The Looming Disruption of Civil Society

The continued development of Social Impact Bonds has signified a new paradigm of cross-sector partnership and offers a significant source of capital for addressing a range of social issues, writes Not for Profit Global Voices’s National Scholarship Recipient Arthur Wang.

Access to sufficient capital has always been a major barrier for most non-government organisations (NGOs). The challenge has been exacerbated in the aftermath of the Global Financial Crisis and European Debt Crisis, as governments around the world face significant budgetary constraints.

Alongside this situation, there is increasing pressure for social intervention in areas of criminal justice, unemployment, medical care and homelessness, and insufficient program delivery to meet these needs. This has created a two-way dilemma. Governments are hesitant to spend on preventative services and Not for Profits are constrained to compete for limited short-term funding.

However, in 2010, significant inroads were made by Social Finance UK in the deployment of a new type of social instrument – the Social Impact Bond (SIB). The SIB is a public sector agreement in which a government commits to pay for improved social outcomes that result in public sector savings.

Under the arrangement, the government identifies a list of host Non-Government Organisations (NGOs) to issue bonds to. Investment can be raised from the private sector, high net-worth investors, superfunds and other charitable trusts to pay for a range of projects and social interventions. The investors are entitled to a return contingent upon the risk involved and agreed social outcomes being met.

Despite being in the early stages, the SIB presents enormous opportunities for different stakeholders.

For governments, it represents a low-risk alternative to solving costly social problems and helps to lock in future government savings. It encourages research, development and innovation in NGOs, whilst simultaneously improving operational efficiency and resource allocations. For investors, SIBs offer an incentive to improve society through impact driven returns and the opportunity to diverse investment portfolios.

Governments and investors around the world have already shown significant interest in supporting pilot SIB programs for certain social interventions.

In the UK for example, the Rockefeller Foundation provided £5 million to several NGOs to deliver services that would discourage repeat criminal activity. In support of SIB schemes, the government announced a 30 per cent tax relief for return on social investment in its FY2014 budget.

In Australia, two SIB programs were launched in New South Wales targeted at out of home care services, with the intermediary agency (Social Ventures Australia) successfully raising $AU7 million in investment.

Additional SIB pilots are also underway in the US, Canada and South Africa targeted at the chronically homeless, unemployment, youth outcomes, and early childhood education.

To ensure the widespread adoption and long-term success of SIBs, some challenges still need to be overcome. The most important of these is the difficulty in identifying suitable programs, and the availability of reliable frameworks to help measure and quantify social return.

Charitable funding often does not flow to areas of greatest social need, and more emotionally appealing areas tend to attract greater donations. As a result, prisoners, youth offenders, the homeless and drug addicts are often disadvantaged and they are the very categories of issues that impose the greatest costs on society and the public purse. Political considerations also make it difficult for government to spend money in certain areas.

Governments can help to improve the process by identifying social interventions in policy areas that offer the greatest payoff, developing guidelines for the evaluation of social impact, and providing regulatory incentives that encourage NGOs and investors to participate.

There are also a plethora of examples from existing pilot programs that offer insights and learnings. This provides the opportunity to develop a global best-practice SIB model going forward, one that can be reapplied by individual economies to their in-country situations.

Based on existing insights and learnings, two improvements can be made to the current SIB model.

The first involves the role of intermediary agencies. To enable greater credibility and transparency, governments should contract directly with host NGOs in the implementation of a SIB scheme. An intermediary agency will not be necessary, however may be useful as consultants to the NGO and helping its capacity to raise funds and meet performance outcomes.

The second is an expansion of risk sharing options between the government and investors. Currently, SIBs reward investors when social outcomes are successfully achieved, however failure to do so means that the government pays nothing. Due to the inherent risks, the pool of investors and level of investment have been very limited.

In order to achieve scale, the SIB model should enable some of risk to shift to the government. This could involve a portion of the NGO’s program delivery cost being subsidised by the government through a fixed grant, with the remaining costs and reward payment dependent on the achievement of a successful outcome. Amount of the grant will be subject of negotiation between the NGO and government, and can vary based on perceived appetite of potential investors for individual projects.

The continued development of SIBs has signified a new paradigm of cross-sector partnership, and offers a significant source of capital for addressing a range of social issues.

It calls for cooperation between individuals, corporations, governments and NGOs in order to achieve inclusive growth and ultimately build long-term resilient economies.

About the Author: Arthur Wang is a Global Voices National Scholarship Recipient and was a Global Voices Delegate to the OECD Forum in May this year. Global Voices is a Not for Profit organisation whose mission is to provide opportunities for young Australians to engage with international policy both at home and abroad.