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Bringing Social Impact Bonds to the US?

28 June 2012 at 11:46 am
Staff Reporter
While there’s been early interest in Social Impact Bonds across the US, the country is still a long way from launching a full scheme, according to an extensive analysis by global management consulting firm, McKinsey & Company.

Staff Reporter | 28 June 2012 at 11:46 am


Bringing Social Impact Bonds to the US?
28 June 2012 at 11:46 am

While there’s been early interest in Social Impact Bonds across the US, the country is still a long way from launching a full scheme, according to an extensive analysis by global management consulting firm, McKinsey & Company.

And experts say Australia and the UK are leading the charge.

The US McKinsey report, called From Potential to Action: Bringing Social Impact Bonds to the US, said a number of cities and states—including New York City and the states of Connecticut, New York, and Michigan—are actively exploring Social Impact Bonds (SIB) but most jurisdictions are still a long way from launching one.

The report says it evaluates SIBs not on their savings potential for government budgets but on their broader benefits to society.

A social Impact Bond (SIB) is described as a new approach for scaling social programs.
Currently being piloted in the United Kingdom and generating interest globally including trials in NSW, a SIB is a multi-stakeholder partnership in which philanthropic funders and impact investors—not governments—take on the financial risk of expanding preventive programs that help poor and vulnerable people

Not for Profits deliver the program to more people who need it and the government pays only if the program succeeds.

The McKinsey report’s authors said that because the concept of a SIB is so new, information about how—and how well—this approach could work is very limited in the US.

In this report, the researchers looked at current SIBs, how SIBs are structured and assess their potential in two specific program areas of interest in the US – homelessness and criminal justice.

Here’s how the McKinsey Report sets out the SIB structure: A SIB structures a government contract for social services as a type of pay-for-performance contract. There are seven stakeholder groups involved in a SIB: constituents (the direct beneficiaries of the social services), government, Not for Profit service providers, investors, intermediaries (responsible for overall SIB project management), evaluation advisers (to help monitor and refine the program), and independent assessors (to determine if SIB targets are met).

SIB investors provide capital that fulfills two purposes: up front, it pays for the services of the Not for Profit service provider and, over the lifetime of the SIB, for the intermediary, the evaluation adviser, and the independent assessor.

The intermediary raises capital from investors, selects the service providers, contracts with government, works with the evaluation adviser and the independent assessor to set and measure performance targets, and partners with the evaluation adviser to monitor and analyze interim results and suggest midcourse corrections. If the program meets performance targets, the government pays the intermediary an agreed amount.

The intermediary is responsible for repaying the investors their capital plus a return on investment.

The researchers say SIBs can give structure to the critical handoff between philanthropy (the risk capital of social innovation) and government (the scale-up capital of social innovation) to bring evidence-based interventions to more people.

SIBs can do this by aligning incentives among a broad set of stakeholders and shifting financial risk away from government.

They says SIBs support a government’s goal of performance transformation. SIBs can help government move toward paying for results rather than paying for activities.

The first SIB began in September 2010 in the UK. After raising £5 million from philanthropic funders, Social Finance UK—a non-governmental organisation that develops financing structures and raises capital to help fund social service organizations—launched a SIB to help rehabilitate 3,000 short-term prisoners at Peterborough Prison expected to be released over a six-year window.

The McKinsey report points to the Australian experience saying the New South Wales Government is in the development phase for three SIBs or, as they are being called in Australia, “social benefit bonds” in the areas of criminal recidivism and out-of-home care for children.

Prof Peter Shergold, the Australian Chair the Social Investment Expert Advisory Group set up to oversee negotiations between government departments and the NSW trial participants, said that Australia in many ways is leading the charge on Social Benefit Bonds.

Prof Shergold said three trial proponents – UnitingCare Burnside, Benevolent Society and Mission Australia – are currently looking at ways of measuring impact over the medium and long term.

He said Australian trial proponents are taking on the projects with their eyes wide open.

“Innovation comes with risk but these new areas encourage innovation.

“While it is exciting at one level it is not a panacea for all fundraising and won’t replace government grantmaking but it will provide a new private source of sector funding.”

And other countries are taking notice. Social Innovation Europe, an initiative of the European Commission, has commissioned a report on SIBs.

Canada’s Federal and Provincial Governments are also exploring whether SIBs are right for them. The 2012 federal budget mentions plans to test SIBs “to further encourage the development of government-community partnerships.”

In the last year, US local and state Governments have been exploring SIBs and a broader array of Pay For Success models.

The McKinsey report said in the US early interest in SIBs has focused on two social issues: chronic homelessness and criminal and juvenile justice. SIB uptake will likely occur in places where those two issues are among a governor’s or a mayor’s current priorities.

At the Federal level in the US, there has been some activity as well. President Obama has signaled his support of Pay For Success pilots by seeking congressional authority to reserve up to $100 million in his 2012 budget for a number of program areas including workforce development, education, juvenile justice, and care of children with disabilities.

President Obama proposed extended availability for PFS funds to allow longer disbursement periods; he also requested permission to redirect PFS funds that are not used to make results-based payments. Congress rejected the President’s proposal, but in the meantime the McKinsey report said the administration has launched PFS pilots that meet the current statutory guidelines.

The McKinsey Report can been found by clicking here.

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