Social Impact Investing

Benefits and Costs of Social Impact Bonds
Advocates of these performance-based investments claim that they encourage
innovation and tackle difficult social problems, asserting that new and innovative
programs have potential for success, but often have trouble securing government
funding because it can be hard to rigorously prove their effectiveness. This form of
financing allows the government to partner with innovative and effective service
providers and, if necessary, private foundations or other investors willing to cover the
upfront costs and assume performance risk to expand promising programs, while
assuring that taxpayers will not pay for the programs unless they demonstrate success
in achieving the desired outcomes. The expected public sector savings are used as a
basis for raising investment for prevention and early intervention services that improve
social outcomes.
In many cases, Pay for Success programs can achieve positive social outcomes, may
create fiscal savings for government, but also involve changes in funding arrangements
that bring risks to service agencies. The assumed benefits makes Pay for Success
politically attractive to governments and businesses. For example, $250 million of
investments towards preventive programs that reduce recidivism might eventually make
it possible to close prisons that cost taxpayers $1 billion per year to run.
The benefits of Social impact bonds depends on the definition being used, but the broad
benefits (though not measured and verified yet) are that:
More funds are available for prevention and early intervention services.
The public sector only has to pay for effective services; the third party investor
bears all the risk of services being potentially ineffective.
Investors and servicers have an incentive to be as effective as possible, because
the larger impact they have on the outcome, the larger the repayment they will
receive.
The Social Impact Bond approach imbeds vigorous ongoing evaluation of
program impacts into program operations, accelerating the rate of learning about
which approaches work and which do not.
Government funds “what works”; thus repositioning government spending to
cost-effective preventive programs.
Attract new forms of capital to the social, educational and healthcare sectors.
Independent evaluation creates transparency for all parties.
Critics note that because the outcomes-based payments are dependent on
governmental funds which must be budgeted, Social impact bonds do not actually raise
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