Two potential obstacles of SIBs

“A SIB is a new approach for expanding successful social programs. It is a partnership in which private investors —not governments—provide capital for nonprofits to scale up”[1]. Intermediaries make contracts with governments, raise capital from investors, help direct service providers, select independent assessors to evaluate impacts of social programs. If impacts achieved predefined goals, investors will get repaid with capital plus a return, which comes from government; If the programs fail, investors bear the loss. This pattern benefits constituents through preventive solutions, makes it easier for social programs to raise funds, lowers governments’ financial risk, provides investors with a way both to do well and do good. With a lot of advantages, however, there are still two difficulties should be addressed.

Firstly, evaluation of social programs is important because it determines returns of investors, but it can be hard when quantitative measurement is not enough or collecting data itself is costly. For example, there is an NGO in Hongkong focusing on enriching life of immigrant labor by giving art lecture. The number of lecture is far from enough for evaluating the impact because what really matter are whether the lecture fits the interest of immigrant labors, to what degree they feel enriched from the lecture and what if the organization spend the money to held a party for them. To know how the targeted constituents feels, a survey should be conducted which can cost a lot of money and human resources.

So, to make evaluation more doable, at this early stage, it is better to conduct SIBs in areas where outcomes can be clearly defined and historical data are available. In addition, SIBs are more appropriate to be carried out where preventive interventions exist that cost less to administer than remedial services; some interventions with high levels of evidence already exist; political will for traditional direct funding can be difficult to sustain[2].

Secondly, nonprofit direct service providers in less developed countries are not mature and capable enough to implement social programs well, which increases risk for investors. Meanwhile, community of impact investors in these areas is not as large as that in developed countries, so it will be hard for SIB to attract investors. Therefore, SIB in these areas can include some governmental service providers to ensure the quality of service so that investors will come. One example is the poverty relief program in Shandong, China, in which a governmental department takes responsibility of social programs such as constructing power stations to creates jobs and to improve infrastructure. Five commercial banks have invested about a hundred million dollars in total. This program is estimated to directly benefit 22,000 people across 125 poor counties.

Breaking boundaries of nonprofit, public and private sectors, SIBs make good use of resources to provide preventive solution to social problems. However, with more parties included than the original approach (where governments give money directly to nonprofit service providers), how can we ensure the efficiency of work and avoid unnecessary cost?

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[1] From Potential to Action: Bringing Social Impact Bonds to the US (Callanan, et.

al., May 2012)

[2] Fact Sheet: Social Impact Bonds in the United States (Center for American Progress, Feb 2014); https://www.americanprogress.org/issues/economy/reports/2014/02/12/84003/fact-sheet-social-impact-bonds-in-the-united-states/