Social Impact Bonds (SIBs), also referred to as "Pay For Success" contracts, are an innovative financial instrument that offer a new means for growth-ready nonprofits to scale evidence-based interventions that improve social outcomes and create government savings. Aligning the interests of nonprofit service providers, governments, and investors, SIBs raise private investment capital to fund prevention and early intervention programs that reduce the need for expensive crisis-driven services and safety-net responses. The government repays investors only if an independent evaluator determines that the pre-defined outcomes have been achieved, such as reducing homelessness or re-offending rates. If the outcomes are not achieved, the government is not required to repay the investors.
In this way, SIBs enable the government to transfer the risk of funding prevention services to the private sector and ensure accountability for taxpayer money. At the same time, investors will have the tools to analyze, measure, and price the risk of an investment that offers both financial returns and social benefit. Nonprofits benefit from a predictable stream of revenue that enables them to serve greater numbers of disadvantaged individuals, families, and communities.
While SIBs are not a panacea for all of our country’s social challenges, they do represent a new domestic impact investing opportunity, focusing explicitly on the “bottom of the pyramid” in the U.S. In the wake of the financial crisis, they signify a new paradigm of public-private partnerships, one that privatizes the risks and shares the gains.
Source: Adapted from Jeffrey B. Liebman, "Social Impact Bonds," Center for American Progress (February 2011).