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Thinking about Social Impact Bonds in the South African Context (lessons from the United Kingdom)

Authors: Michael Mulvaney and Laurel Kriegler
Date: 2014-06-02

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Due to growing interest in social impact bonds (SIBs), Cornerstone commissioned research into SIBs during 2013. We had a particular interest in their relevance to the South African context. The research draws on the experience of three SIBs in the United Kingdom. While SIBs have the potential to create substantial alternative sources of finance, their scope is limited. 

SIBs are a mechanism financers can use to invest in products and services that aid socio-economic development, with the express aim of making a profit. During times of pressure on public sector funding, SIBs create important alternative sources of finance for addressing social issues. SIBS, through an intermediary, bring together social impact investors, who are looking for opportunities to make social impacts, and charities looking for funding for innovative programmes.

The original SIB approach created a mechanism whereby investors could provide finance for, typically, non-government service providers to address a social challenge through innovative programmes that are difficult for governments to implement due to bureaucratic constraints. These innovative approaches aimed to reduce the need for specific government services. Savings accrued, as a result, to government would be paid to the SIB. Hence the term “payment by results.” There are various different ways in which such agreements can be structured.

The paper explores three models of payment by results. 1) Public Finance – State Delivered, which is funded and implemented by the state, who takes on the risk. 2) Public Finance – Non-State Delivered, in which the state funds the capital and operational expenditure in the form of loan financing, but a non-government entity delivers. The risk structure depends on the structure of delivery agreements and how funds are recuperated. 3) Private finance – Non-State Delivered, involves no upfront state funding, and all risks are transferred to the private provider. The benefits depend on the pricing of service units delivered.

The benefits and challenges of SIBs are discussed. Governments can use them as a way to experiment with innovative approaches to address social challenges and transfer the risk of failure to the SIB. SIBs are complicated instruments, and their effectiveness in public services relies heavily on government structuring appropriate agreements and defining the benefits they are willing to pay for. It is crucial that the value of payments made are, at most, less than what they would have been in the absence of the SIB. Other challenges and benefits are explored.

The three case studies described at the end of the paper are the Children Services SIB at Essex County Council; the Department for Communities and Local Government (DLCG) Greater London Authority (GLA) Homelessness SIB; and the Department for Works and Pensions (DWP) Innovation Fund SIB.