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An introduction to social impact bonds (SIBs)

This guide will introduce you to social impact bonds (SIBs) and will help you decide whether it is feasible to use a social impact bond to deliver your policy, service or intervention.

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Chapter 1

What are social impact bonds?

4 mins read

This chapter sets out what social impact bonds are, the key stakeholders involved and how they have developed over time

An overview

A social impact bond is one form of outcome based contracting. Although there is no single agreed definition of a social impact bond, most definitions understand a SIB as a partnership aimed at improving the social outcomes for a specific group of citizens or ‘beneficiaries’.

In financial terms, a SIB is not technically a bond. Bonds generally have an unconditional and guaranteed rate of return, while in a SIB, the financial return is tied to the performance of the contract provider, and will vary. As a financial instrument, a SIB is more like project finance, but with the investors carrying some or all of the risk of non-performance and sheltering service providers from this. In the US, SIBs are often referred to as “pay for success” schemes.

The central feature of a SIB is that it brings together three key partners: a commissioner (or outcome payer), a service provider, and an independent investor (although in practice a SIB may involve more than one of each type of partner). The commissioner is typically a central or local government organisation; service providers are often – though not always – from the VCSE sector; and the independent investors can be mainstream, socially motivated, and/or charitable.  

The roles of each player are outlined in Figure 1.

Figure 1: SIBs as partnerships - partners and responsibilities
Figure 1: SIBs as partnerships - partners and responsibilities

The roles of each player are outlined in Figure 1.

  • Commissioner – they identify the unmet needs and expresses a ‘willingness to pay’ for specific social outcomes. 
  • Service providers - they offer a service or intervention intended to meet the needs of those beneficiaries and to achieve the outcome the commissioner desires. As in other forms of outcome based contracting, the payment to the provider (wholly or partly) depends on whether are achieved. 
  • Investors – they provide flexible arrangements to finance the project over its duration, rather than expecting the provider to finance from their own services or from loans with set payment schedules. The explicit involvement of one or more investors differentiates SIBs from other forms of outcome based contracting.

The repayment to investors in a SIB is linked (wholly or partly) to whether the outcomes are achieved, protecting the service provider from all or part of the financial risk. The SIB model is thus intended to shift at least some of the financial risk from the commissioner to the investor, while protecting the service provider from all or part of the financial risk of an outcome based contract.

How have SIBs developed?

The UK was a pioneer of the development of SIBs and is still a leading proponent. The first SIB was implemented in Peterborough prison in 2010 to reduce reoffending rates. As at July 2018, 45 SIBs have been launched in the UK with over 100 worldwide, covering such diverse sectors as integrating refugees in Finland, supporting homeless people in Canada, and getting young children ready for kindergarten in Chicago. Figure 2 shows the timeline of the development of social impact bonds in the UK. 


Figure 2: Timelines for the development of social impact bonds
Figure 2: Timeline for the development of social impact bonds

How are SIBs used?

In the UK, SIBs have been used to fund services for groups such as young people not in education, employment or training (NEET), recently released prisoners, children in or at risk of entering statutory care, and people experiencing homelessness. Figure 3 shows the distribution of SIBs in policy areas until September 2017 and Figure 4 shows the policy areas and development of UK SIBs up to July 2018. 

UK SIBs by policy theme
Figure 3: Distribution of SIBs by policy area (as of September 2017)
Figure 4: Policy areas and development timelines of UK SIBs (until July 2018)
Figure 4: Policy areas and development timelines of UK SIBs (as of July 2018)

Our Projects Database covers all the SIBs that have been launched across the UK, providing key information on different aspects of the SIB. You can also search the comprehensive Global Database that is put together by Social Finance, or read detailed information on particular SIBs in our Case Studies section.

Intermediaries

Social impact bonds sometimes use experts to provide specific services. Confusingly these are typically all referred to as “intermediaries”, but encompass at least four quite different roles.  

  • Consultant – they will support the commissioner to develop a business case for the project that secures internal and external approval to proceed, meaning that the project can be procured and implemented.
  • Social investment fund manager – manages the funds on behalf of the social investors and managers the project with commissioners. 
  • Performance management expert - who reports on the performance of the SIB, providing an independent source of information and scrutiny to investors and the commissioner. This might be required if there is a perceived conflict of interest in the provider measuring and reporting on their own performance, or if the provider lacks the skill to deliver the standard of reporting required by stakeholders.
  • Special purpose management company that brings together other parties in a contractual relationship and holds the contract directly with the commissioner. You can read more about Special Purpose Vehicles (SPVs) in our technical guidance.

The Big Lottery Fund have developed a directory of organisations that can provide support on developing a social impact bond, which can be accessed here.

Evaluators 

In many cases there will need to be an independent evaluation to determine whether a project has delivered according to the objectives set out by the commissioner. Sometimes the result of the evaluation forms the basis for payment, as in the Peterborough Prison SIB – but this is more typical in US SIBs than UK ones. The scale and form of the evaluation required for a SIB will need to be decided early. This includes whether the evaluation should be commissioned externally or conducted in-house, either partially or wholly. You can look at our technical guide on Evaluation to find out more. 

Chapter 2

The debate around social impact bonds

4 mins read

This chapter will look at the current government policy on social impact bonds, the pros and cons, as well as what the evidence says 

The UK government continues to look to test innovative approaches to managing demand, improving value for money and tapping into new sources of funding. They are also keen to foster cross sector collaboration with the voluntary and private sector to tackle complex social problems.

In the Civil Society Strategy, published in August 2018, the UK government committed to continuing to pursue social impact bonds as a way of funding public services.
[social impact bonds] bring innovation, additional private sector finance, and a wider range of service providers to the taks of addressing long-term social challenges. They additionally require a focus on outcomes and as such, enhance the social value of public service contracts.
Civil Society Strategy, DCMS, August 2018

SIBs are the subject of both enthusiastic promotion and passionate criticism and in this section we set out the potential benefits and limitations of SIBs as stated by those on both sides of the debate. We then share the latest research by the GO Lab that seeks to move beyond this often-ideological debate to provide a constructive response based on robust academic research.

Potential benefits of social impact bonds

Proponents of SIBs cite some of the following as the potential benefits of SIBs. We have grouped these under the headings of collaboration, prevention and innovation, which we explain further in the next Chapter.

Collaboration 

Cross-sector expertise. Service providers often have a deep understanding of a particular cohort of people and the type of interventions that are effective. Socially-minded investors may have both finance and contract measurement experience, as well as a desire to have a social impact. SIBs allow commissioners to bring together these complementary competencies. Much of the qualitative evaluations of SIBs indicates that those involved see significant value coming from the collaboration of investors and providers, combining operational expertise with a robust approach to evidence-led management and scrutiny of performance. 

Collaboration between multiple commissioners, multiple providers, or both. Some SIBs have enabled multiple commissioners to work together to deliver a single service to an agreed target cohort – for example, “Positive Families Partnership”, A SIB targeting children at risk of entering the care system co-commissioned by five London boroughs. Other SIBs have enabled multiple service providers, each with different competencies, to collaborate around delivering a single agreed outcome or set of outcomes – for example, the “One Service” in the Peterborough Prison SIB, or West London Zone

Prevention 

Unlocking future savings by investing more up-front. SIBs enable government to focus on prevention and early intervention services that might otherwise not get funded. This helps improve the life chances of the most vulnerable people in society and reduces the demand for public services in the long term. 

Innovation

Enabling new interventions to be tried. SIBs might provide a way for government only to pay for interventions that are effective – and they provide a clear measure of what has been spent to deliver that impact. SIBs shift financial risk of new interventions away from the public sector, towards investors and service providers This can enable more of a risk to be taken on less proven interventions, as government is more protected from failure (at least financially). 

Enabling greater flexibility in delivery of interventions.Unlike traditional methods of contracting, where contracts are designed around a presumption of existing expertise, SIBs are designed for contracts where all parties accept a level of uncertainty and the need for change. This balances accountability for achieving outcomes, with the flexibility to innovate and try out new methods of delivering services. This is because by specifying outcomes rather than activities, service providers are free to adjust the way they deliver a service throughout the contract. 

Improving performance management. Related to this, SIBs give the potential for a better quality of accountability for public sector spending, by fostering a culture of robust performance monitoring and evaluation.

Voluntary sector engagement. One of the originating policy arguments for SIBs is that they level the playing field for voluntary, community and social enterprise (VCSE) organisations in delivering payment by results contracts. This remains a principal consideration where social value and the strengthening of the VCSE sector, as well as economic value, are seen as key priorities.  

Better quality of evidence. The legacy of a SIB, if there is a focus on impact evaluation as well as ongoing measurement of outcomes, is that the commissioner can make a much better-informed decision around future spending.  

Potential limitations of social impact bonds

Detractors of SIBs often make the following criticisms of SIBs. Sometimes these contradict the arguments made by proponents. As shown in the next section, the evidence on both sides is varied, and more experimentation and evaluation is needed to improve our learning.  

Expensive to develop. SIBs are complex and demand a quality of capacity and commitment that is not readily available in the public sector or could detract from other services. As many of them are bespoke, it is not always possible to scale the services and decrease the costs.

Do not foster innovation. SIBs do not foster genuine innovation in providing and implementing public services, because to have assurance they will get their money back with a return, investors tend to prefer proven models that have been shown to deliver.

Lack of transparency. There is no clear sight of costs, payments and investor returns after procurement. This makes it difficult to determine whether SIBs offer value for money or not, compared to more straightforward methods of contracting. 

‘Financialisation’ of the public sector. This term refers to a process whereby economic and public policy making are subordinated in favour of the interests of the financial sector. Similarly, SIBs may create incentives for the VCSE/non-profit sector to pursue commercial interests over their social mission.

Incompatible with a public service ethos. It is unclear whether a strong focus on results changes the ethos in the public sector in a helpful way, or whether it reduces the human element of delivery and leads to (or reinforces) the chasing of targets.

Chapter 3

The evidence around social impact bonds to date

3 mins read

Can SIBs be a tool for public sector reform?

Seeking to move beyond the polarised debate, The GO lab published its first major report in July 2018. Building the tools for public services to secure better outcomes: Collaboration, Prevention, Innovation looks at the current state of play of UK social impact bonds to date. Here are the key findings: 

Tools for public sector reform: Collaboration, Prevention, Innovation 

Challenges in the public sector include the fragmentation of public services, a short term political and financial focus, and difficulty creating change. SIBs may help to reform the public sector through facilitating collaboration, prevention and innovation. Figure 2 sets out a theory of change which illustrates how SIBs may do this.

Collaboration– SIBs may encourage collaboration as Local Authorities and service providers can work together and ‘wrap around’ citizens to meet their needs. 

Prevention– SIBs may encourage earlier intervention to prevent a crisis which saves money in the longer term. 

Innovation– SIBs may encourage innovation as risk is transferred to the investor so there is room to try new interventions or new forms of delivery and performance management.  

Figure 5: GO Lab's 'Theory of Change' for SIBs - how SIBs might be expected to lead to public service reform
Figure 5: GO Lab's 'Theory of Change' for SIBs - how SIBs might be expected to lead to public service reform

Keys to collaboration prevention and innovation

Astated earlier, there is a lot of variation between different SIBs. The GO Lab found four potential dimensions upon which SIBs vary, through systematically reviewing the literature and conversing with SIB practitioners. These dimensions may lead to better collaboration, prevention and innovation. We need to understand the variations in more depth to know whether certain dimensions can improve public service delivery.

  1. The nature and amount of payment by results - were payments made squarely for outcomes or was some payment made for inputs or activities?
  2. The nature of the working capital – was this investment tied to achievement of outcomes or would it be repaid no matter the performance?
  3. The social intent of the provider organisation – was the service delivered by a charity, or a company without explicit social values?
  4. The performance management approach – how hands on were the stakeholders in overseeing the delivery of the service? 

A core objective of the GO Lab is to understand how these factors interact in different circumstances to produce different results.

Figure 6: GO Lab's Key SIB Dimensions - hat might drive collaboration, prevention, and innovation?
Figure 6: GO Lab's Key SIB Dimensions - hat might drive collaboration, prevention, and innovation?

Understanding the 'SIB effect'

Looking at all the evidence on SIBs to date, there is not yet any conclusive evidence that SIBs are better than other commissioning structures at delivering public services. Many SIBs currently look at whether the intervention achieved results, but few look at whether it was due to the SIB approach, or whether the same results could have been achieved if the intervention had been commissioned in a more conventional way.

We don’t yet know how the commissioning structure might change the outcome of a service. We need to tease apart the commissioning structure and the intervention to understand whether the SIB approach leads to improved social outcomes. Understanding the ‘SIB effect’ is a key objective of the GO Lab and this is captured in Figure 7.


Figure 7: Assessing the evidence on UK SIBs
Figure 7: Assessing the evidence on UK SIBs

Further Reading

Chapter 4

Further considerations around social impact bonds

3 mins read

This chapter looks at further considerations around SIBs for those who are interested in setting one up. This includes what makes them an attractive model, and some common questions over the value for money and development challenges 

What make SIBs an attractive model to providers?

For those who have participated in SIBs, they may be an attractive model. The benefits for commissioners have been outlined in chapter 2, but they may also be attractive to service providers and investors. Here we online a few reasons why.

For service providers

  • Ability to access outcome based contracts and thus to scale up interventions
  • Risk of participating in an outcome based contract is passed on to, or shared with, a separate party (the investor) 
  • Opportunity to develop new services and generate evidence of impact 
  • Greater flexibility in delivering and adapting services around the observed need 
  • Access to a committed, multi-year funding stream 
  • Consistent goals to work to

For investors

  • Achieving blended returns: social and financial
  • Building a portfolio of projects where they have confidence in the service providers’ ability to deliver impact
  • Enabling investment related to their social mission
  • Introducing a metric for impact

Do SIBs offer value for money?

For many commissioners, value for money is an over-riding priority. While SIBs can be costly to develop, there are a few ways that a well-designed SIB might help to ensure value for money:

  • The outcome-based payment element can mean that commissioners will not pay, or will pay less, if the work does not achieve the specified outcomes.
  • Given the requirement for evidence of outcomes achieved, SIBs can contain a natural evaluation element. Applied adeptly in the longer term, this allows organisations to build evidence around ‘what works’ and ensures future interventions can achieve greater value for money.
  • The development of a SIB demands precise definition of target cohort, desired outcomes, and payment amounts, and includes elements of cost-benefit analysis, which all helps to ensure that interventions are supported by a robust business case.
  • The involvement of a third party in the form of an investor who risks losing money can bring in an added dimension of performance management, above and beyond what commissioners have the capacity to perform on their own.
Unlocking this value for money depends on a combination of sound design of the contract terms, and good quality relationships between the different sets of stakeholders. Forthcoming GO Lab research suggests three aspects of a contract that should be tightly specified in order to have assurance a contract will deliver value: the cohort, the outcomes, and the price of the outcomes (see Figure 8). However, the degree of technical know-how and stakeholder negotiation required to define this ‘outcomes specification’ in detail needs to be balanced with the time and resource available to develop and launch the contract (the so-called ‘transaction costs’). Forthcoming GO Lab research explores this balance in greater detail.


Designing a robust framework
Figure 8: The GO Lab's Triangle - Improving outcomes specifications

N.B. Attribution (and the related term additionality) is the extent to which changes in outcomes are caused by the programme or intervention used. Deadweight (and the related term counterfactual) is the change in outcomes which would have occurred anyway, regardless of the programme or intervention. 

The development challenges of setting up a SIB

As a form of contracting, social impact bonds can be technically challenging to develop and place additional demands on commissioners. SIBs should be designed to provide better value to commissioners than any available alternative, and commissioners of SIBs need to make a strong business case for choosing SIBs over other funding models. We would recommend this business case is underpinned by a public service reform logic as described in our report. Can the SIB help overcome fragmented services through collaboration, short-term thinking through prevention, or difficulty creating change through innovation?

While it is likely that the development process will become easier as the market matures, some of the current challenges to setting up SIBs include:

  • A long lead time for designing an effective SIB contract, due to the unfamiliarity of the approach.
  • The analytical complexity of designing a robust outcome framework and a payment mechanism that offers appropriate incentives.
  • The need to manage relationships with multiple stakeholders and negotiate terms which are satisfactory to all.
  • Agreeing on the most appropriate evaluation method, and whether the evaluation should be linked to payment, or separate.
  • The availability of reliable and timely data.

The GO Lab providers extensive guidance and support to help commissioner meet these challenges. 

Our technical guides provide in depth information on a range of topics that you will need to know about when developing a SIB, Setting and Measuring Outcomes, Procurement, Contracting and Governance, and Evaluation.  

Our SIB readiness framework explores the considerations that need to be made at each stage of developing a SIB, including best practice and when there’s more work to do. They break down the complex and perhaps unfamiliar processes in bitesize chunks.

Chapter 5

Is your SIB project feasible?

5 mins read

Social impact bonds are not suitable for all social policy areas and in many cases more traditional approaches to funding services continue to be more appropriate. This chapter will look at what you need to do to make sure your SIB is feasible   

Having considered what SIBs are, the debate and evidence around why you might use one, and the practical considerations of setting one up, you may wish to determine if a SIB is feasible as a way of meeting a particular need in the population, or of commissioning the delivery of a particular service.

The SIB Readiness Framework, developed by the GO Lab in partnership with the Big Lottery Fund, Traverse, and The Social Investment Partnership (TSAP), provides detailed guidance on what you need to do to develop a SIB contract to the point of launch. Prior to that detailed development taking place, there are some quicker questions to answer to determine whether a SIB project is feasible. We have arranged these under the same headings as the Readiness Framework, in case you do decide to continue to develop the project having answered these questions. These are: developing the business case, managing relationshipsand designing the service.

Developing the business case

Why a SIB? Clear reason to use a SIB over another form of contract

Most important of all is to be clear and explicit about the reason for using an outcome based contract tied to flexible investment – a SIB – rather than a more conventional form of contract. In our Report, Building the Tools, we outline three reasons why SIBs may be a useful tool for public service reform: a way to overcome fragmented delivery (though collaboration), a way to reduce demand for high-need intensive services (through prevention), and a way to disrupt the usual way things are done (though innovation). Before going any further, a commissioning body should be clear whether any or all of these are desired benefits.

Urgent action is not required

SIBs can take a significant amount of time to develop – up to a year or more. Commissioners need to consider if the response required is urgent and whether this time period is appropriate.

There is a budget line to pay for the contract

Commissioners should have a clear idea at the start of where the money to pay for outcomes is likely to come from. This applies both for business cases which are based on unlocking savings through demand reduction, and those which seek to bring improved performance to an existing service. A link will need to be made between the type of outcomes which might be paid for and the budget line in question, as budgets tend to be specified according to service or policy areas, not outcomes.

Outcomes can be measured 

Commissioners need to build a consensus around the high-level outcomes that they are willing to pay for. These must be meaningful and measurable, and achievable within a typical contractual period. Read the Setting and Measuring Outcomes guide for specific guidance on setting appropriate outcomes

There is a way to know that outcomes claimed would not have happened anyway 

counterfactual is an estimate of what outcomes would have occurred without the intervention. It is an attempt to compare what happened within a SIB with what might have happened in an alternative reality where the SIB didn’t happen. While this is tricky to do in practice, it is especially important in an outcome based contract. It is a way to be assured that the outcomes being paid for have been achieved because of the work done under the SIB. This is not guaranteed – many outcomes, both positive and negative, happen by accident (real or statistical), or can be caused by work being done by others (which, if paid for by the same party, risks double-funding).

For more information about developing the counterfactual look at our Evaluation guide. 

There is a defined target cohort 

The cohort must be made up of people with historically negative outcomes and the commissioner thinks that better outcomes can be achieved through a SIB. 

The cohort must be clearly and unambiguously defined. This is crucial for the commissioner so they can prevent the provider from ‘cherry picking’ individuals, and so that the commissioner has some obligation to refer the relevant individuals to the service. This clarity is also equally important for the provider and investor as a poorly defined cohort or high dropout rates may lead to additional costs to achieve each outcome. 

The characteristics of the cohort must be defined in sufficient detail. The commissioner must know their current use of services, any distinguishing events or behaviour, e.g. offences, and any needs assessed by a qualified party, e.g. Special Education Needs.

The contract is large enough to justify the set-up costs 

The value and length of the contract also needs to be sufficient to offset the time and cost of setting it up. associated with management and governance of the contract, which may be higher than for other forms of contract. Our Project Database gives some indication of the typical size and duration of SIB contracts. Many people believe SIBs would be more effective if they were larger.

Managing relationships

There is internal capacity and commitment 

One of the main causes of outcomes contracts not achieving a successful contractual outcome is the lack of senior engagement and commitment from stakeholders. The commissioner needs to establish an effective project team from the start, committed to the SIB intervention.

There provider market has appetite

Commissioners should consider the type of providers they wish to engage, and the sort of relationship they wish to have with them. There are examples of SIBs that use both large, national providers and small, local ones. Equally, there are examples of SIBs where there is a highly trust-based relationship with providers; conversely, some have relied more heavily on the contract terms as written (though some evidence appears to suggest this can be problematic). 

Commissioners may seek to explore:

  • the level of understanding amongst expected providers of outcome based contracting or social impact bonds, and the rationale for using these approaches;
  • whether these providers are likely to respond positively to payments being linked to the achievement of outcomes.

The provider market has capability

As well as provider appetite, you should explore provider capability to deliver in this way. This can be done through pre-tender market engagement. It is also important that there is a likely supply of risk capital. This is particularly important where there is no established provider or social-investment backed market, or there is concern about the viability of the service being run through a social impact bond.

It must be appropriate to give service providers the freedom to deliver the service in accordance with their own methods. 

Commissioners may seek to explore: 

  • the quality of experience and capacity available, and the possible role of an intermediary;
  • interest from investors and whether they see the project as a viable investment;
  • the best way to engage the market when developing the business case and during the formal procurement phases. These processes are explained in the procurement technical guide.

Designing the service

The contract will integrate with existing provision

The proposed contract needs to integrate with existing or proposed services as part of the system of local public services. There may be organisational and/or cultural differences that challenge the relations between other teams in related public services. Consideration should also be made around the confidence in local residents or service users in the proposed service.

Contracting the service out will not infringe upon statutory obligations 

The service can be contracted to an external party without breaching statutory public sector obligations.

There are indications that effective interventions exist

There must be either an existing evidence base, or a robust ‘theory of change’, for possible interventions which might meet the identified population need. This means even if you don’t know what will work, there should be a strong logic to show what mightwork. If there is a range of possible interventions which are well proven, and there are providers who have shown they can deliver them effectively, there is probably no need for a SIB – a straightforward service contract might do. Conversely, if there are few interventions, they are unproven, or providers are weak, investors may deem the SIB contract too risky to make or back any bids. 

Chapter 6

Getting started

1 min read

As a new form of commissioning, developing social impact bonds does place additional demands on commissioners, and can be technically challenging at first. At the same time, the potential benefits of this approach have prompted a growing number of local authorities to explore and engage with the model, providing examples of how to adopt new practices and share learning.

The GO Lab offers advice and support to local authorities interested in exploring social impact bonds models of service provision. We offer a range of support materials. If you are interested in developing a social impact bond here are the first steps you can take

  • Look at some case studies – we have a selection of case studies on the website that cover a range of policy areas and issues. They offer insight into the project, how it was set up and what it aims to achieve.  
  • View our projects database to see more social impact bonds – Our project database is an up to date resource that captures every social impact bond that has been launched in the UK. Take a look at the kinds of SIBs that are underway and the outcomes they hope to achieve. 
  • Book an advice session with the GO Lab to discuss your project, from considering whether it is feasible, developing the business case or implementing the SIB.  
  • Find out whether there are government outcome funds available. The Government seeks to catalyse the development of scalable and replicable SIBs, by making available to Local Authorities outcome funds.

If you are beginning to develop your social impact bond and want more in depth guidance: