Wild World of SIBs

Social-impact bonds are a relatively new concept that is proving to gain quick popularity. Since McKinsey’s report on SIBs in 2012, more groups have moved forward to act upon the idea. Earlier this year, the Rockefeller Foundation and Harvard University partnered together to a form a competition for SIBs. Surprisingly, they had 28 applications. Six states have been selected: Connecticut, Illinois, New York, Ohio, South Carolina and Colorado. The states are now working on contracts for the SIBs.

SIBs could take on positive or negative associations depending on the view. Initially, I found the concept confusing. Why should I put money in something that will either produce returns or never give anything back? There’s not much middle ground here. It seems like the chance for the government and non-profits to try something out that could very well fail and then suffer zero consequences. If they do perform well, it seems as though the end situation is worse financially because they have to pay the money back with interest. There is almost an incentive for the governments and non-profits to miss the benchmarks.

On the other hand, SIBs provide a great opportunity for governments and non-profits to scale innovation to something that could be very successful. And if it doesn’t work then the taxpayers don’t pay. If it does, then they do. The private entities, which provide money, also choose the projects with which they will work and have the opportunity to mitigate risk in that decision. There may be additional risk buffers in the contracts as well. For example, if a partnership breaks down early enough in the process, then the money should be returned (without interest).

There could also be intermediary benchmarks. Maybe if one aspect of the project is successful then only 50% of the funds plus interest are returned. Taxpayers would pay for the portion that works. Additionally, risk could be mitigated if resources are pooled and then distributed to multiple projects; something like a mutual-fund-type SIB.

As SIBs are so new and just starting to form, what will they look like in 5 years? Will they exist and thrive? How will the contracts and structures for SIBs evolve?

http://www.washingtonpost.com/business/economy/can-investors-make-money-in-social-services/2013/06/07/a010e7f6-ced6-11e2-8845-d970ccb04497_story.html