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SIBs in Action

Updated: Jun 17, 2021

A key component of the Impact Revolution and a major way we will achieve the societal shift we are working towards is through Social Impact Bonds (SIBs). Last time we discussed the arrival of impact philanthropy and how the best service providers are tracking their outcomes and activities. This is a critical step in making pay-for-success investment models such as SIBs and DIBs accessible.

The market for SIBs and DIBs has attracted over $400 million in investment and more than $1 billion of commitments to pay for successful social outcomes that address youth, employment, social welfare, criminal justice, education and healthcare. Preventative interventions through SIBs are proving successful in tackling many social challenges, from recidivism and homelessness to unemployment and diabetes. Today, we will see how SIBs can deliver better execution and expansion of social services.

Global Expansion

SIBs and DIBs are spreading across the world. There are now more than 200 in 35 countries tackling 15 different social issues. The UK is a significant center for SIB innovation, with nearly 40 percent of the world’s total SIBs currently active there. The United States is also a major hub of activity, with 25 active SIBs, and there are 11 in the Netherlands, and 10 in Australia.

As the SIB market expands, philanthropists, governments and investors are becoming more aware of its potential. In Germany’s leading business newspaper Handelsblatt, SIBs are included as one of the 75 new ideas that can change the world.

Success Stories Abound

In 2014, the UK’s National Health Service commissioned the Bridges Ways to Wellness SIB. The aim was to help adults with multiple long-term health conditions such as diabetes and heart problems change their lifestyle through a social prescribing service that would help improve their health. The new service helped people exercise, reduce their isolation and improve their diet, allowing them to avoid hospital treatment and thus save government money. The project has surpassed all its targets, helping over five thousand adults improve their health and delivering a 35 percent reduction in healthcare costs.

In the US, Maycomb Capital, an impact investment manager co-founded by Goldman Sachs alumna Andi Phillips, launched the first American equivalent of the Bridges SIB Funds. The fund, which was launched in 2018, aims to raise a total of $50 million and includes Prudential Financial, the Kresge Foundation and Steve Ballmer, the former CEO of Microsoft, among its backers. One of Maycomb's investments is in the Massachusetts Pathways to Economic Advancement SIB, launched in 2017 by Social Finance US, which focuses on integrating immigrants into society.

The Greater Boston area is home to a significant refugee and immigrant population with little or no English skills, making it hard for them to find employment, let alone high-paying jobs. On average, this population earns $24,000 less per year than immigrants with similar credentials who are fluent in English and many of them are left dependent on state help, with over 50 percent relying on cash assistance.

Part of the reason for this situation is the lack of language learning services; at least 16,000 adult learners are waiting to get into some kind of language course. On top of this, the available learning programs are not complemented with career help. There was a clear need to achieve more effective results at scale, and the pay-for-outcomes model was a proper solution.

Through Pathways, 40 investors provided $12.43 million upfront to enable the charitable service provider – Jewish Vocational Services (JVS) – to serve two thousand English language learners through four programs that combine language lessons and employment services. The project's goal is to increase employment, secure higher-wage jobs and achieve a successful transition to higher education. Project outcomes are measured quarterly and dictate the payments received by investors. So far, eight successful payments have been made.

JVS got involved in the pay-for-out-comes program model because they wanted to expand their activity to the largest numbers of adults who could benefit from their services, but had no financing mechanism. This model also allowed them to offer a service designed to achieve better outcomes – in this case, better economic opportunity–by providing a combination of English language instruction, employment services and career coaching.

In other words, the combination of investor discipline and pay-for-outcomes equals expansion, innovation and impact. When you consider how difficult it is for these service providers to secure grants, it is clear that pay-for-outcomes offers a much more effective funding option for those who wish to attract substantial capital to scale. As of January 2020, there were 26 active SIB projects in the US and many others in development.

There’s Still More Work to Be Done

As with anything new, there are growing pains and challenges. So far, most SIBs are quite small: the median number of beneficiaries of each active SIB is around 600, with a median upfront capital commitment of just ~$2.7 million. The largest SIB in the world, which supports teenage mothers in South Carolina, is still only $30 million.

SIBs are more complicated to design and implement than grants, as they involve three stakeholders: the outcome payer, the delivery organization and the investor. This is currently leading to higher transaction costs relative to capital deployed, but the ease and speed of implementation are constantly improving.

As experience grows, terms and outcome metrics will standardize, and both professional outcome funds and SIB/DIB investment funds will enter the market and allow impact bonds to scale. SIBs and DIBs should ultimately be judged according to the cost per successful outcome and the number of successful outcomes they can achieve, both of which I expect to be significantly more favorable than what can be achieved through traditional grants.

Next time, we will take a deep dive into DIB’s and pay-for-outcomes. Until then, if you would like to learn more about how you can be a part of the Impact Revolution, pick up a copy of my book, IMPACT: Reshaping Capitalism to Drive Real Change. All royalties are going to impact charities and no person or contribution is too small when it comes to making an impact.

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