Social Impact Bonds: Implementation, evaluation and monitoring Foroogh Nazari Chamaki Department of Banking and Finance, Eastern Mediterranean University, North Cyprus E-mail: [email protected] Glenn P. Jenkins Department of Economics, Queen‟s University, Kingston, Ontario, Canada, K7L3N6, and Department of Economics, Eastern Mediterranean University E-mail: [email protected] Development Discussion Paper: 2016-04 Abstract Traditional approaches to public policy increasingly fail to resolve social challenges, particularly in the field of criminal justice. High rates of juvenile recidivism, for example, are often linked to inequality in education and persistent, long-term unemployment—factors which, while complex, are nonetheless conducive to preventative strategies. Social impact bonds (SIBs) are „pay-for-success‟ programs that attract private-sector, upfront funding for social interventions. If the program achieves agreed targets, taxpayer funds repay the investor. If the program fails to meet agreed targets, investors take the loss. This innovative form social finance through public-private partnership (PPP) has helped spur efficiencies and improvements in the provision and outcomes of criminal justice services. However, the success of a SIB depends on careful implementation, evaluation and monitoring. Keywords: Pay-for-success, social service, social impact bond (SIB), public-private partnership (PPP), social finance, service provider. JEL Classification: H53, A13, L33 1 INTRODUCTION Social Financing and Social Services Social financing relies on investors willing to bear higher risks and lower financial returns—a model that combines the (financial) incentives required by commercial investors with the (social) gains sought by philanthropic organizations and charitable donations. Over recent years, a number of western countries have witnessed rapid growth in the social financing of services provided by state and local governments, charities and philanthropic organizations. In the US, social financing has expanded at a faster rate than traditional commercial investments. In 2010 social financing in the US totaled $3.07 trillion (US SIF, 2010), rising to $6.57 trillion in 2014—a 76% increase on the $3.74 trillion achieved in 2012 (US SIF, 2014). Social Impact Bonds or Pay-for-Success Contracts Social impact bonds (SIBs), also known as pay-for-success (PFS) contracts, are multi- stakeholder mechanisms designed to finance more effective social-service interventions at lower cost to the taxpayer. A SIB is a contract between one or more public entities (at the local or state level), investors and a private service provider. The public entity specifies the social-impact goals, the investors shoulder upfront costs, and the service provider implements the project using the investor funds. Once the project is complete, a monitoring entity assesses the outcomes achieved. If these are in accordance with those stipulated in the contract, the public entity pays investors their principle investment, plus an additional return linked to specified project objectives. These additional returns are funded by savings accrued to the government by implementing the project through the SIB model (Figure 1). 2 Figure 1: Basic Model of SIB Contract If the project does not meet agreed targets, investors are not repaid. A long-running contraction in the global economy has led to increasing demand for public services amidst ever-shrinking government finances. Essential services such as those related to criminal, particularly juvenile, justice, are often viewed as failing or under unsustainable strain. The SIB model is therefore an important tool in the provision of more efficient and more effective social services. A feasible SIB project depends on specific parameters that must be clearly detailed in the project contract. These parameters are outcomes, rate of return (ROR), service delivery, and project period and payment point. 3 The successful implementation of a SIB depends on a number of factors. First, is a SIB a good fit with the project in question? Second, what is the best policy intervention to pursue? Third, which analytical tools are best suited to the project model and specifications? Do these tools enable the development of clear formal structures appropriate to all parties? Fourth, what are the project phases and how will each be monitored? And fifth, how will it be determined if the project has achieved target outcomes (Liebman and Sellman 2013)? The SIB model is not ideal for every project or policy area. Important preconditions are: the potential for meaningful cost savings; the availability of clear and measurable outcomes; contracts properly adjusted to reflect the responsibilities of multiple stakeholders, including investors public entities and service providers; and the appointment of an effective coordinator. SIBs are most appropriate in the field of high-cost services, the provision of which is essential to the wellbeing of society as a whole. These include criminal justice as well as education, job training, healthcare, the provision of disability services and foster care. Notwithstanding the success of the SIB model, however, governments must not use SIBs as an excuse to cut the budget for social services. Policy-makers must guard against the withdrawal of government from the design and provision of essential services. If the core, founding mechanisms for the delivery of social services are lost, SIBs will not fill the gap. At the same time, the success of SIBs should not overshadow efforts to improve and develop other financial tools and mechanisms. In short, the SIB model and others are not a replacement for but a means of improving traditional social-service systems. The independent monitoring and evaluation of SIB impacts and outcomes is critical, promoting accountability and helping to keep projects on track. Close monitoring and regular evaluation 4 also provide a mechanism by which projects can be halted due to cost overruns as well as facilitating the learning process in the context of future implementation of SIB projects. Advantages of the SIB model Under a SIB model, the public sector (state or local government) pays for success—for outcomes and results that provide a reasonable cost-saving to the taxpayer. The model transfers the risk of financial losses incurred in the implementation of ineffective projects from the public to the private sector. Another significant benefit to public sector bodies is the opportunity to explore innovative solutions to intractable social problems. Innovation poses both great risks and great rewards. However, government entities with limited budgets cannot afford such risks. SIBs enable government to transfer the risk of social innovation to private sector interests with greater flexibility and resources, in exchange for the opportunity to realize a profit while engaged in an altruistic activity. As such, a great number of private sector organizations view SIBs as a win- win instrument. Finally, SIB projects improve performance and lower costs. A focus on prevention rather than remedial interventions is more efficient, resulting in more effective outcomes and higher quality services. In addition, the strict feasibility analysis and step-by-step monitoring of a SIB project facilitates the achievement of specified outcomes while controlling costs, as well as enabling rapid adjustments to adapt to new or unforeseen circumstances. SIBs benefit all parties—government, private sector entities and society as a whole. 5 LITERATURE REVIEW AND HISTORICAL DEVELOPMENT Literature Review The literature relating to social impact bonds (SIBs) can be divided into two. The first group describes the origin and history of the concepts underlying SIBs—how they emerged and why they came to be so widely used. This literature focuses on the UK, where SIBs were invented and first implemented, and bears particular testimony to the role of SIBs in a fiscal environment dominated by restricted government budgets amidst rising demand for social services. The second group of literature describes the legislative and regulatory structures governing the implementation of SIBs in the UK and elsewhere in Europe, as well as Canada and the US. This literature highlights variations in legal and regulatory structures between regions and countries, as well as the evolution of project implementation. Origin and History of SIBs The use of SIBs originated in the UK in 2007, when Prime Minister Gordon Brown asked the Council on Social Action (CoSA) “to generate initiatives through which government and other key stakeholders could develop and celebrate social action” (Strickland, 2010). CoSA was established by the Office for the Third Sector—a Cabinet Office group covering charities, voluntary communities, social activists and philanthropists—as an independent advisory group tasked with finding new ways to control the cost to government of social services. SIBs were presented as one novel solution, creating innovative partnerships between government, service providers and investors to address social issues through cost-effective projects based on concepts of early intervention and prevention. 6 CoSA began identifying feasible SIB-packed projects, examining costly services that would gain from a focus on root causes rather than consequences—areas such as criminal justice, education, homelessness, foster care, and health and mental health care. The first SIB project was launched in September 2010 at Peterborough prison