1. A Literature Review of Social Impact Bonds in the United States
Judah Axelrod
Dr. W. Steven Barnett – Graduate School of Education, National Institute for Early Education Research
Abstract
Background
Outcome Funder
Managed:
Intermediary or intermediary-
controlled SPV
Intermediated:
Investors or investor-controlled
SPV
Direct:
Service provider or provider-
controlled SPV
CONTRACT
CONTRACT
CONTRACT
Future Direction
As the SIB model is a new development in the increasingly important field of social finance, most
operational programs have yet to yield any results. For this reason, our research took a different
focus. We organized important information about all of the SIBs in the United States into a
descriptive table and chose three specific areas that we knew were both crucial to the success of a
program and had need of improvement in the future. The purpose of this project, as previously
stated, was to lay the groundwork for future research. However, we also hope that the literature
review can help the engineers of future SIB projects to avoid the pitfalls of preceding programs.
Social impact bonds have the potential to be a powerful mechanism that helps government,
investors, and disadvantaged populations, and that is where we see the model in the future with
proper revision and oversight.
AcknowledgementsReferences
Conclusions
The table below shows descriptive information on three of the seven United States SIBs. It is
noteworthy that all seven programs use a managed structure in which the outcome funder contracts
with the intermediary. We also found some problems with the three areas of focus outlned in the
Methods sections. With regard to evaluation design, only three of seven programs used a
randomized controlled trial (RCT), one of the most rigorous approaches to assessing the impacts of
an intervention. We highlighted the Utah Preschool program in particular, which failed to include a
comparison group in its evaluation or even attempt to measure the impact of the preschool program.
Transparency -- both between parties and with the general public -- was also an issue. Only four
programs had data-sharing agreements to facilitate efficient communication of information between
the parties, and two of the actual SIB contracts were not accessible to the public. Finally, incentive
alignment is a major issue. On the one hand, the SIB model must reconcile investors’ desire to
maximize return on investment with a socially optimal outcome. And on the other hand, in multiple
programs the service provider actually has an incentive to operate with no regard for the goals of the
program because they are not the party responsible for repaying investors. All of these concerns are
areas upon which to improve moving forward.
Research suggests that there are many social programs that would both benefit society
and pay dividends in the future. However, the government is often hamstrung by lack of
public support or budgetary restrictions. The social impact bond (SIB) model is a recent
alternative means of financing these programs that has gained bipartisan acclaim. In this
model, private and philanthropic investors are contracted to pay for the programs up
front, and if certain outcomes are achieved, the government repays investors with the
savings the program creates. We aim to create the first literature review of existing SIBs
in the United States, compiling information from relevant literature, reports on the
programs, and the available SIB contracts. The three main focuses of the review are: (1)
the similarities and differences in the structures of the various SIBs, (2) specific elements
that seem crucial in determining the strength of any SIB, and (3) potential weaknesses in
the existing contracts. Results indicate that the evaluation of a program’s effectiveness,
the alignment of incentives for the different parties involved, and transparency of the
entire process are all areas upon which to improve SIBs moving forward. Ultimately, the
goal of the review is to create a foundation for future research as the SIB model
continues to gain momentum.
I would like to thank Dr. Barnett for introducing me to such an interesting and important topic, as
well as mentoring me through the entire research process. This has been such an invaluable
learning opportunity, and without the resources, knowledge, and confidence you gave me, it
would not have been possible. I would also like to thanks the Rutgers Aresty Research Center for
funding and assistance on this project.
Methods and Materials
We began by reading relevant background literature on the theoretical SIB model, to gain an
understanding of the purpose, different types of structures, and any potential pitfalls or limitations.
We then turned to examining SIBs in the United Kingdom, where the model originated, to analyze
the first programs put into practice. This helped to identify three specific areas – evaluation
methods of the program, transparency and accessibility, and the alignment of incentives among the
different parties – as the most crucial determinants of the success of a SIB. Next, the focus shifted
to SIBs in the United States, which is the focus of the research. We looked at any information on the
United States programs, including fact sheets, press releases, news articles, and reports, as well as
the actual contracts themselves when accessible. We compiled a detailed table that contained both
qualitative and quantitative information on all seven United States SIBs. While one focus of the
literature review was to compile relevant information in this organized way, another was to analyze
how well the programs succeeded in these three areas.
The purpose of SIBs from the standpoint of government is to transfer the initial costs of
funding a program, and the risks of investment if the program fails, to philanthropic or
private financiers. If the outcomes of the preventative programs are achieved, these
foundations or private businesses are later reimbursed by the government from the
savings supplied by the program for their principal, plus interest and a “success fee” if
the program performs well enough. Ideally, SIBs align incentives and result in savings for
government, profits for investors, and the social benefits of the program for society.
Nonetheless, the specific structuring is key, as incentives vary with each specific SIB
design type, and a particular delivery structure might not just be different, but also
more effective. Gustafsson-Wright et al. (2015) outlines three theoretical SIB models
that vary in terms of which body contracts with the outcome funder and thus assumes
the most responsibility. This body also controls the Special Purpose Vehicle (SPV), which
is a legally independent entity that serves as a channel for the transmission of funds, if
one is created for the program.
Outcome
Funder
Managed:
Intermediary or
intermediary-
controlled SPV
Intermediated:
Investors or
investor-
controlled SPV
Direct:
Service provider
or provider-
controlled SPV
CONTRACT
Gustafsson-Wright, E., Gardiner, S., & Putcha, V. (2015, July). The Potential and Limitations of Impact Bonds
Lessons From the First Five Years of Experience Worldwide. Retrieved October 7, 2015.
Impact Bond Mechanics [Online Image]. (2015). Retrieved from
http://www.brookings.edu/research/reports/2015/07/social-impact-bonds-potential-limitations
SIB Name Utah High Quality Preschool Program Juvenile Justice Pay for Success Initiative Partnering for Family Success Program
Location Salt Lake City and surrounding areas Massachusetts Cuyahoga County, OH
Social Issue Early childhood education access Prison recidivism Family homelessness and child welfare
Target Population Up to 3,500 low income 3- and 4-year-olds across up to five
cohorts of around 600 per year. The first cohort
included 600 children in the 2013-2014 school year and the
second cohort will include 750 children in the
2014-2015 school year
929 at-risk men ages 17-24 leaving correction houses, in juvenile justice system, or
on probation
The intervention will reach 135 families who were recently
homeless and their approx. 270 children (age 0-18; ≈60% age 0-
5). Also control group of 135 families (3 cohorts of 45/45)
SIB Structure Managed Managed Managed
Intervention Utah High Quality Preschool Program, a high impact and
targeted curriculum to increase school readiness and
academic performance among 3- and 4-year-olds
Two years of active education, life skills and job training, two years of rigorous
follow-up
FrontLine’s Critical Time Intervention, which will help mothers
find appropriate housing, apply for government benefits and
employment opportunities and learn other life skills with the aim
of reuniting children and mothers and reducing children’s length
of stay in out-of-home care.
Service Provider Granite School District, Park City School
District, Guadalupe School, YMCA of
Northern Utah, Children’s Express, and
Lit’l Scholars.
Roca Inc. FrontLine Service (and three housing providers: Cuyahoga
Metropolitan Housing Authority, Emerald Development &
Economic Network, Famicos Foundation)
Intermediary United Way of Salt Lake, Salt Lake County (first year only), State
of Utah (after first year)
Third Sector Capital Partners Third Sector Capital Partners;
Enterprise Community Partners Inc. (project manager and owner
of SPV)
Outcome Funder State of Utah, Salt Lake County, United Way of Salt Lake Commonwealth of MA (Social Innovation Financing Trust Fund)
and US Dept of Labor
Cuyahoga County
Technical Assistance Provider(s) Voices for Utah Children Harvard Kennedy School SIB Technical Assistance Lab, Sibalytics LLC Third Sector Capital Partners (government advisor)
SPV N/A Youth Services Inc. (operated by Third Sector) Cuyahoga PFS, LLC
Investors Senior: Goldman Sachs - $4.6 million
Subordinate: J.B Pritzker - $2.4 million
Senior: Goldman Sachs - $8 million
Subordinate: Kresge Foundation and Living Cities - $2.66 million
*(Roca and Third Sector also stand to earn success fees)
Recoverable Grants and Investment Guarantees: Anonymous Foundation, New
Profit, and The Boston Foundation - $5.45 million
Senior: The Reinvestment Fund - $1.575 million
Subordinate: The George Gund Foundation, Nonprofit Finance
Fund, The Cleveland Foundation, Sisters of Charity Foundation of
Cleveland - $2.275 million
Recoverable Grants and Investment Guarantees: Sisters of
Charity Foundation of Cleveland - $150,000
Upfront Capital Commitment $7 million $16.1 million $4 million
Data Sharing Agreement N/A MA can provide data to the technical assistance providers, certain defined data to
Roca, and non-personalized data to the other project partners
Between FrontLine, Case Western, Cuyahoga County Dept of
Child and Family Services, and the Domestic Violence and Child
Advocacy Center and Emergency Shelter
Outcome Metric(s) Years of special ed avoided K-6th grade for students at least 2
standard
deviations below mean on PPVT before entering program.
(These are students considered "likely to use special ed
services")
1. Decreases in incarceration (treatment vs. control groups)
2. Increases in job readiness (number of quarters participant engages with Roca
youth worker 9+ times)
3. Increases in employment (number of quarters participant is employed compared
to similar people not in program)
Reduction in out-of-home placement days over the five years
of the program versus control group
Outcome Evaluation Method PPVT testing to determine which children would
have needed special ed; school records to track through 6th
grade and determine amount of special ed avoided
1. RCT
2/3. Administrative data calculated by Commonwealth of MA (job readiness) and
the SPV (employment)
RCT
Outcome Evaluator Utah State University Urban Institute Case Western Reserve University
Threshold for Payments Any child in payment cohort not needing special education 1. 5.2% reduction in incarceration
2/3. Any positive increases
Any reduction of out-of-home days (versus control group)
Maximum Return Capped at 7.26% (across the two cohorts) Goldman Sachs: 5% annually + $970,466 in success fees
Subordinates: 2% annually + $540,466 in success fees
Roca: $3.26 million in deferred service fees + $822,979 in success fees
Third Sector: $50,000 in deferred service fees
Any other money left over is used to recycle philanthropic funding
The Reinvestment Fund: 5% annual base interest
Subordinates: 2% annual base interest + equal participation in
$1 million of success fees
SIB Program Information