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.