The Social Impact Bond (SIB) model is not without risks. A multi-party, cross-sector initiative introduces complexities that traditional government-vendor contracts do not entail. For this reason, Social Finance believes it essential to play an active risk management role throughout the entire SIB, from deal origination through investor repayment. This type of intermediation mitigates the following risks:
INTERVENTION MODEL RISK
If the selected intervention is not carefully vetted, it may fail to produce the expected social outcomes.
Our mitigating approach: We will undertake a careful due diligence process to understand the intervention model, project cash flows, and assess nonprofit providers.
Intermediaries must be enduring to add value to SIBs from deal origination through investor repayment. They are required to raise the capital, administer its deployment, and price and manage the risks inherent in an SIB proposition. Intermediaries that fail to commit to SIBs over the long term, either due to changing internal priorities or weak financials or governance, expose SIBs to greater risk.
Our mitigating approach: We will continue to build a team of staff, board members, and advisors with multi-disciplinary knowledge across the financial, governmental, and social sectors, and develop strong working relationships with evaluation firms and subject-matter experts.
Problems can occur in SIB execution if there are unclear lines of authority, poor communication among participants, lack of follow-through by one or more partners, failure to capture timely and reliable data on progress toward outcomes, and insufficient care to ensure that no harm comes to the target beneficiaries. In addition, SIBs impose significant managerial, performance, and measurement burdens on nonprofit organizations. SIBs may encounter problems if nonprofits lack sufficient capacity to manage these responsibilities when scaling their programs.
Our mitigating approach: We will actively manage the project over the life of the SIB. We will facilitate coordination among the relevant parties, assess the need for course corrections, and ensure smooth execution of data collection, evaluation, and audit.
Investors bear the financial risk in SIBs.
Our mitigating approach: We will incorporate investor risk mitigation methods, such as first-loss provisions, reserve funds, or other credit enhancement products, into the investment structure. We will keep investors up-to-date on the project’s progress by producing and circulating regulator investor reports.
The government could fail to repay investors even when the pre-defined outcomes are achieved.
Our mitigating approach: We will work to secure an obligation from the government to pay agreed-upon returns under unambiguous terms and conditions.
In the event the SIB intervention is unsuccessful, the SIB-funded nonprofits may suffer from negative publicity. Similarly, if the government fails to repay investors despite the achievement of social outcomes, it too can suffer damage to its reputation and its credit rating.
Our mitigating approach: We will collaborate with nonprofits and other stakeholders over the life of the instrument to guide successful expansion of the SIB-funded intervention. We will work to secure legislative authorization of multi-year government contracts to minimize the political risk and provide investors with confidence in repayment.