Social Impact Bonds in a nutshell

The Social Impact Bonds (SIBs) are a social initiative that is currently disrupting some markets and investment portfolios, not because of high expectations of ROI but because of the unique approach with potential for a triple-win outcome to the three main stakeholders: Government, Investors and the society in need.

“The purpose of the Social Impact Bonds is to generate cost savings for a government, focus on outcomes rather than inputs or outputs, and reduce political and financial risk” (Princeton University, 2014, p. 8). We can take for example how the focus of the government the past few years has been to alleviate the poverty, the homelessness or increase the job placement, but because of bureaucracy and limited budget, the outputs are not always the expected, hence, the biggest motivator for the governments to implement a SIB is the cost savings. (Princeton University, 2014, p. 8)

The SIB “is a public-private partnership where one or more investor(s) provide “upfront” capital for the realization of public projects that generate verifiable social and/or environmental outcomes” (United Nations Development Programme, 2015, p. 1).

The Government hires an intermediary, also called project sponsor, to implement and manage a social or environmental project in exchange for a promise of payment (return of capital) contingent on the social outcomes delivered by the project. This intermediary will raise the capital for the project, here is where the name Bond takes usage, from investors. Then, the intermediary will hire a service provider to deliver the desired project outcomes/outputs. (United Nations Development Programme, 2015, p. 1).

The key concept inside a SIB is that when the project fails to deliver the desired outcomes/outputs, the Government does not provide the payment to the investors, losing part or all the capital provided, on the contrary, when delivered, a premium will be paid for the success of the project. Here the term pay-for-success got coined. (United Nations Development Programme, 2015, p. 1)

Social Impact Bonds approach a recently developed idea, where they target the work of the outcome instead of the output. It is important to define the difference of Outcome instead of Output. The Output will be referred as to what is done while the Outcome is referred to the difference that is made in the final target. Just by generating more inputs or outputs in a project, we are not necessarily generating more outcomes, let’s take the next example, an outcome pertaining to employment programs would be getting the final job to the people, the input the people enrolled in the program and the output, the job training certificates. This way, the SIB will be more focused on what is desired, the objective. (Princeton University, 2014, p. 10)

Through the SIBs, the governments have the opportunity to off-set financial risks to the private sector and mitigate political risks. The key differentiator will be that if the government asses that the service providers have not met the previously signed objectives, the government will not repay the investors. (Princeton University, 2014, p. 10)


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