Thursday, June 30, 2011

Buzzword 2011.1 - Social Impact Bond

It's June 30 - time to roll out some buzzwords.

Social Impact Bonds - (SIBs) these are a new type of financing for nonprofits that comes to us from the UK. These "bonds' involve guarantees for payments for services delivered effectively. There is one being test in the UK, the State of Massachusetts is experimenting with them, President Obama has endorsed them in his 2012 budget as "pay for success." The Nonprofit Finance Fund has a learning hub on SIBs and SocialFinanceUS is a new organization launched to help bring these to the social sector.

Keep an eye on these. We've reached a point in the development of the social economy that this kind of financial product innovation is going to take off. Especially as the relationships between state governments and charities becomes increasingly...difficult.

It's too soon to know how effective these bonds will be for drawing in more capital to the social economy. Regardless, I love this buzzword because the folks talking about them almost uniformly tell you about them and then say that "they're not really bonds." Perhaps there is a better name for them?


Sean Stannard-Stockton said...

Arthur Wood calls them "Enhanced Social Investment Note". Social Impact Bond sounds safe, "Enhanced Social Investment Note" sounds like one of the derivatives that blew up the world financial markets.

Jon Pratt said...

I guess it was only a matter of time before the creativity of the financial services industry would be exported further to new markets where debt and investor returns have not been a factor. Debt financing current education, health and human services instead of an appropriation to fund the activity, requiring from 5% to 10% to ??% for investor returns, seems like a poor bargain for service providers (or the people served), but new money for someone. Maybe the investors will be philanthropies who will accept a lower return -- but requiring a cumbersome process that looks "new" and like "social innovation." At this stage Social Capital Bonds are an obviously attractive (new money!) concept only half-baked -- deserving pre-mortem examination.

Arthur Wood said...

Sean since you mention my name I hope will excuse a response. As I posted on your blog. These are not what I call them - technically they are called structured product and technically with this type of structure they technically are often called Notes. In relation to your comment that these sound like the instruments that blew up the world - not very helpful to educating our world.

The huge irony to that remark is that in the for profit world we are as you note reaping the whirlwind of over leveage. In the not for profit world we are completely unleveraged. To quote Stephen Lloyd the leading UK Charity lawyer - we are pre capitalist.

The critical bit in all this innovation in applling capital market skills for social endeavour is ensuring that in its application we have a clear and defined social outcome - hence in my mind that there are intermedairies that can bat on behalf of the social entrepreneurs on these financing issues and secondly that there is a legal framework that empowers the social entrepreneurs and the community in this process. Indeed makes these instruments accessible to those communities on there terms.

To the second comment from Jon Pratt also with due respect you have missed the point or perhaps I have misunderstood your post.

The purpose with an SIB is to create a mechanism that captures the future cash flow created by a social sector innovation - ies flip the traditional model on its head. There is now a cash flow tied to a social outcome.

In the process this levers private capital to take the risk and indeed to inject there skills to achieve a quicker social outcome, further more it provides long term funding capital to the social entrepreneur - so they are not spendig half there time raising unleveraged capital annually that they do in a traditional model.

Marry this to a simple replicable legal framework and you have something accessible to the community - with social mission hard wired (something we are currently doing) then finally securitise the cash flow and you have a liquid market.

As opposed to being half baked - I paradoxically and ironically - given I am a Liberal (in the UK sense) who believes in the power of the market - as Lenin said - To make an "Omlette you have to break the shells".