Three recent social impact bond developments

A lot of interesting things have been happening in the social impact bond space over the past several weeks. Here is a recap of three major events.

Early Education in New York City: Manhattan Borough President Scott Stringer proposed a social impact bond to expand Early Head Start, an early education program. According to the New York Times report of his proposal, the idea appears to have political motivation to counter the tax-the-rich proposal of Bill de Blasio, a New York public advocate. Early Head Start offers educational services to children ages 3-5 through 250 centers throughout New York City. The program has been evaluated through rigorous trials at the national level and found to positive results: “Compared with controls, Early Head Start parents were more emotionally supportive, provided more language and learning stimulation, read to their children more, and spanked less."

One of the biggest concerns about the applicability of the social impact bond model to Early Head Start is whether the program pays for itself through cashable savings at the city or state level. Existing designs of social impact bond programs (designs, since only one program is in operation) center on programs that generate government savings. This value proposition has made social impact bonds especially attractive as state struggle to fund social programs in a time of fiscal austerity. I will write more on early childhood social impact bond programs later.

Healthcare in New Jersey: Assemblyman Angel Fuentes (D-Camden/Gloucester) has introduced legislation to create program and studies and issues social impact bonds to improve healthcare to low-income residents. The bill does not propose a specific program, but rather appoints the NJ Economic Development Authority to study whether such a program is possible. The proposal has its own Twitter account at @NJ_SIB_Act.

Social investment in England: Across the pond, the first UK social investment bank Big Society Capital has announced its first round of funding. Big Society Capital is a hybrid for-profit/nonprofit organization that carries a government mandate to capitalize the social investment market in the UK on a sustainable basis. BSC invested $60 million into 12 providers of social finance. This set of investments includes $720,000 to Triodos Bank for its social impact bond program and the same amount to Think Forward for its social impact bond program. I analyze these investments in detail in subsequent blog posts.

Reflections on the SOCAP Conference in San Francisco

Two weeks ago I had the opportunity to attend SOCAP, the Social Capital Markets conference in San Francisco. I attended as a Social Entrepreneur Scholarship, which SOCAP graciously offers to a select number of social entrepreneurs for a full discount on the $1,300 ticket that other conference attendees have to purchase.

The conference highlighted the release of a report by Omidyar Network on impact investing titled Priming the Pump: The Case for a Sector Based Approach to Impact Investing. Attendees mentioned that each SOCAP conference centers on a particular issue or topic, with this year's focus on impact investing.

Here are some insights I had from my amazing time at the SOCAP conference.

1. Figure out your goal. SOCAP will overwhelm you if you do not prepare in advance by defining a goal and using that goal to choose what to do as well as what not to do. This is true for many large events. With over 1,600 participants, three days of panels, and side-bar presentations, meetings and receptions, doing everything at SOCAP is impossible. The three step solution should be a) define your goal, b) select meetings and panels that advance your goal the most, c) keep away from events and meetings that do not meet you goal.

2. Prepare for meetings. The easy thing is to create a pitch, perfect it, and deliver it ad nauseum. The hard thing is to learn about your audience and tailor your pitch to their interests. One investor might like the geographical focus of your work. Another might be interested in an innovative way you structure your financing to achieve your objectives. A third may be fascinated by your use of mobile technology in a development setting. The same pitch might excite one investor and bore another. You might get a second chance to approach that investor or her company, but you shouldn’t bet on it.

3. Pace yourself. I spoke with several social entrepreneurs who had audacious goals for day one of the three-day conference and were devastated when they failed to meet those goals. Not everything must happen on day one. One of my most unexpectedly productive meetings happened when I decided to share a cab ride to the airport with two people leaving the SOCAP conference who I had not met before. After the initial meet and greet in the cab, I quickly realized that they are impact investors whose focus aligns with that of a close friend’s social enterprise. Just like that – a connection, a call, and the start of a due diligence process. The lesson is not to lose energy and enthusiasm if the first day does not go as planned.

These lessons sound simple and mundane, but they bear repeating because it is so easy to forget them. I thought I knew them going into the conference, but still I made mistakes on each front and can do better next time.

Overall the conference was a useful window into social enterprise. I met former Echoing Green applicants whom I had judged as part of Echoing Green’s Social Investment Council. I met former professors who taught me business in developing countries at Harvard Business School. And I made new connections with entrepreneurs in South Africa, Japan and Singapore, who I may not have met otherwise.

Harvard's CID launches Building State Capability, features Instiglio

Harvard Kennedy School's Center for International Development has launched a new research program, Building State Capability. The goal, as stated on their website, is to research "new strategies and tactics that can be used to escape capability traps and build the capability of public organizations to execute and implement."

The website features practitioners that build state capabilities, including Instiglio, the nonprofit I co-founded that advances social impact bonds in developing countries, and IDinsight. Research papers can be found here.

Published in Colombia's Portafolio

My Instiglio colleagues Michael Eddy, Avnish Gungadurdoss and I were recently published in the op-ed section of Portafolio, Colombia's Wall Street Journal. The article is available in Spanish here and in English here.

An excerpt from the article:

Social impact bonds hold promise for addressing some of Colombia’s most complex problems. With a youth unemployment rate over 19 percent governments increasingly focus on creating stable upward trajectories for young Colombian. These trajectories must resolve multifaceted and interconnected challenges that range from lack of money, to unstable families, to inadequate educational opportunities. [...] Colombia has an opportunity to become the first Latin American country to pilot social impact bonds, and spark policy innovation for the region and the world. At Instiglio, we hope to help Colombia realize that opportunity.

US Department of Labor Social Impact Bond Update (cross-posted from

Cross-posted from Instiglio.
In this blog post, we comment on the recent information regarding savings and intermediation released by the U.S. Department of Labor (DOL) regarding its $20 million social impact bond (SIB) solicitation.
DOL has released selected answers to questions that were asked by the public regarding its solicitation for a SIB program in workforce development. As we understand, DOL must have a comment period, and must respond to questions, but may choose whether it answers the question in whole or in part, and may address several questions with one answer.
Background on the DOL SIB Solicitation: DOL has made approximately $20 million available for pay for success programs out of its Workforce Innovation Fund. It expects to fund one to three grants, up to $12 million per grant. Responses are due by December 11, 2012 and funding will be disbursed by September 2013. The goal of any proposed program should be to create “positive workforce outcomes.” DOL is “particularly interested in projects that focus on expanding the availability of social services to address difficult workforce system problems, such as strategies intended to eliminate significant barriers to employment faced by at-risk, disadvantaged, and hard-to-employ populations (e.g., high school dropouts, homeless individuals, long-term unemployed, former prisoners).” (Source: DOL SIB Solicitation)
In this solicitation, government entities must apply jointly with an intermediary. New York City has indicated that it may reply to the DOL solicitation by requesting proposals for collaboration from intermediaries.

The savings question:
“Q1. In the Peterborough pilot, savings are described as recoverable, cashable savings. Can you please confirm if savings must be cashable savings or is it sufficient to identify/show evidence of savings but not have them isolated and converted to cash at the end of the Period of Performance? Can savings be expressed in terms of return on investment?
[Government’s Response] A1. While we do not use the phrase “cashable savings” Section V. Criterion 5, Factor 1, Bullet 4 states: You must calculate the savings that will accrue to the public sector based on successful achievement of each outcome target through the intervention. Savings must be shown in dollars. If public sector savings accrue at multiple levels of government, you must break out the savings by each level of government. However, you must be able to demonstrate some savings at your level of government. Savings may accrue through preventative programs that reduce the customer burden on existing services. […] These savings for the local government could be based on reduced need for workforce system services by the target population, increased efficiency due to a decreased intensity of service delivery needs, or a better allocation of resources. […] Pay for Success models are best viewed from this cross-sector assessment; accordingly, you should describe any cross-sector savings or additional non-monetized benefits. As a result we expect applicants to calculate in dollars the anticipated savings as a result of the project. Savings must still accrue to the government, including at the applicants level of government, even after the return on investment has been paid out. The savings do not need to be cashable.”
Commentary: We read this answer to mean two things. First, savings will accrue to different budgets across different governments, both during the lifetime of the SIB program and afterwards. This is in line with the savings analysis that was published by McKinsey several months earlier. Second, the government is interested in programs in which direct “cashable” savings do not fully cover the cost of implementation. This means that, at least in the short run, the government expects to spend more on the SIB program that it will save.

The intermediation question:
“Q6. Can a government entity separate of the applicant act as the intermediary?
[Government’s Response] A6. While the SGA does not define the type of organization that may be an intermediary, applicants should be mindful of the complications that could arise if another government entity acts as the intermediary. As stated above, the intermediary must be in a position to actively and quickly manage service providers and delivery strategy based on real time information. A key benefit of the PFS model is that it allows governments to pay for outcomes that are achieved through service delivery methods that they may be unable to undertake themselves. Furthermore, while it is not inconceivable that one state agency, “the applicant,” could subcontract another agency to act as the “intermediary,” such an arrangement between government applicant and government intermediary must be governed by the Federal contract guidelines of the funding stream, which do not allow for sub-grant authority.”
Commentary: We believe this answer conflates programmatic and financial intermediation in the SIB model. By programmatic intermediation, we mean activity related to selecting, managing and scaling-up service providers over the lifetime of the SIB project. By financial intermediation, we mean activity related to raising capital from private investors on behalf of service providers. An intermediary can engage in one or both activities. In some cases, no financial intermediation is necessary because the service provider is better positioned to raise funds. In other cases, no financial intermediation is needed because, for example, only one provider may be delivering services.
The answer suggests that the government would make a poor programmatic intermediary because it would have trouble nimbly managing the operations of several nonprofit organizations.
But the answer does not rule out financial intermediation by a government entity. In this case, a government entity would offer financial sponsorship to social service organizations while they implement the program, after which the line agency that commissioned the SIB would pay for any program outcomes. In fact, several government entities worldwide have already started exploring the potential to inject capital into organizations that would act as financial intermediaries for the SIB. Although Big Society Capital in the UK is not a quasi-governmental organization, it was created by a group of political and financial actors for the purpose of catalyzing the impact investment space. A portion of BSC’s work may include capitalizing financial intermediaries and potentially acting as a financial intermediary.

Private Investment in Social Impact Bonds

I just published some thoughts about the Goldman Sachs social impact bond deal in the Stanford Social Innovation Review.

Private Investment in Social Impact Bonds

Stanford Social Innovation Review
August 8, 2012
Michael Belinsky

This past week marked the introduction of social impact bonds to the United States. Government officials, businessmen, and academics who have been working diligently to develop this policy innovation have announced progress on two social impact bonds (SIBs), one in Massachusetts and another in New York...

Minnesota's pay-for-performance pilot

As part of its effort to create a pay-for-performance pilot, Minnesota recently released a request for information that asks the public to submit information in response to multiple questions about the potential design of a pilot program. The state has expressed willingness to issue bonds up to $10 million to finance the pay-for-performance pilot. The RFI asks for feedback on programs in workforce development and supportive housing. There are several similarities to, and differences from, the pay-for-success model that is currently being designed by Massachusetts.

- Minnesota has issued two RFIs, one for service providers and another for third parties. - Massachusetts issued one RFI, but two RFPs, asking service providers and intermediaries to apply separately for the invitation to negotiate with the state. One purpose of this separation was to avoid a situation where the intermediary entered into an exclusive relationship with a suboptimal service provider, or vice-versa. A downside of this separation was that it was much harder for the intermediary to create, plan, and describe a potential program delivery model without knowing for sure which service provider's model it would ultimately use. Minnesota seems further removed from this decision. It currently seeks responses that would inform its program design, rather than RFP responses from which it would select its preferred service providers and third parties.

- Minnesota's RFI mentions that the state might play the role of an evaluator. The Massachusetts RFP did not discuss that option. If the state commissions the social outcome, agrees to pay for it, and evaluates the service providers' success in achieving that outcome, then it will have to manage a perceived - and perhaps a real - conflict of interest.

 - The bond. Minnesota is interested in issuing a bond to pay service providers for successful achievement of social outcomes. Here is the logic of issuing a bond, as I understand it. The service providers' program would reduce costs or increase revenues to the state. These financial benefits would appear in the state's budget during the service providers' program and after the program; service provision will create other benefits, as well, but they may not appear on the budget at all. Massachusetts and Minnesota have chose two different options for paying for all these benefits. Massachusetts has requested budgetary authorization (for $50 million) to pay service providers if they achieve predetermined outcomes. Minnesota has chosen to issue a bond (for $10 million) to pay service providers if they achieve their outcomes. Minnesota will presumably repay the bond at least in part from the financial benefits that the service providers' programs created.

 - Service providers' funding gap. In the proposed designs of both states, service providers will need to self-finance or raise external capital to fund the implementation of the program. The state pays only when - and if - predetermined outcomes have been achieved. In both cases, there is an opportunity for private capital to fund social outcomes.

- Minnesota Third Party RFI
- Minnesota Service Provider RFI

Justice Project Pakistan wins the Echoing Green fellowship

I am so excited that Sarah Belal, founder of Justice Project Pakistan, won the Echoing Green fellowship this past month. As a member of the Echoing Green Social Investment Council, I had the pleasure of meeting Sarah several times during her application process.

JPP defends death row inmates in Pakistan, combating cruel and usual detention (in poor conditions and in secret prisons), interrogation by torture, and wrongful conviction. It distinguishes itself in the Pakistani context by having an investigative team, interviewing the inmates it defends, and operating as a woman-run legal shop in a male-dominated legal culture. I personally think that Sarah is doing important and impactful work.

I called Sarah to congratulate her last week. She was in the Pakistani mountains (a less dangerous feat that I imagine, I was assured), but her happiness at winning the award was apparent even through the choppy reception. Before the fellowship, she was being funded in part by two Open Society Institute grants, and hopes that the fellowship will increase her ability to secure grants from organizations that fund criminal justice activities worldwide.

Imitator protests: Hong Kong, Middle East, and elsewhere

There have been many political protests over the past twelve months, from the Middle East to Wall Street, from Russia during the elections to swearing in of the new Hong Kong chief executive. The reasons for these protests are several and different across the political contexts. Russians feel cheated by Prime Minister Putin’s pass-the-baton dance around the country’s constitution. Many hoped that Putin would eschew the presidency. Egyptians are upset that the country’s military leadership is tending toward dictatorship as it stripped the newly elected prime minister of much of his political authority. Yet many had hoped for a better slate of presidential candidates so that breaking up with Hosni Mubarak didn’t mean entering into a relationship with the Muslim Brotherhood. And, in a microcosm of the anti-Communist wave in China, the people of Hong Kong are lashing out against their newly elected chief executive, a “close ally of the Communist party,” much like the mainland politburo lashed out against the Bo Xilai, the Community party-affiliated governor who wire-tapped Hu Jintao.

These protests, however, have not accomplished their political goals. Putin has assumed the presidency seemingly unscathed. The Egyptian military authorities have ignored the (confused and confusing) political demands of the recent protests. And the Leung Chun-ying, the Hong Kong chief executive, will start his job protests notwithstanding. Not to mention Occupy Wall Street, which apparently fizzled out.

Perhaps this recent wave of protests are insufficiently large, insufficiently motivated and lack a coherent agenda. Russian wanted recounts, disliked the typical corruption of their electoral process, and were generally upset at Putin. But the alternate candidate was uninspiring. They did not necessarily want him; they just didn’t want Putin. The current Egyptian throng is a shade of the previous protest movement that ousted Mubarak and transformed Egypt. And Hong Kong is one of China’s pressure valves: You protest on its streets because you cannot protest on the mainland, you circumvent the mainland’s one child policy in Hong Kong hospitals, and you enjoy the city’s several distinct freedoms.

So maybe we are seeing the rise of imitator protests, ones that are sparked by the large successful movements in Egypt and elsewhere, but lack their strength, direction and perseverance.

SEC wants vote on money market mutual fund regulation

It’s interesting that SEC Chairwoman Mary Schapiro is only now increasing regulation of money market mutual funds. MMMFs are mutual funds that hold fixed income assets, usually short-term (less than one year) assets like commercial paper. Their liability side has a fixed value claim of $1. When Lehman collapsed, Reserve Primary Fund, a large MMMF, broke the buck, meaning it lowered its share price below $1. This caused a run on the Fund, and subsequently a general run on money market mutual funds. The government had to step in and guarantee all existing MMMF claims.

Now Schapiro is proposing several regulations:
- capital buffer against the assets in the MMMF portfolio
- limit amount of shared that can be redeemed at any one time
- or, in lieu of the limit, make funds float their net asset values, meaning they will no longer be fixed to $1

The limit on the number of shares is curious since, as I understand, money market mutual funds can already hold money back for 90 days, although they rarely do this. Also, I am not sure how the limit-or-float mechanism would prevent an imitator run like the one that happened in 2008 when Reserve Primary Fund broke the buck. Presumably the limit prolongs the run, but the float encourages it, as a falling share price may spook investors and spark a run.

The capital buffer is also curious. I presume, although I have not checked, that the size of the 2008 run exceeds the size of the capital buffer than Schapiro is proposing. This means that her proposed regulation would not have stopped the 2008 run from occurring. A friend recently mused that financial regulation is always designed to avoid the previous crisis. Well, it should do at least that.

Update on social impact bonds in Australia

The New South Wales government in Australia has made some progress with its social impact bond program. NSW started looking at SIBs about a year ago. Here are some details on their work so far.

SIB 1: Foster Care

Size: $10 million
Population: 550 families
Duration: 5 years
Target outcome: Number of days that children spend in foster care

Government: NSW, Australia
Nonprofits: Benevolent Society
Investors: Westpac Corporation and the Commonwealth Bank of Australia
Intermediary: Mission Australia and Social Finance (different organization from Social Finance UK)

SIB 2: Foster Care

Size: $10 million
Population: Unknown number of children up to 5 years old and their parents
Duration: 7 years
Target outcome: Number of days that children spend in foster care

Government: NSW, Australia
Nonprofits: UnitingCare Burnside
Investors: Westpac Corporation and the Commonwealth Bank of Australia
Intermediary: Mission Australia and Social Finance (different organization from Social Finance UK)

SIB 3: Youth Recidivism

Size: $7 million
Population: 500 young adult repeat offenders
Duration: 6 years
Target outcome: Unknown 

Government: NSW, Australia
Nonprofits: Unknown
Investors: Unknown
Intermediary: Mission Australia and Social Finance (different organization from Social Finance UK)


Social impact bonds in international development

Elizabeth Littlefield of OPIC (and previously head of CGAP at the World Bank) recently chaired a Steering Committee discussion on the application of social impact bonds in international development. Key questions, of course, are 1) who plays the role of the payer in this model, 2) how are social impact bonds different from Cash on Delivery, and 3) what's the right intervention for this model? One intervention that has already been analyzed is for malaria (see Dalberg report). And the Gates Foundation, whose key achievement (and starting point for the foundation) has been with respect to polio, is interested not only in that, but also in family planning.

Instiglio has put out some preliminary research along the same lines: "Social Impact Bond Applications in International Development." 

Social impact bonds on YouTube

Here are some recent and earlier videos about social impact bonds.

1. An old announcement of the launch of the Peterborough social impact bond. Link.

2. A Centre for Social Impact video featuring Dr Alex Nicholls from the Skoll Centre for Social Entrepreneurship at Oxford and Professor Cheryl Kernot from the Centre for Social Impact. Link.

3. A short video by McKinsey describing the SIB concept. Link.

4. A webinar by McKinsey on SIBs. Participants include Tracy Palanjian from Social Finance, Professor Jeffrey Liebman from Harvard Kennedy School, and Laura Callanan from McKinsey, and moderator Matt Miller from the Washington Post. Link.

OMB May 18 memo on pay-for-success

In a May 18 memo titled "Use of Evidence and Evaluation in the 2012 Budget," the Office of Management and Budget describes pay-for-success contracts. One key message of the memo: "Agencies should demonstrate the use of  evidence throughout their Fiscal Year (FY) 2014 budget submissions." The memo covers:

- Proposing new evaluations
- Using comparative cost-effectiveness data to allocate resources
- Infusing evidence into grantmaking (the pay-for-success model is mentioned here)
- Using evidence to inform enforcement
- Strengthening agency evaluation capacity

The pay-for-success message is: "OMB invites agencies to apply a pay-for­-success model for programs funded by either discretionary or mandatory appropriations. Agencies should also consider using the new authority under the America COMPETES legislation to support incentive prizes of up to $50 million."

Excepted language on pay-for-success:

     Pay for Success:  Taking the principle of  acting on evidence one step further, the
Departments ofJustice and Labor will be inviting grant applicants to use a "pay for
success" approach, under which philanthropic or private entities (the "investors") pay
providers upfront and are only repaid by the government i f  certain outcomes are met.
Payment amounts are based, in part, on the amount that the Federal, State, or local
government saves.  A pay-for-success approach is appropriate where: (i) improved
prevention or other up-front services can produce better outcomes that lead to cost
savings at the Federal, State, or local level; and (ii) foundations or others are willing to
     To date, the Administration has focused its Pay for Success planning on programs
financed with discretionary appropriations.  OMB invites agencies to apply a pay-for­
success model for programs funded by either discretionary or mandatory appropriations.
Agencies should also consider using the new authority under the America COMPETES
legislation to support incentive prizes ofup to $50 million.  Like Pay for Success, well­
designed prizes and challenges can yield a very high return on the taxpayer dollar.


McKinsey's report on social impact bonds

McKinsey's Social Sector Office has continued their work with social impact bonds. Yesterday, they issued a 68-page report that analyzes the nascent market for social impact bonds in the United States. This report is part of their larger work on SIBs, which includes:

  • "Will social impact bonds work in the United States?" -  a brief overview of SIBs issued in March 2012.
  • "From Potential to Action: Bringing Social Impact Bonds to the U.S." - This report, issued on May 15, 2012. 
  • Rapid Sustainability Assessment - A toolkit aimed to help potential funders, providers, and intermediaries determine their organization's suitability for participation in the SIB ecosystem. Publication date is TBD.
  • Capabilities Due Diligence - A more thorough evaluation for each of the stakeholders. As I understand, this will focus on due diligence analysis of potential service providers. Publication date on this is also TBD.

Increased state revenue

Patrick Lester at Driving Social Impact writes about some promising news for social services funding at the state level:

     According to a report released May 2 by the National Conference of State Legislatures, more than half of U.S. states expect to end their current fiscal years with budget surpluses. The report is based on a survey of state budget officials.
     The recovery is being led by an overall rebound in tax revenues. According to a separate report last month from the Nelson A. Rockefeller Institute of Government, state tax receipts have risen to their highest levels since the start of the recession in 2007. The gains have been highest in Midwestern states such as Iowa, Nebraska, Illinois, and Michigan.