Kitabı oku: «Позитивные изменения. Том 2, № 2 (2022). Positive changes. Volume 2, Issue 2 (2022)», sayfa 6
«Sandboxes» for Social Investments: how Social Impact Bonds Projects are Developing Globally
Ivan Smekalin
DOI 10.55140/2782-5817-2022-2-2-30-39
The impact investment market is growing all over the world, and its forms and types are becoming more elegant. If earlier investments in solving social problems could be more like spending CSR budgets – "give and forget", than the current state of the market dictates other rules. The new standard is accounting not only for invested funds but also for assessing the socio-economic efficiency of the results obtained. One of these «new» formats is the «SIBs» that came to Russia not so long ago – so-called from the English-language term Social Impact Bonds.
Ivan Smekalin
Analyst, Positive Changes Factory
TO TAKE, YOU HAVE TO GIVE
Social Impact Bonds are also known simply as social bonds (Weller & Pedersen, 2018). The phenomenon has other names as well, such as Pay for Success and Development Impact Bonds. Despite being called "bonds," these projects are not exactly bonds, but rather a subcategory of public-private partnerships. Social Impact Bonds are effectively a contractual and financial mechanism in which the return on investment occurs once the social effect is achieved.
Public-private partnerships are based on the interactions and commitments between three parties:
1. a public agency initiates the project and shapes the expectations for its social impact;
2. a contractor receives funding from investors and implements the social project to achieve the agreed results;
3. an investor provides capital for the contractor with the expectation of getting their money back from the state agency once the expected social impact has been achieved.
The complexity of social impact bonds is that they combine a service delivery model with project management, impact evaluation and an investment system (Andersen et al., 2020). While the key role for making decisions (and launching actual projects) in most cases belongs to public agencies, the projects themselves are funded and implemented by private-sector actors – and this creates grounds for controversy. Each party may have different interests, goals and performance indicators.
In particular, we can note the following potential contradictions present in social impact bonds (Weller & Pedersen, 2018):
1. public agencies tend to choose the lowest budget projects, which affects the quality of services provided;
2. this de-facto privatization of public services is hard to explain to the public: why not spend the money through the government institutions rather than channel it to private players?
3. during the project implementation phase, it is hard to choose between sticking to the original plan and being flexible to meet the goals;
4. greater risks for investors: under comparative risk levels, greater return can be achieved from investing under general market conditions than by dealing with the government.
MEDIATORS AND THEIR ROLE
It is important to note the role of mediators who handle the interaction within the triangle of stakeholders – the government, the contractor, and the investor. There are two types of mediators (Urban Institute, 2020): financial and expert. Financial mediators, also known as transaction coordinators, provide support for project planning, investor protection, and contract negotiation. Expert mediators review the project design, costs, and offer methods for researching the intervention's social impact.
The VEB.RF state corporation, one of the major social impact operators in Russia, represents (2021) the following list of stakeholders: the contractor, investor, public body, independent evaluator, and operator. This list correlates to the three key stakeholders and two mediators, as described above. However, the Russian mediator's role is somewhat limited compared to traditional expert mediators: specifically, it does not provide project review or assistance in designing the project prior to its launch. The Russian model also does not allow for a participant to guarantee the investor's interests, other than by the investors themselves. However, these two models are not the only options for implementing social impact bonds. Below we will examine project cases from different countries.
THE UK EXPERIENCE. DEVELOPING INNOVATION THROUGH AN EVIDENCE-BASED APPROACH
The world's first social impact bonds project was implemented in the UK (The Economist, 2013). In 2010, Peterborough, a town in Eastern England, launched a six-year privately-funded prisoner rehabilitation program. No payments from the state fund to investors were projected until 2014, and not until the Department of Justice acknowledged that the criminal reoffending rate within the pilot project area differed from the national average. What made the Peterborough case unique:
• a longer implementation period for greater service flexibility – the investor’s multi-year funding for the services gave the contractor more autonomy to flexibly implement the project tasks;
• not just a one-time fixation on results – monitoring was conducted regularly during the project, with monthly reports being provided to investors;
• visible social effect – the requirement to demonstrate social impact on an ongoing basis resulted in the continuous development of new methodologies to study the social problem being addressed, which could only yield a positive social outcome.
As we can see, the very first social impact bonds project offered the contractors plenty of room to develop efficient impact tools, and innovate in analyzing the social problem at hand, while investors received regular opportunities to monitor the project’s progress.
Since then, more than 30 social impact bonds have been implemented in the UK (A guide to Social Impact Bonds, 2017). In describing the British program of state support for social projects (Guidance on developing a Social Impact Bond, 2017), it is emphasized that the private contractor’s main interest is to develop innovations in the evidence-based approach for assessing impact effectiveness. Costs are treated as current costs multiplied by a percentage of the maximum rate of return. The estimated value of social change is added to the formula, based on the value of the social results achieved.
Academic researchers (Warner, 2013) argue that Britain’s experience shows the inevitable emergence of an industry of social impact evaluators and contract mediators who will ultimately become the main beneficiaries of these projects. Moreover, the effect on public policy turns out to be highly controversial, since projects are often limited by their context and are not reproducible. On the other hand, the project itself is a de facto instrument for privatizing state social functions within the framework of the New Public Management program. The contradiction here is that the social problem is broader than the ongoing project, or the project is too extensive, and would be cheaper to implement with the government’s tools. However, it is worth noting that the state is less flexible in inventing new problem-solving methods.
The authors quote (Warner, 2013, p. 313) a British investor who participated in a social impact bonds project:
"[These projects] involve high-risk investments with low or medium rates of return," which reduces the appeal for investors because, in addition to less than favorable financial conditions, they have to deal with the state which, by definition, is more demanding and more rigid than private sector players.
THE US EXPERIENCE. A TOOL WITHIN IMPACT INVESTMENT
McKinsey's U. S. office in 2012 came to the following conclusion about social impact bonds (SIBs): they are a social intervention assessment tool that allows the government to pay for results and investors to invest in things that actually make an impact. The introduction of SIBs in the United States began as an attempt to catch up with the British experience (Moodie, 2013). Design for the first projects started in 2013. Despite a higher volume of impact investment than in the UK, SIBs failed to immediately be adopted as a common tool in the United States. This is primarily because SIBs are not a type of investment, but rather a contractual mechanism that requires an experimental design.
Social motivation is an important aspect: the profit would be higher at the same risk level when working with commercial players.
Thus, Americans saw SIBs primarily as a tool within impact investing which facilitated the development of more efficient interventions in the social sphere and assessed their impact.
Like in the UK, the first social impact bonds project in the US was also focused on reducing the reoffending rate among ex-convicts. Goldman Sachs (2020) acted as the investor in partnership with the city of New York. The investment totaled $9.6 million, with the expectation that the entire amount would be repaid upon meeting the goals. If the results exceeded expectations, the investor would receive a financial return comparable to that of typical lending, pro rata to the performance above the target.
The Center for Public Impact (a BCG foundation) notes (2016) that large investors can offset the increased risks of participating in SIBs through economies of scale. Social motivation is another important aspect for the investor: the profit margin would be higher at the same risk level when working with commercial players. As of 2016, SIBs remained largely a British story, as more than half of them were conducted in the UK. Proponents of this format see the advantage of social impact bonds in outsourcing the financial and political risks of addressing social issues, while creating opportunities to improve social impact tools.
We should note that descriptions of the US experience in implementing SIB never mention that investments were repaid per the "costs x key interest rate + assessed value of the social impact" formula, just that the actual investment was recovered. In other words, the American funding model is less economically feasible than the British model.
THE EU EXPERIENCE. TOOL FLEXIBILITY
A policy brief from the European Parliamentary Research Service (Davies, 2014) describes SIBs as a way for public authorities to try out a social service without spending money on it in the absence of positive results, and without bearing political responsibility. The policy brief also considers this innovative tool as a part of social investment, with its respective cost allocation. For example, during the implementation of the European Commission's investment program, an agreement was reached (Fraboul, 2020) between BNP Paribas and the European Investment Fund with the aim of facilitating access to funding for social organizations. The project featured an investment of €10 million to support 1,000 students and 130 children.
An important feature of SIBs emphasized in the European experience is that this mechanism lowers the entry barriers for investors in the social investment sector, by offering the potential for recouping invested funds from the state. Further, the emphasis on measurable results allows investors to spend money on more expensive projects, as their impact will be more pronounced than that of conventional social investments.
German-Dutch cross-border cooperation is a good example of how an investor can benefit from a social issue. The idea of the project was to "provide Dutch workers with work opportunities in Germany," that is, to integrate labor markets in the cross-border regions of the Netherlands and Germany (Koekoek, 2016). Companies were effectively investing in the retraining and mobility of their would-be workers, achieving positive social and economic effects. However, this raises the ethical question of the state paying money to a private company that benefits from a social impact bonds project. In the context of the European Economic Community, the answer lies in the plain of European solidarity and the value of integration per se. But in other contexts, the rationale for similar projects seems much more complex.
SIBs have not been met with equal enthusiasm everywhere: for example, in Portugal this financial instrument essentially duplicated community social investment funds but with more reporting requirements, which resulted in too much bureaucracy and reduced the flexibility of project implementation (Ferreira, 2020).
A case study of the Danish social impact bonds project (Andersen et al., 2020) shows that funding can be flexible: in particular, the municipalities certainly funded recruitment, project review and evaluation, while investors were involved in funding the actual growth acceleration. The roles of the provider, project operator and evaluator were combined in the project, which is considered a conflict of interest in the classical SIB model. The lack of a project coordinator responsible for concept development and management greatly hindered the ability to build an integral framework in place of an array of isolated elements. Also, funding was predominantly activity-based, not outcome-based. Looking at this case study, we can conclude that outsourcing public services is not the only form for SIBs to take; they can also exist in the format of an external reconfiguration of existing public social policy practices.
CANADA'S EXPERIENCE. COMBINING THE ROLES OF MODERATOR AND EVALUATOR
Deloitte conducted a survey of Canadian investors in 2013 (that is, at the very beginning of the SIB launch within the country). In discussing the main barriers, investors cited high transaction costs and an unwillingness to work with the state due to the uncertainty of its priorities. One of the most common collaboration formats is joint investment in a project as part of an investment consortium, as this allows the number of market entry points to expand. Consortia also enable pooling and sharing expertise, which is a major gain for the investor, second to the actual social impact. As a confidence-building measure during the initial implementation stages of social impact bonds, the consultants suggest considering the option of providing a guarantee for a portion of the invested capital. The scheme works as follows: for any outcome of the project, the state guarantees to return a certain portion (i.e. 5–15 %) of the upfront investment. The essence of SIBs is the transfer of risk from the state to the private sector, and therefore the demand for this step is bound to decrease as the project practice spreads, mechanisms are developed and, most importantly, the state demonstrates a sustained commitment to long-term participation in such projects. Most respondents indicated the optimum project duration to be 4–6 years, which is sufficient for long-term cooperation. The investors surveyed confirmed the relevance of the British model, pointing to the need to have two extra agents beyond the PPP triangle: an impact evaluator (which is not a common service in the Canadian context) and a mediator to communicate with the government. However, Canada mainly used a 4-part model, where the roles of a moderator and evaluator were combined.
THE LATIN AMERICAN EXPERIENCE. DREAM
The Inter-American Development Bank Research Lab (Ronicle & Strid, 2021) has formulated five criteria for a successful social impact bonds project – DREAM (Demand from government, Regulatory framework, Economic and political context, Availability of data, Market capacity):
1. Demand from Government – Developing an approach based on the governmental demand, which includes influential private players in the discussion. In Argentina, the state agency combined the roles of financial guarantor and contractor. This led to the state funding its own services, which violates the logic of SIB and reduces the effectiveness of the projects.
5 criteria for a success of SIBs – Demand from government, Regulatory framework, Economic and political context, Availability of data, Market capacity.
2. Regulatory Framework – the presence of an appropriate regulatory framework for SIBs that is flexible, results-oriented and regulates government payments. In Mexico, a specialized research institute was established to study the legal barriers to implementing social impact bonds. And in Chile, legal consultants were used for this purpose.
3. Economic and political context – in the political sense, it is essential to provide guarantees that programs will not be phased out after a change in government at the beginning of a new political cycle. While Argentina and Colombia made some attempts to create enforcement mechanisms for SIBs that do not depend on political campaigns, the general recommendation is to launch projects within the political cycle and negotiate with elected politicians at the beginning of their elected term. The economic context is important in the sense that high inflation levels require contracts accommodating regular price increases. This is what happened in Argentina without an inflation adjustment mechanism, which obstructed the successful implementation of social impact bonds.
4. Availability of data – During the SIB ecosystem growth states, it is critical to have sufficient administrative data (or to have the resources to obtain the necessary data on your own) in order to develop SIB concepts and assess their impact. In Colombia, for example, the development of data banks resulted in data-driven decision-making.
5. Market Capacity – this includes investor willingness to take risks and to participate in the social investment process, access to expertise to design the SIB concept and the results evaluation system, and the availability of contractors to implement social impact bonds.
HOW SUCCESSFUL PROJECTS ARE SIMILAR
Social impact bonds (SIBs) emerged as a contractual mechanism at the junction of social investments and governmental social development programs. The original UK program, which laid the foundation for similar projects on a global scale, was based on the principles of long-term financing, regular monitoring of interim results, and the development of new tools for evaluating the social effect.
The British experience demonstrated the importance of having two additional participants within the project framework: the investor, the government, and the contractor benefit from the involvement of financial and expert mediators. The first type of mediator is concerned with coordinating transactions and managing contractual obligations. The second type of mediator reviews the project design, costs, and offers a social impact research toolkit.
The US experience solidified the understanding of SIBs as a tool within impact investing, whose organizational structure facilitated the development of more efficient social interventions and assessed their impact. It also demonstrated that large investors can offset the increased risks of participating in SIBs by economies of scale. Canada developed a format consisting of a conglomerate of investors, which allowed risk and expertise to be shared.
Negative experiences mainly stem from a failure to comply with the DREAM criteria (Demand from government, Regulatory framework, Economic and political context, Availability of data, Market capacity). For example, Portugal’s institutional environment led to SIBs duplicating existing community development funds. Canada’s experience was not successful because the stakeholder engagement scheme combined the roles of project operator and impact evaluator. The Danish experience was not extensive enough to build a results evaluation scheme, which in the context of roles mixed between the provider, project operator and evaluator, undermined project sustainability.
Investors need social impact bonds as an opportunity to enter the social investment sector at a relatively low cost. For the state, this type of project represents an option to outsource the social function and mitigate political risks in the event of failure. The market as a whole receives a new contractual mechanism and innovative impact assessment tools. The public benefits from improvements in a particular aspect of the social situation. And in general, all this means that such a tool is worth at least studying in more detail.
REFERENCES
1. Participants in social impact bonds. (2021). VEB.RF. (in Russ.).
2. A guide to Social Impact Bonds. (2017, September 26). Government of the UK.
3. A. P. (2013, May 10). The Peterborough principles. The Economist.
4. Andersen, M. M., Dilling-Hansen, R., & Hansen, A. V. (2020). Expanding the Concept of Social Impact Bonds. Journal of Social Entrepreneurship, 1–18. doi:10.1080/19420676.2020.1806100
5. Davies, R. (2014, August). Social impact bonds. Private finance that generates social returns. European Parliamentary Research Service.
6. Deloitte, MaRS Centre for Impact Investing. (2013). Social Impact Bonds in Canada: Investor insights. Deloitte.
7. Ferreira, F. S. V. (2020). Social Impact Bonds: The Portuguese Case.
8. First US Social Impact Bond Financed by Goldman Sachs. (2020, May). Goldman Sachs.
9. Fraboul, A. (2020, February 4). BNP Paribas and the European Investment Fund launch a €10 million fund to co-invest in Social Impact Bonds ("SIB") in the European Union. BNP Paribas.
10. From potential to action: Bringing social impact bonds to the US. (2012, May 1). McKinsey & Company.
11. Guidance on developing a Social Impact Bond. (2017). The Centre for Social Impact Bonds. Retrieved April 22, 2022.
12. Koekoek, R. (2016, October). World's first binational Social Impact Bond fosters Dutch-German collaboration. Medium.
13. Moodie, A. (2013, January 20). British social impact investing has left the US playing catch-up. The Guardian.
14. Ronicle, J., & Strid, А. А. (2021, January). Social Impact Bonds in Latin America. IDB Lab's Pioneering Work in the Region Lessons Learnt. American Development Bank.
15. Social Impact Bonds: how private finance can help transform public outcomes. (2016, September 11). Centre for Public Impact. A BCG Foundation.
16. Urban Institute. (2020). «What Role do Intermediaries Play in Pay for Success?» Urban Institute.
17. Warner, M. E. (2013). Private finance for public goods: social impact bonds. Journal of Economic Policy Reform, 16(4), 303–319 doi:10.1080/17487870.2013.835727.
18. Weller, A., and E. R. G. Pedersen. (2018). Pay for Success Literature Review: A PreCare Report. Copenhagen: Copenhagen Business School.
