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Social Impact Bonds: Good for Nevada?

January 31st, 2014

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Social impact bonds (also known as pay for success contracts) have attracted significant interest in the last few years and are being considered by policy makers in California, Connecticut, Massachusetts, New York, Ohio, and Utah, among others. These creative financing mechanisms were first popularized in the United Kingdom as part of the Conservative Party’s “Big Society” effort to use market discipline to improve public services.

Social impact bonds bring together four parties – private investors, a financial intermediary, a government agency and one or more social service providers. Together, they create a contract, with specific deliverables and clear performance measures, in order to achieve a specific social outcome (i.e. lower recidivism rates, higher graduation rates, etc.).

Under the terms of the contract, an intermediary raises capital from foundations, investment banks, and even high-net-worth individuals to fund nonprofit organizations who are responsible for working on the specific social outcome. If the nonprofit organizations are able during the period of the contract to meet the terms of the mutually agreed upon performance goal, the investors will receive their money back plus a return. On the other hand, if the service providers do not meet the performance goal, the investors lose their money. In essence, the government is paying for results, and the savings from social interventions (such as providing immunizations, full day kindergarten, reducing the recidivism rate, etc.) should more than pay for the social impact bonds.

One of the attractive features of social impact bonds is that it is a public-private partnership where the private sector invests the risk capital and provides significant due diligence. Social impact bond investments should also be cost effective because they generally fund prevention programs, and thus should provide significant cost savings for the government in the long run.

From the government’s perspective, social impact bonds protect taxpayers by only requiring payment when the program is successful, thus requiring stakeholders to monitor and evaluate performance (by an independent contractor). From the non-profit or service provider perspective, the program is designed to reward innovation and efficiency. If done well, the private sector receives its initial investment and a return.

In England, the social outcome of the first social impact bond involved reducing the 60 percent historical recidivism rate for prisoners. In Utah, the Goldman Sachs Urban Investment Group (UIG) formed a partnership with the United Way of Salt Lake and J.B. Pritzker in August 2013, jointly committing up to $7 million, to launch the state’s first social impact bond designed to finance early childhood education that includes a a high impact and targeted curriculum focused on increasing school readiness and academic performance among at-risk 3 and 4 year olds in Utah.

In New York, community organizations and government agencies have joined with Goldman Sachs to launch a social impact bond (valued at almost $10 million) to reduce recidivism rates by working with inmates during and after their release. Most recently, Massachusetts announced that it was completing negotiations with two nonprofit groups to finance juvenile justice and homelessness programs, with the promise of repayment only if the programs work.

While it is too early to assess impact, there is some early learning on best practices of implementation. First, outcomes and performance measures must be clearly defined and measurable while achievable within the period of the contract. Second, government funds should not be released until and unless the outcome is achieved. And third, external organizations should have the flexibility to define and implement the strategy that will allow it to achieve the agreed upon goal.

Experience suggests that putting together a social impact bond often requires more time than the government simply providing the service directly or contracting with a nonprofit organization to provide the service. And the costs of attorneys, consultants, and program evaluators may drive up the cost of a project.

Regardless, we might benefit from exploring the use of social impact bonds here in Nevada. First, there are always benefits in strengthening opportunities to build private-public sector partnerships. And social impact bonds could help facilitate a shift in norms in our state. Specifically, social impact bonds might be quite valuable if they can improve our cultural understanding and build a stronger community of practice around defining and developing performance measures and metrics at the outset of program development and delivery. In Nevada, in both the public and nonprofit sector, we tend to fund and support programs without knowing whether our interventions are having the impact we so often desire. As stated in a 2013 report (sponsored by the Lincy Institute and Strategic Progress, LLC.) assessing Nevada’s ability to compete for federal funding, “The state has consistently scored below average on the evaluation components of grants, and many stakeholders interviewed stated they did not have sophisticated or even adequate evaluation plans in place” and lacked the “capacity to evaluate how the actions we are taking are impacting social outcomes.” If implemented correctly, social impact bonds could have significant direct and indirect benefits for our state.

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