Do social impact bonds work?
The Promise and Pitfalls of Social Impact Bonds (SIBs)
Over the past decade, social impact bonds (SIBs) have gained traction as an innovative way to finance social programs. SIBs operate as Pay-for-Success contracts, where private investors provide upfront funding for social initiatives and are only repaid if the program achieves its predefined success metrics.
In today’s climate, it’s no surprise that many organizations are considering SIBs to finance efforts like COVID-19 relief and other pressing social challenges. However, before embracing this funding model, it’s important to understand both the potential and limitations of SIBs.
What Are Social Impact Bonds?
At their core, SIBs aim to connect investors with social programs to drive measurable outcomes. If the program achieves its agreed-upon targets—such as reducing recidivism, improving employment rates, or increasing school readiness—investors are repaid, often with interest.
This model aligns financial returns with social outcomes, offering a compelling way to bridge the gap between philanthropy and traditional investment. However, the reality of SIBs is far more nuanced.
The Challenges of Social Impact Bonds
1. High Failure Rates
One of the main criticisms of SIBs is their inability to consistently achieve their intended outcomes. A study by researchers at Harvard and NYU found:
Out of 58 SIB evaluations conducted between 2007 and 2016, only 19% were successful in achieving their targets.
SIBs had a success rate of 31%, significantly lower than traditional philanthropy (62%) or government funding (78%).
These figures highlight the high-risk nature of SIBs, which often fail to deliver on their promises.
2. Redirection of Funds from Proven Programs
SIBs often attract funding to programs with untested interventions or those targeting underserved populations. While fostering innovation is a worthy goal, this can inadvertently divert resources from established programs with proven track records.
Example: A program addressing youth homelessness with a new intervention might receive funding over a long-running initiative with consistently positive outcomes.
This shift in priorities can jeopardize the stability of effective programs while gambling on unproven solutions.
The Pros and Cons of Social Impact Bonds
Before deciding whether to use SIBs to finance a social initiative, it’s essential to weigh their advantages and drawbacks.
Pros:
Outcome-Based Funding: Ensures that funds are tied to measurable success.
Encourages Innovation: Promotes investment in new and untested approaches.
Risk Transfer: Reduces financial risk for governments or non-profits by placing it on private investors.
Cons:
High Failure Rate: As studies show, SIBs often fall short of their targets.
Resource Diversion: Can redirect funds away from proven, effective programs.
Complexity: Structuring and evaluating SIBs requires significant time, expertise, and resources.
Is a Social Impact Bond Right for Your Organization?
The decision to use SIBs should come down to a careful cost-benefit analysis. While SIBs offer a unique approach to raising capital and driving innovation, they also come with significant risks:
Does the potential upside justify the failure rate?
Will funding this program take resources away from other proven initiatives?
Can your organization manage the complexities of structuring and evaluating an SIB?
Ultimately, SIBs are not a one-size-fits-all solution. For organizations exploring this funding model, it’s crucial to assess whether the benefits outweigh the challenges in the context of your goals.
Final Thoughts
Social impact bonds represent an exciting innovation in financing social programs, but they are far from a guaranteed solution. By understanding their risks and rewards, organizations can make informed decisions about whether SIBs are the right fit for their needs.
Careful consideration and a strategic approach can help ensure that resources are directed where they will have the greatest impact—whether through SIBs or other funding mechanisms.
