Earlier this year, we considered whether social impact bonds (SIBs), also known as pay-for-success contracts (PFSs), are a viable form of financing for your nonprofit organization. SIBs are a form of financing where the government pays only if a social intervention achieves results. With state and local governments facing constrained budgets and nonprofit service providers under pressure to deliver results, SIB activity has been rapidly on the rise in the U.S.; in fact, we could see results from one particular SIB demonstration in Utah as early as next fall. Check the graphic below to discover if your state has SIB activity. For more detailed information on SIBs and which states are working with them, please refer to our latest report.
Here are some of the exciting developments now moving SIBs from theory to practice:
- Building an ecosystem to support scale: There is a growing need to experiment with new funding models that can generate substantial capital for startups and even mature organizations alike. This experimentation has been successfully garnering support from both the private and nonprofit sectors, as well as all levels of government. The ecosystem to support SIB development is growing quickly – private investors such as investment bank Goldman Sachs and philanthropist J.B. Pritzger are providing initial funding for SIBs in New York and Utah; governments are committing to allocate funding to reimburse successful SIBs; and intermediaries with capabilities to manage SIB projects are proactively working with providers and the public sector. These elements are important to support the growth and ultimate success of SIBs.
- Capitalizing on leading practices: The SIB field is moving rapidly. The best way to position projects for success is to ensure they avoid repeating mistakes and maintain ongoing flexibility (should they need to pivot in the future). The SIB Technical Assistance Lab (SIB Lab) at the Harvard Kennedy School plans to facilitate this effort by working with state and local governments. Colorado, Connecticut, Illinois, New York, Ohio, and South Carolina have volunteered for the Harvard Kennedy project, as they design and implement their SIB initiatives at the state and municipal levels. The SIB Lab helped Massachusetts and New York become the first states to develop SIB projects – now they are leveraging the lessons they have learned to replicate and customize SIB models in other states. By doing so, these states (and the states to come) will give themselves the best chance for success.
- Testing theories in practice: The SIB model is viable only if nonprofit organizations can significantly generate savings to state and local governments. For example, we may know as early as next fall whether there is a future for SIBs in the U.S. education system. Children who receive a quality early childhood education are generally better prepared for kindergarten and are less likely to require special or remedial education. Utah’s SIB project targeting low-income preschool children is testing this hypothesis with a nonprofit service provider, Voices for Utah Children. If the organization is successful in helping children advance in school without need for special education, the investors fronting $7 million to scale the program will be refunded a portion of the resulting savings. Furthermore, if the state saves money by having to fund fewer costly special education programs, that money can potentially be plowed back into other social sector organizations or state programs. For more information on what other states are doing, please refer to our at-a-glance report.
The excitement surrounding SIBs is infectious, and the ecosystem to support their success is promising. However, this model is still unproven, so state and local governments should proceed with caution. With numerous SIB projects launching across the country (and around the world), the results should start coming in during the next year or two. The best bet may be to monitor their progress, analyze the data, and capitalize on the resulting lessons to avoid costly missteps as we go forward.
We want to hear your analysis of SIB activity in the U.S. and welcome your feedback.