When is a social impact bond (SIB) not a SIB? Should we care?

SIB pic

There are advantages and disadvantages to the term ‘social impact bond’ (SIB).

From the time it was coined it has caused confusion. The word ‘bond’ implies that capital is guaranteed, that interest is fixed, and that cash flows for the principal occur at the beginning and end, with ‘coupon’ or interest paid in the interim. Some SIBs are like this, particularly in the US. But some are a set of contracts and cash flows that bear almost no similarity to a bond at all. So should it be called something else? The Peterborough contract actually uses the words ‘Social Impact Partnership’, a phrase also chosen for the Western Australian paper on SIBs. But the word ‘bond’ has attracted more interest from the financial sector than ‘partnership’ might have, an observation I first heard expressed by Social Finance’s Toby Eccles. In Australia, the bulk of media on SIBs has occurred in the Australian Financial Review, which has loved ‘bonds’, but may have been more inclined to put stories about ‘partnerships’ in its sister publications for general news.

To figure out what is a SIB and what’s not a SIB, I use the definition we came up with at the Cabinet Office:

The Centre for Social Impact Bonds defines a Social Impact Bond (SIB) as an arrangement with four necessary features:

  • a contract between a commissioner and a legally separate entity ‘the delivery agency’;
  • a particular social outcome or outcomes which, if achieved by the delivery agency, will activate a payment or payments from the commissioner;
  • at least one investor that is a legally separate entity from the delivery agency and the commissioner; and
  • some or all of the financial risk of non-delivery of outcomes sits with the investor.

More recently, however, I’m seeing the words ‘social impact bonds’ and ‘social investment bonds’ refer to financial instruments that look much more like bonds. They borrow money at a fixed rate, use it to do something which generates some kind of income, and then pay the money back at the end. They don’t involve financial risk for the investor that is pegged to the non-delivery of social outcomes.

So is there a problem?

I like my world ordered, and it initially bothered me that a concept I define so tightly was being applied to something else. How are we to collect relevant literature on something if our key search terms are being used to refer to something else? Disaster! But then I remembered why social impact bonds interested me in the beginning: they interrogate and align the incentives of stakeholders in social programs. These other bonds showed innovative thinking about structuring finance to deliver social outcomes. That’s worth celebrating! Let’s put the definition aside and celebrate a few variations on the theme (NB: dates relate to announcements – most are still in development):

  1. Khazanah Nasional – social impact bond / social impact sukuk – Malaysia – April 2015

This issue is raising M$1bn (US$282m) and is rated AAA. It will fund a range of environmental and social projects, rather than just one. Instead of investors getting paid more when outcomes are achieved, this instrument pays less. “The Ihsan SRI sukuk incorporates a unique feature where the principal amount is reduced when the selected project hits certain key performance indicators. This means investors will not recover the original sum put in, although they will continue to enjoy an income from the annual distribution rates or coupons. That suggests annual returns will be key in driving demand.

  1. Richmond City (US) – social impact bonds – US – March 2015.

This is a proposal from the Richmond Community Foundation, but which Richmond City sells social impact bonds to raise money that the community foundation could use to buy homes. Local workers rehabilitate the homes, which will then be sold to people through first-time home buyer programs.  A sale of $3 million in bonds was expected in March 2015, pending final approval by the Richmond City Council. That would pay for the rehabilitation of 20 properties a year over five years.

  1. Instituto de Crédito Oficial (ICO) – social bonds – Spain – January 2015.

The funds raised from investors via the “social bonds” will distributed as loans to finance micro-businesses and SMEs. The bonds are rated and total 1 billion euros, with a term of 3 years and an annual coupon of 0.50%.

  1. IIX – Women’s Impact Bond – International – October 2014

The WIB will raise US$10 million, deployed as loans to a selected group of clean cook-stove-related businesses. The bond will have a maturity of 4 to 5 years. The WIB is a pooled fixed income security issued by a special purpose vehicle (SPV) created by IIX.

  1. Midlands Together and Bristol Together – bonds/social impact bonds – UK –July 2013

Triodos worked with Midlands Together to raise a £3m bond for a five-year term and offered investors an annual fixed return of 4 – 6 per cent secured against the company’s assets. This followed £1.6m of funding across two raises for Bristol Together, both in the form of a five year bond issue. The ‘Together’ model involves using the money raised from the bond to buy empty and sub-standard homes and works with social enterprise partners to employ ex-offenders in the repair, refurbishment and restoration. Once the properties are fully restored they are then sold and the original capital, plus any profits, re-invested back into the business and used to pay investors.

Other examples of Triodos Bond raises for environmental and social organisations are here.

5 thoughts on “When is a social impact bond (SIB) not a SIB? Should we care?

  1. Hi Emma,

    Can you elaborate a bit on why a SIB needs an investor that is legally separate from the delivery agency? Certainly in Australia there are some big organisations that it’s plausible to imagine funding their own programme and pocketing the returns from government at the end (leaving aside the fact that none of them would actually want to).

    It seems like an arrangement like that has the financial incentives that we’re looking for in a SIB.


    • Hi Matt,

      Great question!

      The definition describes the particular contracting arrangement as it was implemented, rather than the ideal model to deliver social outcomes.

      I guess if everything is similar except that the organisation doesn’t require external investment then we’d call it an outcomes-based contract or a payment by outcomes/results contract. These certainly exist in several countries, including Australia (organisations delivering employment services collect payment for outcomes after having already spent their own money on achieving them).

      You’re right that the financial incentives would be very similar for whatever organisation or individual is stumping up the initial funds. Where it differs is the level of financial risk a not-for-profit delivery organisation might be exposed to. In the UK, these delivery organisations are usually paid full-costs up front, perhaps in addition to some financial incentive for achieving positive outcomes, so they assume almost no financial risk (although reputational risk is substantial). In Australia our not-for-profits have assumed more financial risk as investors or simply due to the payment metrics we’ve developed, but the investor money is still funding the delivery of the services as they go.

      When we were developing our Australian SIBs, all parties were pretty keen on protecting not-for-profit delivery agencies from serious financial repercussions if outcomes were not achieved.

      Is that helpful? Feel free to come back to me. Others may also have differing opinions on this and they’d be most welcome!

      • I agree that some of the NFPs might be unwilling to take the sort of financial risk that investing in their own SIB would entail, although my understanding is that some of the investors in Australian SIBs are actually big charities?

        I think it’s interesting to think about whether the delivery agencies would necessarily by charities or even NFPs in a mature SIB market. Certainly the predictions about the NDIS seem to be that for-profit players will move in to delivering disability services as the market matures.

      • You’re right. Charities that have invested in SIBs include the Benevolent Society in Australia (both in their SIB and in the Newpin one), ROCA in Massachusetts and St Mungo’s and Thames Reach in London. Investors and government have actually been more concerned about charities taking financial risk than charities themselves.

        I’m not sure how you’d set up an NDIS SIB, unless additional government funding were allocated for outcome payments.

        And absolutely – SIBs could definitely be delivered by for-profit organisations, but some government representatives I’ve spoken to say that they would have to do a whole lot more due diligence and thinking around the perverse incentives if they were. Social investors may also be less keen – we don’t know that for sure, but if you’re primarily interested in social outcomes, then an organisation with a mandate to deliver a social mission, rather than a profit, might be preferable.

  2. Sorry, I just meant that the NDIS is an example of for-profit players moving into a space that was previously the domain of NFPs, because now there’s serious money up for grabs. If SIBs become a commonplace way of funding social services in the future, I wonder if the same would happen more generally in that cross-cutting SIB space.

    That point about government representatives being more cautious about commissioning SIBs with for-profit organisations is really interesting.


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