Archive for December 2011

Social impact bonds - exploration across the world

Governments worldwide are examining the social impact bond structure as a potential mechanism to deliver social services to their constituencies.  I gather here the latest information I have found about various

exploratory efforts around SIBs.

UNITED KINGDOM
- Peterborough ongoing recidivism SIB 
- Exploration of SIB addressing preventive care with troubled families

UNITED STATES
- Massachusetts
- Minessota:  investinoutcomes.org
- New York: "'We're actively moving it forward,' said Richard Buery, president and chief executive of the Children's Aid Society, which is working with the Cuomo administration and social justice organizations on the project." (source)
- Rhode Island: "SVPRI [Social Venture Partners Rhode Island] is collaborating with Boston-based Social Finance, Inc. to explore the feasibility of implementing Social Impact Bonds in Rhode Island. [...] We are currently reviewing the process of implementing a bond that would focus on reducing recidivism and could make Rhode Island among the first states to adopt this groundbreaking approach on investing with impact." (source)

SCOTLAND
- "The Scottish Government is currently investigating the potential of SIBs to contribute to improved outcomes and these may have potential to contribute to regeneration as well as other Governmental priorities" (source)

CANADA
- "Feasibility studies are already underway in Canada to explore the use of SIBs, including one with the Heart and Stroke Foundation of Ontario that looks at lowering health-care costs through an innovative health management intervention to reduce hypertension. This initial feasibility work will provide tools and a path to development that will document the support necessary to develop SIBs in Canada." (source)

IRELAND
- Ireland's social investment fund has issued a call for ideas for SIB funding, with the deadline of Sept. 2011.  Clann Credo - The Social Investment Fund, The Atlantic Philanthropies and the Centre for Effective Services have begun research Social Impact Bonds (SIBs) and their potential applicability in an Irish context. (source)
- Programme for Government (2011 to 2016) commits to establish Social Impact Bonds. Topics mentioned include social housing, anti-social behavior, children with ADHD, and diabetes.

AUSTRALIA
- "The New South Wales Government in Australia has announced that it intends to implement a Social Impact Bond (SIB) from February 2011." (source)

SRI LANKA
- "Jeevan Thiagarajah, Executive Director of the Consortium of Humanitarian Agencies, in a proposal to the Ministry of Finance has suggested the creation of social impact bonds. He says under this the initial objective is to attract contributions of Rs.5, 000 from one million citizens who would receive annually 2 % interest on their investment which will be the initial capital of the fund." (source)

Update:

ISRAEL
- "The Portland Trust is in the process of establishing a Social Investment Task Force (SITF) in Israel. This will be led by Sir Ronald Cohen. The SITF will define and determine the course of action to reduce social gaps in Israel. A number of areas are being examined including: case studies of community investment funds from different countries; effective financial tools for social investment (including social impact bonds)" (source)


Decline of religion in Europe

An interesting statistic about the decline of religious observance in Europe.

For years the number of faithful has been declining. The trend has swept across all of Western Europe, with churches forced to close in France and Belgium too. But in the Netherlands, Christianity's retreat from society has been particularly drastic. The Protestant Church alone loses some 60,000 members each year. At this rate, it will cease to exist there by 2050, church officials say.

Source:

Microfinance in the US

Here is an interesting twist on microfinance by West African and Dominican immigrants in Philadelphia.

In this version, the nonprofit fronts the money so that each participant can get a small loan right away — in the case of the Woodland Avenue group, either $500 or $1,000 — rather than waiting their turn for a larger lump sum. But like a traditional ROSCA, everyone shares the risk, via an agreement to assume responsibility for their peers' debts. That peer pressure drives near-perfect repayment rates.

There seems to be a geographic risk here:  If a large grocer opens nearby, many bodegas will see demand plummet and risk-sharing among them won't absorb the shock to their ability to repay the loans.

Source

Larry Summers on the economy

I love how clearly Larry Summers articulates our economic crisis:

LS: The principal problem for the United States economy over the near to medium term continues to be lack of demand. Demand, unfortunately, is heavily in the control of fiscal policy, which requires congressional action for important actions, and monetary policy, which depends on the Fed. So there are limits to what the Obama administration unilaterally can accomplish.

Mitt Romney and Harvard Business School

The New York Times has a wonderful article on Mitt Romney's life in Cambridge and at Harvard's law and business schools.  The articles remind me of a series that the Boston Globe several years ago, which I post below as well.

I think Jodi Canton does a wonderful job of describing how hard working and dedicated to his career and studies Mitt Romney was during his three-year-long joint degree studies at Harvard.  But during the process, she makes the HBS appear much more rigorous and daunting that I have found it.  Perhaps in Romney's day, being grilled was a huge and scary deal.  But today it is stressful and uncomfortable only -- and by no means the frightening endeavor that Canton makes it seem.  The cold call, discussion-based classroom experience incentivizes student to prepare - lest they appear stupid.  But with 10% of the class receiving a "3," the lowest mark, and 20% receiving a "1," the highest mark, while the majority receive a "2," that incentive is weak and forces you to study only so much.  Driven people drive themselves to succeed regardless of environment, and I think Mitt Romney's driven nature (note that I do not endorse his candidacy or politics, but only admire his drive) speaks more of him than of HBS.

"The Making of Mitt Romney"
http://www.boston.com/news/politics/2008/specials/romney/

"At Harvard, a master's in problem solving"
http://www.nytimes.com/2011/12/25/us/politics/how-harvard-shaped-mitt-romney.html

Metrics for the second social impact bond in the UK

More information on the metrics for the second social impact bond project announced by Civil Society Minister Nick Hurd involving problem families in Birmingham, Hammersmith and Fulham, Leicestershire and Westminster.


The new bond for projects with problem families is likely to be more complex. The consultants A4e Insight have been hired by the Office for Civil Society to develop the metrics and will produce an initial report by Christmas. Edward Hickman, director of the firm, says that before any project can go ahead, it must be able to quantify a way of improving families' lives and the improvement must generate sufficient savings for the local authority. Those savings must also be "cashable", he said - capable of being turned into hard cash that will be used to pay back investors.
Andy Robinson, assistant chief executive of Leicestershire County Council, one of the local authorities involved, says there are likely to be a number of metrics. "There are a range of outcomes that might benefit the council," he says. "They might include a reduction in police visits, a decrease in eviction rates, or a rise in school attendance."


Source:
Third Sector
Analysis: Can social impact bonds help to create a better society?
1 November 2011
http://www.thirdsector.co.uk/news/1101352/analysis-social-impact-bonds-help-create-better-society/


Structuring a social impact bond intermediary (Young Foundation)

I came across a paper on social impact bonds by the Young Foundation in the UK that describes a "Public Sector SIB" where local authorities borrow in capital markets to finance a social program and are repaid by the national government is the social program meets predetermined outcomes.

This is an interesting variant on the social impact bond structure that was implemented in Peterborough, UK.  There, funding was raised from foundations and other philanthropic sources, rather than the capital markets; the intermediary was Social Finance UK, a nonprofit, rather than the local government; and the payer was the local, rather than the federal, government.

The obvious advantage of borrowing from capital markets by floating municipal debt is that capital markets offer access to much more money than philanthropies have at their disposal.  And capital markets can not only fund larger and many more interventions, but also offer rating by pricing the risk of the social impact bonds.  In this sense, the pay-for-success contract actual does become a bond -- whereas now the bond is a misnomer for a contract contingent on outcomes.

Perhaps the largest disadvantages to using local governments rather than third-party intermediaries as the project manager revolves around risk and management.  The Peterborough model transfers risk from government -- that is, from taxpayers -- to the funders of the intervention.  If the intervention does not achieve the predetermined outcome, then funders do not get paid.  In the model described by Young Foundation (and they describe other models as well) local taxpayers retain the risk of intervention failure because the bond must be paid, yet the federal government payments are contingent on outcome.  In fact, because mutual funds are large purchasers of municipal debt, and people's retirement portfolios often sit with mutual funds, taxpayers are hurt three times:  from the failed intervention that aimed to improve their social welfare; by having their taxpayer dollars diverted to payment for a failed intervention; and from whatever effects this may have on their retirement portfolio.

Second, although whichever party bears this payment risk faces the greatest incentive to organize the program in a way that best achieves outcomes, the local government may not be the best suited to accomplish this program management.  Local governments typically work with service providers on a regular basis and understand the existing landscape of service delivery well.  But not every local government has the capacity to discover and understand new types of interventions, orchestrate complex delivery of services in a new way, or oversee service delivery in a new way that forces providers to prioritize outcome over process compliance.  Outsourcing of programmatic content and project management is one of the things the innovative social impact bond scheme is testing.

Paper source:

Geoff Mulgan, Neil Reeder, Mhairi Aylott & Luke Bo’sher
Social Impact Investment: the challenge and opportunity of Social Impact Bonds
The Young Foundation March 2011.
http://www.youngfoundation.org/files/images/11-04-11_Social_Impact_Investment_Paper_2.pdf

Some thoughts on impact investing

I recently came across and short and interesting interview with Dr. Judith Rodin, president of the Rockefeller Foundation.  I roughly capture and comment on two Dr. Rodin's points below.  The full interview is here:   http://www.bbc.co.uk/news/business-15102389.

If you look at the problems in the world ... it's estimated that there are trillions of dollars in need.  It's very clear that when we did the catalogue that there are really only billions of dollars of money in government aid and philanthropy that are the traditional sources of trying to solve some of the world's problems...  At the same time we were beginning to understand that capital markets were developing funds with what we called double bottom line mandates...

I think that this quote captures an interesting shift in the social contract between businessmen and citizens in general and the governments under which they operate.  The way I understand the original social contract is that people unite under governments, and agree to surrender to it some rights and resources, and the government agrees to resolve for those people a set of collective problems that they alone cannot address, such as providing for a common defense.  When the Great Depression drastically undercut social welfare, not just in the United States but also abroad, the government took a much larger role in creating and sustaining social safety nets -- we now taxed everyone much more and redistributed welfare to a greater extent.

We now seem to be moving away from looking to governments and international development agencies for safety nets and economic development assistance.  Most of the funding and technical acumen still resides within governments.  But people seem to be increasingly looking toward non-governmental solutions - whether by giving to NGOs as a way to assist with acute crises like in Haiti and Chile, or by preferring double-bottom line solutions like microfinance (through Kiva and others) rather than waiting for the IMF or USAID.

High net worth individuals are acutely aware of the growing inequality in Asia and other developing countries. They want to give back in ways that are consistent with the ways in which they gave money ... For those who would like to figure out how to use their financial acumen and have social impact within the same set of vehicles ... impact investing is becoming a great idea. 

I take away from this quote that economic and social development by businessmen will look drastically different from that done by international development agencies and NGOs.  Already, as I sit in classes at Harvard Business School where we discuss impact investment and social businesses, I see a focus on financial health of socially responsible enterprises at the expense, at least in my mind, of focus on the social impact of those businesses' activities on their target populations.  Whereas financial return is measured using complex instruments, validity of the logic model for the social impact seems to suffice for many business investors when evaluating social return.


Big Society's social impact bonds program

I have not yet seen public announcements of social impact bonds for "problem families," which UK's Big Society project intended to accomplish.

Here is from the August 2011 article from the Cabinet Office:

A major trial of an innovative new way to fund intensive help for families blighted by anti-social behaviour, crime, addiction and poor education was announced by Nick Hurd, Minister for Civil Society today.
Liverpool and Essex are also looking to trial a related Social Impact Bond initiative to support vulnerable adolescents and their families with the objective of preventing care entry
We expect the Social Impact Bond pilots to be funding intensive interventions from spring 2012.

Social impact bonds at the Social Market Conference

The Rt Hon Iain Duncan Smith, a British MP, spoke about social impact bonds at the Social Market Foundation conference last week.  He mentioned the Peterborough UK social impact bond, as well as Steve Aos's research in Washington State about estimating per-dollar social returns.   Some interesting news:

Many of you will be aware of the reoffending Social Impact Bond in Peterborough – the first of its kind anywhere in the world.
We are also in the middle of procuring for the Innovation Fund, which will enable investors to back innovative projects which help disadvantaged young people.
This is about getting in there before people have left school, targeting kids from the age of 14 and up and tackling the root causes of disengagement from education and employment.
And the Cabinet Office is currently leading innovative pilot projects with four local authorities, looking at how social investment can be used to help turn around the lives of some of the most troubled families.

Roundup: Vaclav Havel obituaries

Roundup of great obituaries to Vaclav Havel on the web.

David Remnick, who spent many hours with Havel, writes in his New Yorker
http://www.newyorker.com/online/blogs/newsdesk/2011/12/living-within-the-truth-vaclav-havel.html

Dan Bilefsky, who covers Eastern and Central Europe, and Jane Perletz, who has covered Indonesia and Pakistan, write in the New York Times
http://www.nytimes.com/2011/12/19/world/europe/vaclav-havel-dissident-playwright-who-led-czechoslovakia-dead-at-75.html

And, my favorite, a reprint of Timothy Garton Ash's 1989 piece on the Czechoslovakian revolution in the New York Review of Books
http://www.nybooks.com/articles/archives/1990/jan/18/the-revolution-of-the-magic-lantern/

McKinsey innovation navigator

The McKinsey recently-launched Innovation Navigator profiled my friend's project in NYC to crowdsource ideas for greening New York.

Project:  http://nyc.changeby.us/#start

McK's Innovation Navigator:  http://mckinnovate.com/

Description:
"The Innovation Navigator aims to make it easier for everyone to learn about the people, places, and management strategies driving government innovation. Navigate around the publicly sourced case studies in the map. Become part of the discussion and submit your own."

Social impact bonds -- Westminster's social contact

The city council of Westminster incorporated social impact bonds into a new social contract with its citizens and businesses.

"The government's economy in public spending and other social and economic changes demand a new approach from local government. We see this as being guided by a new sense of civic responsibility, fairness and opportunity. Our principle of responsibility is about recognising the value of public contributions to contribute to making it a successful place.

http://www.guardian.co.uk/local-government-network/2011/dec/12/westminster-council-civic-contract-summary?newsfeed=true

JP Morgan Impact Investing report

JP Morgan's impact investment research team released its second report on the nascent industry.

http://www.thegiin.org/cgi-bin/iowa/resources/research/334.html

Biggest investment are in housing.

See spreadsheet below. If Table 8 in the report is reformatted and sorted by average investment type, we see that the largest investments are made in housing, the second largest in education.  Average housing investment is $5 million, and the average education investment is $0.7 million.  The average overall impact investment is around $2 million.


https://docs.google.com/spreadsheet/pub?hl=en_US&hl=en_US&key=0AoRYN7f_7ejDdEtUNTJhQnEzZno4UVlUUE13TkxBS1E&output=html

Interesting insights about government efforts to spur impact investment (pp. 7-8 of the report):

The United Kingdom (“UK”) government has established Big Society Capital, an impact investor with potentially GBP 600mm (USD 960mm) in capital to serve as a cornerstone investor leveraging further private capital. It will also support the development of new products for the impact investment sector, including “social impact bonds”, in which investors receive dividends linked to successful social results

In the United States (“US”), the Overseas Private Investment Corporation committed USD 285mm to catalyze USD 875mm of investment into six impact investment funds in emerging markets, an example of growing support for impact investments by development finance institutions. The US Small Business Administration also launched an Impact Investment Initiative, pledging USD 1bn over five years to support domestic businesses operating in underserved communities. The initiative matches capital raised by private investment funds through a public-private partnership.

The Australian Government’s Social Enterprise Development and Investment Funds initiative established the country’s first investment funds for domestic social enterprise late-stage seed and growth capital. The funds have been seeded with government first loss capital, include matching capital from private sector funders, and will provide flexible, tailored financial products and support to social enterprises.

"The data exhibits a lower return expectation for developed market impact investments than for traditional investments in the same region."
"For emerging markets, by contrast, the impact investment return expectations are more in line if not higher than the benchmarks’ realized returns"

What do impact investors expect from their investments?
"We find that 84% of investments into non-profit companies or funds were made with concessionary return

expectations (relative to similar non-impact investments). Similarly, 93% of investments made with competitive return expectations went into for-profit companies or funds."


What return do impact investors expect?
Return on debt investments into nonprofits was 3-4%.
Return on debt investments into for-profits was 7-8%.
The corporate form of the investee shaped investors' perceptions more than did the investors' goals for the investment (i.e., concessionary versus competitive expectations).

Returns on impact investments into for-profits do not exceed expectations.
Investors expected returns on the range of 2-7% into developing markets and 8% for emerging markets.  They realized returns of 3-8% in developing markets and 2-6% in emerging markets.  (Tables 10, 11)  And this result is likely to be more stark in reality because reporting bias probably inflates reports of realized returns and suppresses reports of returns that fell short of expectations.