Setting up a social impact bond? Here's how to avoid the pitfalls

SIBs can be an effective tool if they're set up for the right reasons and with the right partners and metrics. But setting them up is a complex exercise, and the SIB market is still relatively young. So how do you avoid the potential pitfalls? James Hills of Palladium Group, which designed and managed one of the world’s largest healthcare impact bonds, shares five essential rules to make them work.

Social impact bonds are not a magic wand for all of society’s problems. However, potentially they can be an effective tool if set up for the right reasons, at the right time, with the right partners and metrics.

SIBs first came onto the scene 10 years ago as a form of outcomes-based funding, where investors provide upfront capital for social services, and then are repaid with a financial return by an outcome funder (often a government), subject to a service provider achieving the agreed results.

A decade on and there are more than 190 impact bonds in dozens of countries, mobilising hundreds of millions of pounds into tackling complex social issues such as health, loneliness among the elderly, refugee employment support, rehousing and reskilling homeless youth, and diabetes prevention.

Demand for innovative forms of financing for social impact is on the rise

Understandably, demand for innovative forms of financing for social impact is on the rise, particularly during a global pandemic when social challenges are ever more acute and government budgets are stretched. They are an attractive mechanism for governments and institutions, which stand to save on the costs of addressing social problems while sharing the risks with private investors.

But, as the mechanism is not always straightforward, how do you avoid the pitfalls?

Rule no. 1: Be SMART

The SIB outcomes are linked to payment, and so they need to be clear.  They need to be specific, measurable, achievable, relevant to those who stand to benefit, and of course timely. Without measurable outcomes, the parties can end up in dispute about what the payment trigger is – or should – be.

Rule no. 2: Produce robust evidence

Investors love certainty, and in the SIB context this means evidence that the results are going to be achieved and they will receive their return on investment. Building on existing long-term social programmes is a good start and reassures those with any doubts about potential success for the pocket and the people. If that is not possible, then a lack of evidence can either be addressed through an additional feasibility study or pilot programme. Again, data really is king.



Rule no. 3: Know your stakeholders

We learnt many lessons when we designed and managed the world’s largest healthcare development impact bond at the time – a five-year programme launched in November 2017 to tackle maternal and neonatal deaths in medical facilities in Rajasthan, India.

It is vital to understand the risk/reward appetites of those who might want to get involved. Outcome funders (government or donor) are focused on robust results at a fair price. An investor wants certainty and needs to trust that the provider of a social service will deliver. In turn, the service provider needs to be sure that it will get paid on delivering a successful result. If one party is shouldering a disproportionate amount of risk, then there is a danger of them throwing in the towel before the contract is signed.

Designing and then implementing a SIB is a long-term and complex challenge. The good graces of all parties will be invariably tested throughout 

Rule no. 4: Build a strong alliance

Designing and then implementing a SIB is a long-term and complex challenge. The good graces of all parties will be invariably tested throughout the design process, and again during implementation.

So, the three key parties in a SIB – the government, investor and service provider – all need to be aligned in what they want to achieve. The investor understands the mechanism and wants a positive outcome for both their pocket and for those hopefully benefitting. The service provider has a track record in delivering but the outcome funder (usually a government) has a vested interest in paying for these results. Often a champion stakeholder from one of the SIB participants, or an intermediary, will need to sit in the middle and drive the deal forward.

Rule no. 5: Understand the costs

SIB transaction costs and time investment remain stubbornly high. However, continued improvements in how we design, contract and scale SIBs should help drive down these costs. Good project management also sits at the heart of a proposed deal and many outcome payers commissioning a SIB in the UK have enviable access to a body of knowledge from the Government Outcomes Lab at the University of Oxford.

There are also clear challenges in both setting and pricing the outcomes. Consensus on accepted best practices in identifying outcomes (or proxy outcomes) is growing although currently many SIB designs are not yet standardised and therefore need to be tailored each time, which adds to the costs. Technical support from specialists with knowledge of SIBs in creating business cases, intervention financial modelling, and evaluation models can also help bridge the gaps.

The pitfalls come in many guises and the SIB market is still relatively young. They can be one effective tool, but all the options should be examined before going down the path – there may be other, simpler methods that take less time in achieving a positive impact.

  • James Hills is a senior manager at Palladium Group

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