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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.
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 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.
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.
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
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
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.
There have been many political protests over the past twelve
months, from the Middle East to Wall Street, from Russia during the elections to
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
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.
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.
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.
Social impact bonds seem to have caught the attention of the European Union. According to this website, the EU's Employment, Social Affairs and Inclusion division is soon holding a seminar to explore funding strategies for addressing homelessness. The second seminar theme, titled Diversification of Funding Resources, includes "the potential of social impact bonds."
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 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.
I was excited to see Christine Lagarde interviewed by the recently created Tri Sector Forum. TSF aims to identify and empower individuals who have the potential to become leaders in private, social, and public sectors. Ms. Lagarde will also be the MPP Class Day speaker at Harvard Kennedy School's commencement address this year.
The interview: http://tri-sector.com/blog/item/lagarde.html
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.