“Pay for Success”: Social Impact Bonds

What is it?

In the “Pay for Success” model of social impact bonds, private investors manage public projects that have some social impact goal. By going through the private sector, the goal is to reduce overall government spending. This also allows the government a risk-free way of supporting creative new social programs that may not become successful but have high potential.

How does it work?

The government goes through an intermediary who is responsible for everything related to the project and who is paid by the government only if the social outcome is achieved. If successful, the intermediary will receive a return on his or her investment and the satisfaction of having made a difference.

How have they been used in the past?

The programs typically emphasize prevention and cater towards poor and at-risk populations. Some examples include:

  1. Decreasing the number of children in foster care
  2. Reducing the prison population through the funding of rehabilitation and employment programs for first–time offenders

What is the future of impact investing?

Social impact bonds are going mainstream. They have wide-ranging support from U.S. think tanks across the political spectrum and funding from major financial institutions such as Goldman Sachs and Bank of America. Also, congress is considering a bill that would enable the government to allocate $300 million to social impact bonds. This act would significantly bolster the amount of projects initiated if passed.

 

 

Sources:

http://www.forbes.com/sites/jonhartley/2014/09/15/social-impact-bonds-are-going-mainstream/2/

http://harvardmagazine.com/2013/07/social-impact-bonds

Top photo by Stephanie Nam

You Might Also Like