11 Mar. 2014 | Comments (0)
As quickly as the buzz surrounding New York State’s record social impact bond (SIB) has diminished, another record-breaking SIB has been launched to fill the void. Not to be outdone by its neighbor, Massachusetts sealed a deal in early February that will bring private investment to help 929 high-risk young men stay out of prison. The SIB could potentially return $27 million to investors.
Two features of this contract in particular stand out:
- In 2013, the U.S. Department of Labor gave Massachusetts a first-of-its-kind grant of $11.7 million to help promote pay-for-success programs. This will allow the state to extend the program, should it prove successful after seven years, to an additional 391 young men in two subsequent years.
- Both the deal’s intermediary, Third Sector Capital Partners, and the nonprofit service provider, Roca, have a stake in the contract through deferred service fees—portions of their fees that will only be paid if the program meets its social impact goals.
The first point is an acknowledgement of the government interest in SIBs and “pay-for-success” (the term many practitioners, particularly in the United States, prefer to use) initiatives. The $11.7 million is part of a $24 million grant that the Department has awarded to Massachusetts and New York State to improve employment outcomes for formerly incarcerated individuals. (Incidentally, New York Governor Andrew Cuomo just last week announced four nonprofit finalists that will enter negotiations to launch new contracts this year.)
An option for corporate philanthropy
The second point is noteworthy for corporate philanthropy, because it offers a way for foundations to take part in a SIB without necessarily being contracted into it. Roca, a nonprofit with 25 years’ experience helping the target population through intensive street outreach and targeted life skills, education, and employment programming, was so confident in its outcomes that it wanted to shoulder some of the risk inherent in the SIB contract. But to do so the organization had to defer its revenue from the project until the SIB matured—and it might not receive any if the success metrics aren’t met. So Roca turned to its philanthropic funders. Lili Elkins, Roca’s Chief Development Officer and Strategy Officer, told me that the appeal for funders of this proposition was that they could reinvest their money when the SIB matures, not only allowing them to serve more young men with their original funding, but also to affect Roca’s long-term sustainability. For the service provider to take such a position in the SIB sends a strong message to other investors, a message that the organization responsible for the outcomes is willing to stand behind its work and deliver results. It could be an important characteristic of future SIBs as they explore other sources of investment.
About social impact bonds
For those new to SIBs, Social Finance USA, a nonprofit dedicated to mobilizing investment capital to drive social progress, defines them as “a specific type of social impact financing in which funds are raised from investors to provide the social service provider with the working capital to deliver their services.” A SIB’s outcome is predicated on robust social impact metrics that are written into the contract. In short, if the project meets its impact goals, the SIB repays investors at a predetermined interest rate. You can read more about SIBs at the Harvard Kennedy School Social Impact Bond Technical Assistance Lab, or at the UK Cabinet Office website.