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Why we should still be talking about social impact bonds

Eventually, the conversation with the Queensland Government will open up again about social impact bonds (SIBs) and we'll want to be ready. Let's go back to the beginning and make sure everyone is on the same page about what SIBs are, how they work and how they fit into the overall social impact investment ecosystem.

 

DEFINITION OF SOCIAL IMPACT BOND (SIB):  

A social impact bond (SIB) is a contract with the public sector or governing authority, whereby it pays for better social outcomes in certain areas and passes on part of the savings achieved to investors. A social impact bond is not a bond, per se, since repayment and return on investment are contingent upon the achievement of desired social outcomes; if the objectives are not achieved, investors receive neither a return nor repayment of principal. SIBs derive their name from the fact that their investors are typically those who are interested in not just the financial return on their investment, but also in its social impact.

(www.investopedia.com )

 

So we know that the Queensland Government is running trials into the use of social impact bonds (SIBs) and that for a variety of legal reasons, they’re just not able to talk about what’s happening until those trials are announced.

But why does that mean that we as an Industry can’t continue talking about SIBs and planning for social impact investment more broadly?

It doesn’t.

Eventually, the conversation with the Queensland Government will open up again.

As an industry, we should still be talking about SIBs, because when that conversation opens back up, we will want to take a clear and solid position on how social impact investment in Queensland should play out. We have the opportunity to step up and ensure SIBs achieve the best outcomes for individuals and communities.

For the purpose of this post, and to kickstart the conversation, we’ll go back to the beginning and make sure everyone is on the same page about what SIBs are, how they work and how they fit into the overall social impact investment ecosystem.

At the very top of this post, we provided a definition of SIBs as outlined by www.investopedia.com.

It is important to acknowledge that SIBs sit as one mechanism among many possible mechanisms within the social impact investment ecosystem.

At the centre of SIBs is the notion of a Payment by Outcomes Contract which can also function as a stand-alone funding mechanism.  

This diagram may help help to clarify:

 

The SIB, using the Payment by Outcomes Contract, brings together a variety of investors to engage with government in a much safer environment than would otherwise be possible.

When a private enterprise, individual philanthropist or other investor chooses to become party to a SIB they make an initial investment to a community service organisation with the expectation that certain social change will be made or that certain social outcomes will be met.

The government – also a signatory to this arrangement – agrees that if that change is made or those outcomes are met and that there is a savings for government, they will rebate the investor to the tune of the original investment as well as a percentage of the savings made.

This handy diagram shows us the exact mechanics of SIBs.

 

 

It's a sound methodology for encouraging private investment in community services, which often comes with a greater level of flexibility than traditional government funding.

How to do we move forward from here then?

Well of course we need to wait and see how the Queensland Government’s current trials play out, but in the meantime, across the industry we need to:

  • consider new models for governance that address the risks and opportunities in the model
  • build capacity for outcomes design, measurement and reporting
  • develop new thinking and new ideas
  • get the right advice at the right time
  • develop relationships with investors.  

Oh, and we need to keep open lines of communication and debate among ourselves so that we’re ready to take the reins of opportunity when it arises.

What are your thoughts on how we should progress as an industry? 

Email us at: info@csialtd.com.au