Putting Social Impact Bonds to the test

Do Social Impact Bonds work?

A recent interesting report from the Brookings Institute examined the 10 most common claims made for 38 different Social Impact Bonds (SIBs) .

SIBs are commonly used to fund payment by results schemes. They are a form of outcomes-based contract in which public-sector commissioners commit to pay for significant improvement in social outcomes (such as reductions in reoffending rates, the number of unemployed people found jobs) for a defined population. Private (or philanthropic) investors finance the bonds which provide the working capital for providers. In this way, the public sector passes the financial risk over to the investors who only receive a return on their investment if the outcomes are achieved.

These 10 claims were:

Brookings SIB

Five positives

The Brookings Institute found five areas where the SIB mechanism had a demonstrable positive effect on service provision:

  1. Focus on outcomes. There was a significant shift in the focus of both government and service providers when it came to contracting and providing social services. Outcomes became the primary consideration in these contracts in which the repayment of the investment depended on achievement of those outcomes which Brookings described as a “significant transformation in culture”.
  2. Build a culture of monitoring and evaluation. The outcome-based contract necessitates the collection of data on outcomes, which helps build a culture of monitoring and evaluation in provider organizations and government. SIBs are beginning to help solve longstanding problems in systemic data collection in multiple instances.
  3. Drive performance management. The involvement of the investors and intermediaries in management of the service performance is a key component of SIBs. These private sector organizations often have stronger background in performance management and bring a valuable perspective to the social service sector.
  4. Foster collaboration. In addition to collaboration between the for-profit, nonprofit, and government sectors, Brookings also found evidence of gridlock-breaking collaboration across government agencies, levels of government, and political parties due to SIB contracts. This was noted to be one of the most important aspects of SIBs but also one of the most challenging.
  5. Invest in prevention. External, upfront capital for services allows government to invest in preventive programs that greatly reduce spending in the future, such as early childhood development programmes that reduce remedial education, crime, and unemployment. Brookings found that all but one of the 38 SIBs were issued for preventive programmes. Going forward, SIBs will not necessarily need to be tied to cash savings for government, but could simply be used as a method to finance programs that achieve desired social outcomes.


Five failings

The Brookings Institute also found five areas where the SIB mechanism had no clearly proven impact.

  1. Achieve scale. Of the 38 impact bonds contracted as of March 1, 2015, 25 served less than 1,000 beneficiaries. The largest impact bond, the SIB to reduce criminal recidivism at Rikers Island Prison in New York City, aimed to reach up to 10,000 individuals, but was terminated a year early this July because it did not meet target outcomes.
  2. Foster innovation in delivery, and
  3. Reduce risk for government. SIBs vary in the degree of innovation and risk to investors—SIBs based on more innovative programmes pose a greater risk to investors and may have higher investment protection or greater potential returns to balance the risk. Brookings found that very few of the programmes financed by SIBs were truly innovative in that they had never been tested before, but that many were innovative in that they applied interventions in new settings or in new combinations.
  4. Crowd-in private funding. The research also found mixed evidence on the power of impact bonds to crowd-in private funding. The literature up until now has claimed that impact bonds crowd-in private funding for social services by increasing the amount of money from traditional funding sources and bringing in new money from nontraditional sources. There is some evidence that traditional service funders, such as foundations, are increasing their contributions because of the opportunity to earn back what would otherwise have been a donation. Many of the current investors in impact bonds, Goldman Sachs for example, are indeed new actors in the space and their increased awareness of social service provision may be a benefit in and of itself. However, if a programme is successful, government ultimately pays for that programme. In this case, investors are solving a liquidity problem for government by providing upfront capital and not actually providing new money.
  5. Sustain impact. Finally, five years since the first impact bond, we have yet to see whether impact bonds will lead to sustained impact on the lives of beneficiaries beyond the impact bond contract duration. The existing literature states that impact bonds could lead to sustained impact by demonstrating to government that a sector or intervention type is worth funding or by improving the quality of programmes by instilling a culture of outcome achievement, monitoring, and evaluation. However, the success of impact bonds depends on whether new efforts to streamline the contract development stage come to fruition and whether incentives for all parties are closely scrutinized.



It is perhaps this last finding – about sustainability – which is the most important. The highest profile Social Impact Bond scheme in the UK aimed at reducing the reoffending of prisoners released from Peterborough Prison, was curtailed early despite initial promising findings because of the implementation of the Transforming Rehabilitation reforms which radically re-designed the probation service. There is a lack of high profile successful SIBs to encourage their development.

Social Impact Bonds, like payment by results itself, are seen by many as having huge potential. As yet though, we lack the evidence to judge their effectiveness.


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