The state of Massachusetts wants to reduce re-incarceration of young at-risk men by 5.2 % or more; Brussels wants to improve employment rates among its young migrant population by 10%; and London is struggling to find new solutions to deal with persistent homelessness. How are they planning to do it? With social impact bonds (SIBs).

 

It is the hot topic to promote social innovation and public programs effectiveness.  SIBs propose a partnership in which the private sector commits to invest money to pay for the costs of an innovative program with well-defined social outcomes and the public sector commits to repay the investment only if the outcomes are achieved.

 

In general terms, the process of a SIB can be described like this: 1) the government identifies a critical social challenge; 2) an NGO, social enterprise or other social service provider is selected based on their design and proposed implementation of an innovative program that addresses the challenge to reach identified outcomes; 3) social investors bring capital to the table to finance the costs of the program; 4) if the program is successful in improving the social problem and reaches the pre-agreed goals and outcomes, then the government will repay the investors the principal amount plus a rate of return on their investment, depending on the level of performance achieved. If the outcomes are not reached however, the investors risk losing their investment. There are many variations in the process of an SIB, but the end result is a transfer of risk from the public sector to other parties.

 

The idea of SIBs first emerged in the UK in 2010 with the Peterborough Social Impact Bond that aimed to address the high reoffense rate among short sentenced prisoners. With about one year to go, the project with its innovative support service design has already demonstrated an 8.4% reduction in reconvictions and a cost-effective approach for public resources management.1

 

Even though there are only 44 Social Impact Bonds (SIBs) currently implemented or in the pipeline worldwide, it’s a glowing hot topic for social impact investors and governments, and many stakeholders are taking initiative. In the US for example, a bill has been proposed to put impact partnerships into federal law and assign further resources for their implementation 2. With a relatively short contract duration, averaging between 3 to 5 years, the SIB model proposes an attractive timeline for investors while affording the government and service providers time and money to test and potentially scale-up innovative programs. So far, SIBs have been focused in areas of social welfare, employment and criminal justice potentially impacting more than 40,000 3 people but the SIB model has far greater impact potential.      

 

Particularly in the context of the developing world, new tools are necessary to overcome the immense challenges we face. If it has proven difficult to finance the Millennium Development Goals (MDGs) it will be even harder to locate the necessary funds for the advancement of the Sustainable Development Goals (SDGs). Compared to the MDGs, the newly finalized SDGs are more detailed and cover many more areas that were not previously on the table 4. Think of any current development issue and it will probably be there: from climate change to urbanism, security or industrialization and innovation. Public resources and funds from international cooperation will not be sufficient to manage all these challenges.

This is particularly true for Mexico. In an economy as dependent on oil, as this one, the recent drop in prices was reflected in the public budget, which in turn affects various programs in the areas of energy, innovation, social development and security, among others. Add to this that Mexico, as many developing countries, suffers from critical issues with quality in public spending, corruption, diversion, inefficiencies and little focus on impact.
 

Finding new ways to enhance the impact of public spending is like a treasure hunt. Results based budgets are an important tool, but sometimes there is no clear path to implement them, and significant parts of the public budget end up being inertial from year to year. Other mechanisms include Public-Private Partnerships (PPPs) which pose a model for collaboration and sharing of risks in public projects while allowing for private sector efficient management, innovation and experience to play an important role. But the complexity of PPPs schemes require the resource and expertise involved in projects of grand financial scale potentially lasting a decade or more. Results-Based Contracts are another way of managing budgets and transferring risks from the government to private parties; however projects set up under this mechanism can face difficulties of initial financing for the program.