Watching SIBs Grow Up

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The recent headline in The New York Times, “The Promise of Social Impact Bonds,” hardly captures the rock-the-globe aura associated with the social financing scheme known by its familial acronym SIBs. Social Impact Bonds are a new way of creating capitol to bring-to-scale social programs such as those that prevent prison recidivism and homelessness. The bonds allow the government to put the costs and the risksonto the investor. If the scaled-up programs actually have the intended prevention impact, then the government winds up saving money and the bondholders get paid back with interest. In a 2011 Spotlight commentary, “Social Impact Bonds: A Game Changer in a Time of Tight Budgets?“ Tracy Palandjian, the CEO of Social Finance U.S., describes these benefits along with other attributes of SIBs.

 

The Times story notes both the excitement and challenges of SIBs, including the potential high costs of managing these complex products. A recent McKinsey and Company analysis notes that SIBs “are an expensive way to finance the scaling up of preventive programs. A SIB۪s ۪premium۪ is justified if conventional options aren۪t working, or if the SIB helps government, philanthropy, and other social sector actors align their priorities and play their roles more effectively and efficiently.”

 

SIBs are so young that the first born a U.K. pilot project to prevent prison recidivism has yet to be evaluated. Nevertheless, enthusiasm for government exploration of the financial instrument is spreading like a summer wildfire. For example, Boston expects to have contracts this summer to secure $50 million in bonds; New York City has been exploring a project; and the Department of Labor is tapping $20 million out of the Workforce Innovation Fund for Pay for Success grants to fund pilots. Dry coffers explain much of what fuels government interest in the instrument. It also doesn۪t hurt that SIBs are new and bold,۪ adding sorely-needed sparkle to today۪s business-as-usual policy prescriptions. 

 

OOTS thinks that as SIBs grow up and are measured, much will be learned about the value of this new tool. As the McKinsey report notes “much remains to be seen” including whether SIBs will become a “permanent part of the government financing landscape” or alternatively will lead government “to fund additional preventive programs.”

Posted by Jodie
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