Jan Tveterås Follow Aug 30, 2016 · 5 min read
An innovative financial instrument to unlock trapped potential
More solutions to social problems are being produced than ever before. These solutions need suitable financing, or they risk ending up as untapped potential. Social impact bonds are an innovative way of mobilizing private capital to finance promising social programs.
Persistent problems seek new solutions Most societies are faced with persistent and serious social problems in areas such as health, education, employment, crime, integration and elderly care. High school dropout rates, sick leave, criminal reoffending, obesity and elderly fall injuries are just a few examples of societal challenges with high economic costs that can be prevented. Luckily there seems to be an increased interest and commitment across society and sectors to address social problems. In a study of 5,000 Millennials (those born after 1982) across 18 countries, respondents ranked “to improve society” as the number one purpose of business. Ninety-five percent of the world’s 250 largest corporations now track and report publicly on the social and environmental impacts they have on society. In the UK, a leading country in the areas of social sector development and social entrepreneurship, there are now around 70.000 social enterprises, employing almost 1 million people. Almost half of these 70.000 enterprises were founded in the last five years. “The sector is not just growing, it’s actually booming,” said Rodney Schwarz, chief executive of Clearly So to Financial Times in 2015. Another great example is the opening of SoCentral in Norway– an incubator for social innovation, with around 120 social entrepreneur members.
Untapped potential Social sector organizations (including traditional charitable organizations and social entrepreneurs) can produce innovative solutions that improve the lives for thousands of people while saving the government millions in costs. However, these organizations are often faced with limited and unstable funding options. Scarce financial resources can inhibit these organizations from realising their potential impact. The lack of access to suitable financing can drive focus away from mission-related activities and capacity building and onto endless fundraising activities to secure survival. Social investments have emerged as a new way to address this challenge by providing social organizations with access to more financing options. Social investments, also called impact investments, seek to generate both a measurable social return and a financial return. While there has been a growing demand for funding from those who create solutions to social problems, there has been a growing supply of innovative financial instruments and services to address these needs. A Social Impact Bond (SIB) is an example of such an instrument.
A tool to unleash the trapped potential A Social Impact Bond is an outcome-based mechanism where investors commit capital to fund a social program, and are repaid by the public sector if predetermined outcomes are achieved. With a SIB, the public sector shifts the intervention risk away and shares a proportion of the savings that come from improving social outcomes with investors. For example, Australia’s first SIB was issued in 2013 with the purpose of reuniting children in out-of-home care with their parents and preventing children from entering out-of-home care, thereby improving their lifechances and outcomes. Every child in out-of-home care costs the Australian government between $37.000 and 250.000 AUD every year. Through the Social Impact Bond, private investors are funding the expansion of an intensive programme that provides support to parents to improve parenting styles, behaviour and practices. After two years in the Social Impact Bond contract, 66 children have been successfully reunited with their families and 35 at-risk cases have been prevented. Since predetermined levels of performance have been met, investors have earned an average return of 8.9%. The Australian government is expected to save around $80 million AUD by the end of the contract. The Social Impact Bond model has gained significant momentum worldwide since the first SIB was launched in 2010 in the UK. The first SIB was in the area of recidivism, with the purpose of reducing criminal reoffending among short-term prisoners. Since then, the model has been used to finance social programs in areas such as youth at risk, homelessness, elderly loneliness, migrant unemployment and more. The model has been used in countries such as UK, US, Germany, Netherlands, Belgium, Australia, Portugal, Sweden and Finland.
Potential benefits for the parties involved With the example from Australia, it’s possible to see that Social Impact bonds can, under the right conditions, create a win-win-win situation for social organizations, governments and private investors. If a social impact bond is properly designed and executed, there are several potential benefits for each of the parties involved. For example, under a Social Impact bond, public money is only spent if predefined social results, such as reduced criminal reoffending or increased employment is actually achieved. If social results are achieved, the government is likely to benefit from considerable cost savings or cost avoidances. For social organizations, a social impact bond will secure stable and reliable financing over the contract period, which typically ranges from two to seven years. This means that time can be spent focusing on what matters — the target group — the people in need. For private investors, be it Corporate Social Responsibility departments of companies, commercial investors, foundations, private individuals or others, Social Impact bonds offer an opportunity to achieve both social and financial returns.
Norway’s first Social Impact Bond and the road ahead The first Nordic Social Impact Bond was implemented in Finland in late 2015. Sweden recently announced their first SIB. Norway, under the initiative and facilitation of Velferdsfinans AS will implement its first SIB in late 2016 or early 2017. Velferdsfinans AS is a social business, a social finance intermediary and a member of SoCentrals Nordic Social Innovation incubator. Following a presentation by Velferdsfinans AS, the Norwegian parliament (Stortinget) passed a proposition to establish a pilot project for Social Impact Bonds in the area of recidivism. We are currently working with public entities, social sector organizations, research institutions and investors to turn the proposition into reality. The social impact bond model is not without challenges, and like most innovations there is a need for further experiences, development and adjustments over time. The model is also not suitable to all social programs and problems, and is as such not an absolute replacement for traditional government funding. Yet, the potential benefits and experiences worldwide show that this financing mechanism deserves attention. It is our hope (and mission) that the Social Impact Bond model becomes an established additional way of financing social programs.