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 Instiglio.org)


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.

Sources
- 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)

Sources:

http://afr.com/p/national/westpac_cba_embrace_social_bonds_myi01zs3Mzr2EVCbfTJrkM#

http://www.csi.edu.au/news/Successful_bids_for_Social_Impact_Bonds_in_NSW_announced175.aspx

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
invest.
     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.

Source: http://www.whitehouse.gov/sites/default/files/omb/memoranda/2012/m-12-14.pdf

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.


Kennedy School Review releases new issue

I'm happy to report that the Harvard Kennedy School Review, which I help run, just released its 2012 issue. Some of the great articles include:

  • It's Not Just the Arab Spring, It's the Economy (Stupid), By Josh Martin
  • Lessons from the “Unorganizable”, By Laine Middaugh
  • Counting What Counts, By Ben Beachy and Justin Zorn
  • Behind Bars, Forever, By Casey Schutte
  • A Needle in a Haystack, By Greg Larson


Big Society Capital, world's largest hybrid organization

England recently launched Big Society Capital as part of its effort to develop the social finance market. BSC is a billion-dollar fund that was capitalized with dormant accounts of UK's largest banks, as well as with funds that the banks gave in order to improve their post-economic recession image in society. The bank's mandate to maintain long-term sustainability requires it to generate enough revenue to cover at least the costs of operations. Its other mandate is to build the social finance market. These two mandates may clash and complicate the life of its managers. Many market-building investments may generate insufficient cash flow to fit under the sustainability mandate. Some of those may be investments to smaller organizations where the cost of the loan is greater than the risk-adjusted return.

BSC's chairman is Sir Ronald Cohen, who helped start Social Finance UK, the organization that is implementing the first demonstration project for social impact bonds.

Notably, BSC is the world's largest explicitly hybrid organization. It comprises three separate organizations. 

1. Big Society Capital Trust, the holding company.
2. Big Society Capital Limited, the operating company that will make for-profit investments.
3. Big Society Foundation, which will "receive charitable donations and develop grant programmes to support the Group's mission." (source)

HKS profile of our public service innovation award

Very excited to be profiled on the Harvard Kennedy School website:

http://www.hks.harvard.edu/news-events/news/students/accenture-award

"We founded Instiglio with the mission of empowering societies to discover, adopt and scale innovative solutions to social problems," said Belinsky. "Our team united over an opportunity to improve drastically the delivery of social services in developing countries by adapting the social impact bond model to emerging markets. We are thrilled to combine our Kennedy school training and our development world experience (our team has collectively worked in over 20 countries) to durably improve social service delivery. " 

Dartmouth Model UN (DartMUN)

This brings back such good memories. I still remember the hectic days of creating this organization from scratch with my best friends during our sophomore year of college. DartMUN was the largest student-run conference the year we started it. And now it looks like it either is, or will soon become, the largest conference at Dartmouth. I'm so proud of all the people who have helped carry on the DartMUN tradition over the past six years.

High schoolers come to College for Model UN
Emily Brigstocke, The Dartmouth Staff
Monday, April 2, 2012
http://thedartmouth.com/2012/04/02/news/modelun

"Dartmouth Model United Nations hosted its seventh annual conference this weekend, drawing 500 students from 33 high schools across the country for the largest conference in DartMUN’s history."

"Despite the serious aspects of the conference, the DartMUN staff also planned twists, such as the kidnapping of the prime minister of India from the Pakistani War Cabinet before the vote on a United Nations-sponsored cease-fire."

Accenture Public Service Innovation Award

I am so humbled to be part of a great team that received the Accenture Public Service Innovation Award last night at the Harvard Innovation Challenge.  Our idea, which we call Instiglio, is to help governments in developing countries apply pay-for-success contracts (a k a social impact bonds) to improve service delivery in areas such as HIV/AIDS, youth gang participation, and contract teachers.  The mission of Instiglio says it best: to empower societies to discover, adopt, and scale innovative solutions to social problems.

More about the award:  www.accenture.com/us-en/Pages/insight-public-sector-innovation-award.aspx

More about our idea:  www.instiglio.org

Media Mentions:

http://bostinno.com/2012/03/30/the-6-winners-who-walked-away-with-their-share-of-50k-from-harvards-i3-challenge/


Pay for Success in Deval Patrick's budget

I just got around to posting this, but here is the recent development from Massachusetts regarding a Social Innovation Financing Trust Fund - a facility to pay for social impact bonds.

     Section 35XX. (a) There shall be established and set up upon the books of the commonwealth a trust to be known as the Social Innovation Financing Trust Fund, in this section called the trust, for the purpose of funding contracts to improve outcomes and lower costs for contracted government services, in this section called pay for success contracts, subject to the requirements of subsection (b).
     (b) Notwithstanding any general or special law to the contrary, the secretary of administration and finance, in this section called the secretary, may enter into pay for success contracts. Each contract shall include: (1) a requirement that a substantial portion of the payment be conditioned on the achievement of specific outcomes based on defined performance targets; (2) an objective process by which an independent evaluator will determine whether the performance targets have been achieved; (3) a calculation of the amount and timing of payments that would be earned by the service provider during each year of the agreement if performance targets are achieved as determined by the independent evaluator; (4) a sinking fund requirement under which the secretary shall request an appropriation for each fiscal year that the contract is in effect, in an amount equal to the expected payments that the commonwealth would ultimately be obligated to pay in the future based upon service provided during that fiscal year, if performance targets were achieved; and (5) a determination by the secretary that the contract will result in significant performance improvements and budgetary savings across all impacted agencies if the performance targets are achieved.
     (c) The secretary, in his discretion, may provide that payments in future years under such contracts shall constitute a general obligation of the commonwealth for which the full faith and credit of the commonwealth shall be pledged for the benefit of the provider or providers of the contracted government services, but the total amount of payments under such contracts secured by such a pledge of the full faith and credit of the commonwealth shall not in the aggregate exceed $50,000,000.
     (d) The secretary shall be the trustee of the trust, shall administer the trust and shall ensure that all funds appropriated as described above are deposited in the trust and shall make payments from the trust in accordance with the terms and conditions of the contracts, without further appropriation. The secretary shall provide a status report on all contracts no later than February 1 of each year to the house and senate committees on ways and means.

Source: http://www.mass.gov/governor/legislationeexecorder/legislation/an-act-making-appropriations-for-the-fy2012.html

Pay for Success in Obama's 2013 Budget

Straight out of the White House 2013 Budget:


Pay for Success in Domestic Programs. Many traditional Government social programs fit one of two molds: prescriptive programs that stifle innovation by specifying eligible providers and activities, or flexible block grants that fail to focus on results. To ensure taxpayers get the best possible return on their investment, the Administration is testing a new program model—Pay for Success—in which the Government provides flexibility for how services are delivered and pays for results after they are achieved. The working capital for a Pay for Success project generally comes from private investors that bear the risk of failure, but receive a financial return if the project succeeds. Projects use and build evidence-based practices to improve the lives of vulnerable target populations, reducing their need for future Government services and cash assistance. Over the course of 2012, the Administration is launching a small number of Pay for Success pilots in criminal justice and workforce development. The President’s 2013 Budget reserves a total of up to $109 million to test this new financing mechanism in a broader range of areas including education and homelessness. If successful, Pay for Success projects offer a cost-effective way to replicate effective practices and support continuing innovation as Federal resources become more constrained.

White House, The Budget for Fiscal Year 2013, "Cutting waste, reducing the deficit, and asking all to pay their fare share," page 45, http://www.slideshare.net/whitehouse/the-presidents-budget-for-fiscal-year-2013.

From the information age to the analysis age

I love this new NYT article on the rise of data.  The next innovations will come not from the ability of people to gather more data, but from new ways of analyzing data - combining it, slicing it up, extrapolating it for predictions, and so on.

UPDATE:

Just discovered Kaggle,  an amazing website that capitalizes on the rise of "data scientists" by throwing them into a tournament against each other.

More here:
http://www.businessweek.com/magazine/kaggles-contests-crunching-numbers-for-fame-and-glory-01042012.html

Essex in UK to use social impact bonds to address foster care

I wrote earlier about Essex County in England exploring social impact bonds. Now Essex County has announced that they will use a social impact bond (SIB) to reduce their residential care population. There are 1,535 residential care children in Essex. (I use residential care to describe all children under government care in Essex.) The SIB will take 11% of that population, 170 kids, and try to move about half of them (90 kids) out of residential care using Multi Systemic Treatment, one of several textbook treatments available for addressing this population. (Some others are Functional Family Therapy, Multidimensional Treatment Foster Care, and Family Integrated Transitions.)

Description of treatment. Multisystemic therapy is an intensive, home-based intervention for chronic, violent, or substance abusing juvenile offenders between the ages of 12 and 17. Trained therapists work with the youth and his or her family in a home, school, or community setting, with an emphasis on addressing the causes of delinquency. Service duration averages 60 hours of contact over four months, with each MST therapist working in a team of four therapists and carrying a caseload of four to six families

Effectiveness of treatment. One of the best academic studies of this treatment was in the population of youth who committed sexual crimes. The 89% of participants who completed the study had 83% fewer arrests for sexual crimes and 70% fewer arrests for other crimes than did the control group. (Source: http://www.ncbi.nlm.nih.gov/pubmed/19170451.)

Cost of treatment. According to the famous WSIPP cost-benefit analysis of various treatments, the marginal cost of MST is $4246. (Marginal cost is the cost of serving an additional person, so it is usually lower than the average cost, which is the total cost of treatment of the population divided by the number of persons treated.) Therefore the total cost of serving this population is at least $721,820.

Return on investment. The Essex press release mentions that MST is 4x as pricey as residential care. Using marginal cost, that means if the SIB moves 90 kids out of the residential care system, it will save Essex $1.52 million. The maximum savings (if it avoids 170) is $2.88 million. If we use 2x marginal cost for the estimate, the target savings is $3m and the maximum is $5.76m.

Other estimatesAccording to NSPCC, residential care costs 1,500 pounds/kid/week ($2300/week, or $118,000/year), while cost of treatment is 8,000 pounds/family. This puts target savings at $10.6 million, and maximum savings of placing all 170 kids of $20 million, assuming only 1 year of foster care avoided. Note, however, that these numbers are different from the 4:1 cost-to-treatment ratio mentioned in the Essex County release.

Direct vs. strategic budgetary costs. NSPCC mentions savings accruing to Essex in several ways: "In theory, over time, as the number of preventable family breakdowns are reduced, fewer children would enter the care system, leading to "cashable" savings for the Council, such as through the closure of a residential care home." This is a stretch goal for most interventions. The first savings accruing from a SIB is a direct budgetary reduction in marginal cost: if you place a kid out of residential care, you no longer have to house and feed that kid, reducing government cost. The second savings comes as you successfully place enough kids to close down an entire home -- or to avoid building a new one to meet expected rise in residential care population.

Control group. According to the Essex press release, the residential care population dropped by 5% from 1630 to 1535 last year. If we expect the same population decrease this year, that means we should expect 89 kids to leave residential care without any additional intervention. The Essex social impact bond takes 170 of the 1535 for treatment and will try to move 90 out of residential care. The cynic might say that the bond's work is easy because if it picks well, it might capture the 89 who would have otherwise left residential care anyway, as predicted by the trend. The optimist might say that the bond's work is hard, because it tries to get a 50% reduction in a population that has historically seen a 5% reduction. In either case, the control group should account for the trend in residential care numbers in the county.

Partners. Essex worked with Social Finance UK to develop this social impact bond.

Timeline. An earlier document had the following timeline for Essex:
  • Sept 2011 - start implementing the SIB 
  • Sept 2012 - interim outcomes review 
  • March 2013 - final outcomes review 
Some remaining questions.
  • Services:  What services and service providers will be chosen for this SIB?   What is the full range of services that Essex delivers to its population of 1,535, and what effect do those services have on the population?
  • Funders: Will the funders for this intervention differ from those that funded Peterborough?
  • Savings:  How much of the savings will Essex pass on to the service provider? 
  • Evaluation:  How will the 170 kids be selected from the population of 1,535?  How will Essex attribute efforts to the treatment? Will the remainder of the population be used as a control group, or will the control be constructed in a more scientific way?
Sources.
  • Essex press release
  • WSIPP
  • Borduin CM, Schaeffer CM, Heiblum N., A randomized clinical trial of multisystemic therapy with juvenile sexual offenders: effects on youth social ecology and criminal activity, J Consult Clin Psychol. 2009 Feb;77(1):26-37.

Triodos bank uses social impact bonds to improve employment in the UK

A while back, UK's Department for Work and Pensions (DWP) created a 30 million GBP innovation fund competition to encourage "social service delivery organisations, financial intermediaries and private sector investors to work together to design and finance programmes which can help improve employment outcomes for the most vulnerable young people in society."

Today, VNFW reports details of one of the winners of DWP's competition: Triodos Bank.  Triodos will partner with a service provider, Greater Merseyside Connexions Partnership (GMCP), on a program, that will start in 2012 and run for 3 years, to help 3900 youth ages 14-24 in Merseyrside get jobs.  

The maximum payout of the social impact contract appears to be 4.5 million GBP ($7 million USD).  Triodos raised 2 million GBP to fund upfront operating costs from "a syndicate of leading UK social investors, including the Big Society Investment Fund."  The key question is whether the syndicate included for-profit investors. If it did, this would make this social impact bond the first to attract private capital. (The Peterborough prison SIB was funded by philanthropic institutions exclusively.)

Two other interesting features of this contract are that a) Social Finance, the originator of social impact bonds, does not appear to be involved and, b) the contract is not for recidivism.  These are both firsts for SIBs.  The first point means that if this works, it proves that yet another firm can act as a SIB intermediary.  The second point expands the proof of concept to an additional social problem.  Social problems addressed by SIBs, so far, are:

Peterborough, UK - adult recidivism (service delivery in progress)
Mass., US - youth recidivism (RFR released in Jan 2012)
New York, US - youth recidivism (in planning stages)
Merseyside, UK - youth employment (in planning stages)

Official Triodos release:
http://www.triodos.co.uk/en/about-triodos/news-and-media/media-releases/social-impact-bond-for-merseyside/

Social impact bonds to reward elderly who downsize

Here is an interesting proposed application of social impact bonds:


There are 25 million empty bedrooms in England - mostly where elderly couples have remained living in family homes.The Redbridge pilot scheme "Free Space" offers them to the chance to remain owners but to move out. The local authority pays for the cost of moving and charges an "affordable rent" (up t 80% of market rent) the proceeds of which go to the owner ( who also saved money on Council Tax and utility bills by having a smaller property.)
It is proposed that Social Impact Bonds - the scheme to attract private investment for schemes where the social benefit produces a financial return - would be suitable for these schemes.

The way SIBs worked in Peterborough, UK, government shared savings that were generated by a social intervention - in that case, avoiding a costly incarceration - with the service provider that delivered that intervention.  For SIBs to work here, a social service providers could be tasked with moving elderly couples out of family homes.  Each moved couple would generate financial return if the affordable rent on their now-vacant house (80% of market rent, as the article says), exceeded the cost of housing them elsewhere plus the cost moving them, plus the cost of operations for this social service provider.  This financial return could be split with the provider - and the social impact bond scheme could work.

The government could, however, go it alone and keep all the savings to itself.  The only reason to use social impact bonds here, in my mind, is if the government thinks that financially-incentivized providers could do a drastically better job at moving elderly couples (while adhering to social and ethical standards), or could do the job just as well but have the capacity to act on a much larger scale.  If the government can get the same efficiency and scale, then perhaps social impact bonds are not the right approach here.

Andrew Lohse discusses hazing at Dartmouth

Although I love Dartmouth dearly, I rarely turn to Dartmouth-related issues in this blog in my attempt to focus on social enterprise and such.  But an opinion piece by Andrew Lohse '12 in today's issue of The Dartmouth, for which I wrote op-eds back in the day, as well, is, in short, huge.

Here's the op-ed piece.  Here's the gist:

We attend a strange school where a systemic culture of abuse exists under a college president who has the power and experience to change what can only be described as a public health crisis of the utmost importance: the endemic culture of physical and psychological abuse that occupies the heart of Dartmouth’s Greek community. President Jim Yong Kim’s sterling credentials in public health are fundamentally at odds with the pervasive hazing, substance abuse and sexual assault culture that dominates campus social life.
I was a member of a fraternity that asked pledges, in order to become a brother, to: swim in a kiddie pool full of vomit, urine, fecal matter, semen and rotten food products; eat omelets made of vomit; chug cups of vinegar, which in one case caused a pledge to vomit blood; drink beers poured down fellow pledges’ ass cracks; and vomit on other pledges, among other abuses. Certainly, pledges could have refused these orders. However, under extreme peer pressure and the desire to “be a brother,” most acquiesced. While not every pledge is asked to do these things, many are. The specific tasks vary year to year, but these are things I’ve witnessed as a member of the fraternity.

And here is Dartblog, a blog that focuses on events related to Dartmouth, writing about the op-ed piece and posting an earlier version of it.

Updates with social impact bonds

Great news from the White House on social impact bonds and pay-for-success contracts:


Today, in keeping with that October 21st commitment, we are pleased to announce that the Department of Justice and the Department of Labor will support Pay for Success pilots through 2012 funding competitions. The Department of Justice plans to give priority funding consideration in 2012 Second Chance Act grant solicitations to highly qualified applicants who incorporate a Pay for Success model in their program design. The Department of Labor will also launch Pay for Success funding opportunities through the Workforce Innovation Fund by early spring, making up to $20 million available for programs that focus on employment and training outcomes. Federal agencies will be releasing more information on these, and potentially other, opportunities in the coming weeks and months.

More here: http://www.whitehouse.gov/blog/2012/01/24/pay-success-new-results-oriented-federal-commitment-underserved-americans

Social enterprise classes around Harvard

There has been a boom in course offerings for social enterprise and impact investing around Harvard University.  Here are some of the classes I've seen being offered this year.

Entrepreneurship in the Private and Social Sectors, a class taught jointly between HBS and HKS, a class for which I'm a teaching assistant. Taught by Richard Cavanagh and Robert Higgins.  This class was taught at HKS, and has taken on new form as a joint offering across the river.

Social Impact Investing: Field Course at HBS, taught by Michael Chu.  In this field course, students select and advise a social enterprise that has received, or has the potential to obtain, funding from impact investors.

Social Innovation Lab: Field Course at HBS, taught by Allen Grossman and Dutch Leonard.

The above courses are taught at Harvard's new i-Lab.  The Innovation Lab is Harvard's most recent attempt to introduce cross-disciplinary curricular and extracurricular offerings.  The idea, as I have heard it, is that students from across disciplines can better tackle the world's problems, which never respect disciplinary boundaries.

New Frontiers in Philanthropy, Social Enterprise and Impact Investing at HKS, taught by David Wood and James Bildner.  David takes a policy perspective on impact investing, thinking about how government should react to the trend.

Social Entrepreneurship at HLS, taught by Suzanne McKechnie Klahr.  Suzanne has taught this class at Stanford and is visiting Harvard Law School this winter as she teaches Harvard Law's first entrepreneurship class.

Social Entrepreneurship and Global Innovation, at the College, taught by Gordon Bloom.  Gordon taught this class at Stanford, Princeton, and at the Kennedy school, and now teaches it to undergraduates in the Yard.


Social Impact Bonds: Lessons From the Field

Now that I'm back from India, I'm excited to report that Stanford Social Innovation Review published my article on social impact bonds:

Social Impact Bonds: Lessons from the field
Stanford Social Innovation Review
By Michael Belinsky
January 12, 2012

And Massachusetts released two requests for proposals regarding pay-for-success contracts, in juvenile youth recidivism and chronic homelessness.  The state press release is here:

http://www.mass.gov/anf/press-releases/ma-first-to-pursue-pay-for-success-contracts.html

Horizontal capital aggregation for social enterprises

I found a really interesting study on horizontal capital aggregation for social enterprises (the process of syndicating distinct pools of impact capital matched to the multiple phases of an social enterprises' development and growth).


    Overall, our analysis confirms that a variety of contrasting investment models and investment expectations exist, and the poor coordination of impact investors creates inefficiencies and redundancies that obstruct the efficient flow of capital system-wide. We conclude that the aggregation of capital can benefit businesses when investors are first and foremost aligned by return expectation.
    Our research indicates that social capital mobilization is early in its development and lacking market mechanisms common to other asset classes. While developed markets enjoy a well-worn path of “upround” private equity sources, there is little, if any, of this “vertical” capital aggregation ladder for social entrepreneurs operating in underserved markets. Consequently, much of the capital formation needed to support the scaling of social enterprises will necessarily be “horizontal”—meaning that capital sources are much more varied than pure equity investors and may include philanthropy, “soft” loans, quasi-equity, and private equity. The hand-off between these participants would not necessarily require valuation increases. Instead, such participants may require systems or organizational infrastructure development, increased management capacity, and a more rigorously stress-tested business model to attract follow-on investors.

Source:
COORDINATING  IMPACT CAPITAL: A New Approach to Investing in Small and Growing Businesses
An Examination of Impact Investors and Phased Investing for the Launch and Growth of Social Enterprises, John Kohler, Thane Kreiner, Jessica Sawhney, July 2011.

M&A in the nonprofit world

Here's a great article on co-locating nonprofits to capture economies of scale.

Expand Your Nonprofit’s Mission Through Co-Location, Jean Butzen, 11 Jan 2012, Stanford Social Innovation Review.

There is a more general movement to reduce back office costs for nonprofits.  SeaChange Capital Partners helps nonprofits, among other services, merge to reduce costs.  Their idea - and their leadership - comes from Goldman Sachs.  They saw an especially strong need for M&A in the nonprofit sector because too often multiple nearly-identical service providers compete for and split the same donor pools and then eat away at that money with their own backend systems and other SG&A expenses.  (Of course donors may have an interest in funding several manifestations of the same service, for example to discover which version works best.)  And not all nonprofit operations could reduce operational costs - or live through post-merger integration that is difficult even in environments where employees are not as mission-driven.

The rise of social impact investment funds

An interesting bit about impact investment funds from the WSJ:

Only a small number of donor-advised funds also have social impact investment screens or goals, but they are attracting more interest. For example, the socially responsible pool within Schwab Charitable, the second-largest national donor-advised fund by assets after Fidelity Charitable, has more than tripled to $7.5 million since its introduction in 2009. The pool is invested in the Parnassus Equity Income Fund (PRBLX).

More here.

Roundup of articles on social enterprise and social investment

Here is a small batch of interesting writing on social enterprise and social investment.

In Search of a New Model for Government-Social Enterprise Collaboration, 6 Jan 2012, in the Stanford Social Innovation Review by K Sree Kumar, CEO of Intellicap, a rising Indian management consulting firm that specializes in microfinance.

An overview of NSW Australia's social import bond request for proposals (see RFP here), 10 Jan 2012, by Steve Goldberg, Managing Director of Social Finance US.  Steve also runs the blog Billions of Drops in Millions of Buckets in which this article is published and which is eponymous with the book he has written.

Malnutrition in India is widespread, 10 Jan 2012, NYT: "Roughly 42 percent of all Indian children under age 5 suffer from malnutrition..."

The Speed issue of Google's new Think Quarterly magazine.

Katie Gilbert on Minnesota's human capital performance bonds

A great article by Katie Gilbert about Steve Rothchild's human capital performance bonds came out yesterday in the Institutional Investor.  Some interesting quotes:

On states looking into SIBs:

The state of Massachusetts formally sought out information about pay-for-success contracting over the summer, and this winter will issue a request for proposals from pubic social programs interested in the model. In New York City, a pay-for-success system will soon be applied to a program that works with the adolescent portion of the adult justice system and seeks to lower the chance that they’ll recidivate. New York State is also exploring the concept, and hopes to present a concrete pilot to test pay-for-success in six months to a year. Similar signs of interest are springing up in Virginia, Michigan, Indiana, and parts of California.

On potential sources of funding for SIBs:

Palandjian confirms that she’s had early conversations about the potential of pay-for-success investments with a handful of pension funds, and is generating the most interest from schemes with Economically Targeted Investment programs, which encourage a focus on investments in the pension fund’s geographic region that offer strong risk-adjusted returns in addition to some economic payoff in the pension fund’s geographic region — a snug fit for pay-for-success products, says Palandjian. It’s still too early for any of these funds to comment publicly on their possible interest in these investments.

On a SIB as an asset uncorrelated with the market: 

“I think one interesting characteristic is that this really does offer the promise of being a very noncorrelated asset for an institutional investor,” says Bugg-Levine. He points out that such an investment would carry two main types of risk: execution risk (the possibility that the nonprofits will not achieve their desired outcome) and political risk (the chance that the government side of the contract will not make good on its promise to pay investors out of the savings it incurs). Typical market risk doesn’t directly impact the investment at all.

Of course this investment is susceptible to macroeconomic risks (i.e., systemic risk) in the same way that the rest of the market is. If economic downturn drives up unemployment, as it has over the past 2-3 years, then a downturn in consumer demand will depress the market, while an increase in unemployment will not only increase criminal activity (the two are typically correlated) but also make it harder for people to get jobs and thereby increase the cost of obtaining the social outcomes (e.g., increased employment, decreased recidivism, housing the homeless) that social impact bonds seek to deliver.  So macroeconomic risk affects social impact bonds at least through the execution risk that Bugg-Levine mentions in the above quote.

The article mentions the $100 million dollars that Obama's 2012 budget designated toward pay-for-success approaches.  I have seen this mentioned again and again, and nobody seems to realize that the money is simply an effort to raise awareness about the pay-for-success model and signal federal government interest. The money itself is not nearly enough to do any serious program, especially when divided across 5 agencies (Education, Labor, Justice, the Social Security Administration, and the Corporation for National and Community Services).

 Katie Gilbert, the article's author, has been following and writing about social enterprise and impact investment for some time, apparently.  I haven't had the chance to read these articles, but some of the ones that caught my eye are:

The Appeal of the Social Impact Bond
June 13, 2011
The Institutional Investor
http://www.institutionalinvestor.com/Article/2847158/Search/The-Appeal-of-the-Social-Impact-Bond.html?Keywords=Katie+Gilbert&OB=D&DatePeriod=0

Impact Investors Move Closer to Getting Their Own Exchanges
January 05, 2012
The Institutional Investor 

And today's article:


The Latest in Socially Conscious Investing: Human Capital Performance Bonds 

The different corporate forms for social enterprise organizations

I recently got interested in the various corporate forms that social enterprises can take when pursuing double or triple bottom lines (financial, social, and environmental returns).  I write here about Google.org's interesting dual structure, as well as benefit corporations and L3Cs.  In future blog posts I want to address some more fundamental questions about corporate form, including:

- What are the key questions social entrepreneurs should ask when choosing which corporate form to start their organization with?  Among those questions are, what sort of money do I want to raise, in what amounts, and what tradeoffs in ownership and other restrictions am I willing to make for that funding?

Google.org
My first interaction with these corporate forms was through a case study on Google.org, which I wrote at the Kennedy school and will soon publish through the HKS case study office.  Google.org was not a hybrid corporate structure, but simply united Google Foundation, a 501c3, with Google.org, a division/arm of Google, Inc.  Google.org's structure allowed it to consider grant, PRI, equity, and other investments into nonprofits, for-profits, and other types of corporate organization.  It essentially was free to make a broad range of investments into a broad range of companies in a way that most other companies cannot do.

Benefit Corporations

Benefit corporations are a new class of corporation for which legislation has passed in 7 states so far: MD, VT, VA, NJ, HI, CA, and NY.  They have two requirements.

Requirement 1: They must operate for general public benefit – that is, “a material positive impact on society and the environment as measured a 3rd party standard through activities that promote the combination of special benefits.”  The 3rd party standard means that they must be independent (not related to party it's measuring) and transparent in its methodology. Their evaluation mechanism must be public, and all changes to it must be reported publicly.

Requirement 2: They might, but are not required to, operate for specific public benefit by providing individuals or communities with beneficial products or services, promoting economic opportunity beyond job creation, improving environment or health, promoting arts / science / knowledge, etc.

Shareholders in this form have a right to action if general public benefit is not taken into account.  This means that anyone who owns shares in the company can file suit if they believe the general public benefit is not being met.  This separates the stakeholders of the company from the shareholders.  The stakeholders are all the members affected by the general public benefit - society, environment, etc. - while the shareholders are those who receive the private benefit of ownership.

Formation.  To form, these organizations, like others, must file articles of incorporation with the secretary of state in the state in which they wish to incorporate; must clearly state benefit corporation status; draft bylaws including mission statement; hold organizational meetings; and issue stock.  Two-thirds vote is required for an existing corporation to transform to a benefit corporation.

Management. The organization is managed by directors, who must consider stakeholders in their daily operation.

Taxation. There are no tax exemptions (e.g., such as the ones granted to a 501c3).  Only benefit corporations incorporated in Philadelphia receive a tax favored status.

Capitalization.  Can receive equity, debt, and PRI.

L3C

L3Cs were created to facilitate PRI investment, yet the IRS has not yet cleared -- and may not ultimately clear -- L3Cs for PRI investment.  The reason that being cleared for PRI investment is beneficial is that PRI comes with high transaction costs, with $15,000 - $40,000 for an opinion letter from a lawyer regarding whether PRI investment into a specific company would be allowed by the IRS.  Errors in judgment about PRI investments are costly, possibly involving personal liability.  The most common type of PRI is economic development money flowing into impoverished neighborhoods.

According to Wikipedia, L3C enabling legislation has passed in Illinois, Louisiana, Maine, Michigan, North Carolina, Utah, Vermont, and Wyoming.  

This organization keeps tabs on all the L3Cs organized throughout the country.

Social stock exchanges (part 2)

Since making my previous list of social impact stock exchanges, I have found some other places where organizations and projects can get listed.

South African Social Investment Exchange (SASIX). This is the first social impact investment platform in South Africa.  It makes "carefully selected social development projects available as investment opportunities with a social return". Each project is valued and then broken up into $6 shares.  Investors can buy each share, and if all the shares are bought then project implementation begins.  This is similar to Kiva and other crowdsourcing investment vehicles that aggregate small investments into a larger loan to an individual or a business.  As far as I understand, investors receive no return on their shares.  I also could not find a way for investors to re-sell their shares.  So this seems to be a grant rather than a liquid investment. 


NEXII Impact Exchange Platform.  Started by SASIX's founder, this organization appears to list socially-responsible companies (and possibly also projects).  I could not find a list of the companies currently listed on the exchange, nor whether the exchange is operational, but I think NEXII only launched this platform in July 2011. 

Social stock exchanges rising

Small roundup of latest on social stock exchanges that aim to facilitate impact investing.

England
"The world’s first stock exchange for social enterprises will be set up in London with the help of money raised from dormant bank accounts, the government has announced.
The Social Stock Exchange (SSE) will be established in the capital with the help of £850,000 from the dormant accounts and it should help improve access to capital for social entrepreneurs."
(source)

Singapore
Impact Investment Exchange Asia (http://www.asiaiix.com)

China
"In 2007 NPI introduced the concept of venture philanthropy, and today the venture philanthropy funds exceed RMB 50 million and support more than 300 nonprofits and social enterprises. In 2010 NPI designed and operated the Shanghai Social Innovation Park, which I had the opportunity to visit, where I met with a number of social enterprises that are pushing the envelope of creativity." (source)