Investors lend to organisations with the intention that they will generate a profit and deliver a good return on the investment.
WRITTEN: MICHELLE GREEN, INVESTMENT ANALYST
However, what if there was a way to achieve a return on the investment and simultaneously effect social change? Social impact bonds (SIBs) are an innovative way to achieve this.
What are social impact bonds?
A social impact bond (SIB) is a contract with the public sector in which a commitment is made to pay for improved social outcomes that result in public sector savings. Repayments to investors are made by outcome funders (usually the government) and are contingent on the achievement of specified social outcomes.
The name was derived from the fact that investors in this mechanism are typically those interested not only in the financial return on their investment, but also in its positive contribution to society.
A social impact bond is not a bond in the traditional sense, since the repayment and return on investment are contingent upon the achievement of desired social outcomes. If the pre-determined objectives are not achieved, investors are at risk of not receiving a return or repayment of capital. Therefore, they are considered to be risky investments. However, this risk can be mitigated through careful attention to the determination and probability of achieving the targets, and the selection and track record of the social service provider and intermediary.
Research has shown that social impact bonds have major advantages over traditional social financing schemes:
Improved social programmes
This financing mechanism has been found to improve both the effectiveness and efficiency of many social programmes, which are usually managed by NGOs who are the providers of the social services. This is achieved through establishing reliable targets for measuring performance and ensuring that resources are allocated optimally to maximise their impact on targeted areas - thereby efficiently employing both financial and physical capital.
Improved government spend
SIBs are a way to ensure that taxpayer money is spent responsibly on programmes that have a proven track record, with service providers who have the necessary skills and expertise in a specific field. In this way, government only pays for programmes that successfully reduce social challenges in specified areas. Furthermore, there are potential savings on future government spend if these challenges are addressed early and are appropriately mitigated.
Promoting public and private partnerships
SIBs are a way to strengthen the relationship between the public and private sectors as they provide a space for responsible social investing that addresses critical social challenges. For example, Futuregrowth invested in the first early childhood development social impact bond in August 2018. This SIB enabled the intermediaries, service providers, outcome funders and investors to negotiate and establish an innovative model to improve the cognitive and socio-emotional development outcomes of more than 2 000 children. The areas of focus are the low-income communities of Atlantis and Delft in the Western Cape. Should the model prove successful, it will change the manner in which social interventions are funded and create a new avenue for further public-private funding opportunities.
Service providers are able to expand their footprint
Service providers, such as NGOs, do not typically have the capital required to achieve economies of scale. Intermediaries and investors are likely to fund service providers whose practices have proven to be successful and are backed by experienced, skilled teams that have the drive to effect positive social change. SIBs provide these service providers with large amounts of capital up-front, which enables them to expand their operations in a relatively short time frame and, in so doing, to expand their overall impact. For example, should the ECD model in the aforementioned article prove to be successful after the life of the loan, the objective is to replicate it across the Western Cape, and throughout South Africa.
Strengthening the lower income class, improving the state of the economy and reducing the budget deficit are significant national priorities in South Africa. Investing in South Africa’s greatest resource, its people, is a good way to start solving these challenges. An innovative means to this end, is to invest in a social impact bond.