and gathering and analysing data.
The final stage is to evaluate the program outcomes and repay investors based on the outcomes achieved.
- Investments are mostly between US$2 million (A$2.7 million) and US$5 million (A$6.7 million).
- Several are of more than US $15 million (A$20.1 million) and one of over US$20 million (A$26.8 million).
- The smallest of US$148,000 (A$198,000) is in Portugal and the largest at US$24.5 million (A$32.9 million) is in the United States.
- Potential beneficiaries range from 22 children and their mothers in Canada to 10,000 youths in the United States criminal justice system, with most serving populations of 1,000 people or less.
- Durations range from 20 to 120 months, with most lasting three to five years.
- Returns range from 3 to 7.5 per cent (including Australian bonds) with, most being around 5 per cent.
About the author: Kyrn Stevens has executive experience across the non-profit, private, and government sectors, and completed an MBA thesis on social investing at Sydney Business School, University of Wollongong. He is a senior corporate affairs and marketing professional who has worked in legal services, for a federal regulatory authority, as well as for Australian Red Cross and in Indigenous health. He is also a non-executive director of the Fairy Meadow Community Bank Branch of Bendigo Bank. Contact him through LinkedIn: www.linkedin.com/in/kyrnstevens/
