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