Social Impact Bonds: Fad or Future?

On paper, Social Impact Bond (SIB) appear to be a novel way for addressing issue of scaling operations of proven social enterprises. It certainly has attracted a fair share of attention in private, government and social enterprise circles. However, in my view, concept of SIB needs to evolve further to ensure it becomes relevant to future of social enterprises.

SIB is a neat framework that leverages supply-demand framework to bring together government on the demand side and social enterprises funded by private investors on the supply side to address pressing social issues. However SIB still fails to address the fundamental issue of attracting funds for social enterprises. Under the current SIB model, social enterprises are still dependent on private sector for upfront capital investment which continues to be a major bottleneck for growth of social enterprises. Until this core issue is resolved, uptake of SIB and other social enterprise initiatives will remain sluggish. If SIB has to become success, it has to be accompanied by supply side initiatives such as tax rebates for private investors to encourage greater inflow of investment from private sector for SIBs.  

Another issue with SIB in its current form is that it leaves the social enterprises and its financial backers exposed if enterprise is unable to deliver results since government pays nothing unless enterprise delivers results. This may actually discourage private sector to invest in SIBs especially those from the more conventional business background. It is no surprise that the first SIB launched in US in [1] New York City involved 83% ($ 6 million) loss guarantee by Bloomberg Philanthropies for financial investors Goldman Sachs in case the project failed. In July 2015, it was declared that New York City project had indeed failed to produce desired results and program was ended in August, 2015. The loss guarantee by Bloomberg Philanthropies considerably reduced Goldman Sachs exposure on the project. However, this also meant that underlying principle of SIB model was violated because cost of failure was not only borne by the investors but by society at large through re-allocation of $6 million towards Goldman Sachs as opposed to being used for other social ventures.

This was not the case with [2] Peterborough SIB, the first SIB launched in England. The project failed to meet its goal of reduction in re offending by 10%, achieving 8.4% reduction instead. As a result, no payment was made to investors. This is a classic example where SIB model left the investors and social enterprise in a tricky position once the project was unable to meet its goals. SIB model needs to offer an “exit strategy” to the social enterprise and investors involved so that social investors and investors can recoup some returns (including financial, knowledge base) from their investment but SIB needs to achieve this in a way that society at large does not bear the cost of this as was the case in New York City project.
    

Despite all the limelight SIBs have attracted, only around [3] 50 SIBs have been launched worldwide since 2012. There is clear need to further refine SIB framework in order to make it more relevant tool for adoption by social enterprises.  What are your thoughts in this?

 [1] http://nonprofitquarterly.org/2015/08/07/what-we-learned-from-the-failure-of-the-rikers-island-social-impact-bond/  

[2] http://www.thirdsector.co.uk/peterborough-prison-social-impact-bond-pilot-fails-hit-target-trigger-repayments/finance/article/1307031

[3] http://emmatomkinson.com/2014/02/14/social-impact-bond-sib-uk-v-world-map/