Social Impact Bonds—Launched in 2010
Why This Initiative
As federal, state, and local governments deal with ongoing budget pressures, government-funded social services—particularly preventive services—are increasingly at risk of cutbacks or elimination in the U.S. and elsewhere. This threat to the system of funding social services is directly impacting many vital areas, including healthcare, education, anti-poverty programs, and the criminal justice system. At the same time, there is growing interest in finding ways in which private sector resources can be leveraged to fund such programs.
Develop private sector mechanisms for investing in socially productive programs that yield financial dividends when successfully implemented. Through these social impact bonds, which are made possible by a combination of government funds, private investment, and non-profit implementation, investors can realize a return on their investment in exchange for funding social programs and services that improve the lives of disadvantaged, poor or vulnerable people. At the same time, this approach helps relieve the burden on government to run such programs and services, which they are often ineffective at providing.
Intervening For System Transformation
When the nonprofit—and Rockefeller Foundation grantee—Social Finance announced in August 2014 that the four-year reconviction rate for a group of 1,000 ex-prisoners in the U.K. city of Peterborough was 8.4 percent lower than the national average, it was more than a tale of personal achievement. The positive outcome also meant that the investors in the world’s first-ever social impact bond (SIB) were on track to see a positive return on their investment. Since that seminal moment, the continuing emergence and proliferation of social impact bonds has transformed the system of funding social programs—rearranging the relationship between governments and private investors, while at the same time shifting the focus of social programs from inputs to measurable positive outcomes, which is central to impact bonds’ “pay for success” paradigm.
The Peterborough Social Impact Bond (PSIB), the first financial mechanism of its kind, was made possible by funding from The Rockefeller Foundation. The PSIB was created in an attempt to reduce recidivism among local prisoners by having private investors provide the capital for a comprehensive support program after they were released. That program, One Service, teams with other local organizations to provide housing, family, health, employment, training support, and drug and alcohol services for its target population. If the recidivism rate for this population remains 7.5 percent below the national norm as of 2016, the U.K.’s Ministry of Justice will repay the investors’ bonds in full.
Besides confirming the effectiveness of Peterborough’s rehabilitation program for ex-offenders—a fact reflected in the U.K.’s subsequent decision to expand One Service to the nation as a whole—the success of the PSIB also showed that “pay for success” investment in critical social service programs is an effective way to provide services to a vulnerable population, and an effective way for investors to realize both financial and social returns.
Following the launch of that first social impact bond, The Rockefeller Foundation has continued to systematically support the growth of social impact bonds. In 2010, the Foundation worked with Social Finance to help introduce SIBs to the U.S. This was followed in 2011 by support to the Nonprofit Finance Fund (NFF) for the same purpose.
As the use of these bonds has proliferated, the Foundation’s strategy has also shifted from a focus on proving that the SIB concept works to support the development of an ecosystem and infrastructure that ensures SIBs are being deployed properly and effectively. The Rockefeller Foundation funded the establishment of Harvard University’s Social Impact Bond Technical Assistance Lab, which advises state governments on SIB startups, heads an annual Foundation-supported national competition to surface SIB concepts, and has published a comprehensive SIB users’ guide. Other Foundation efforts in this area include funding an informational guide on social impact bonds by the Center for American Progress, and assisting banks to create products around SIBs, including JP Morgan Chase, Bank of America, and Goldman Sachs.
The Foundation has invested directly in SIBs as well, including an investment in the seminal Peterborough SIB. We also provided $1.3 million in backstop funds for the first state-led SIB in the United States, a New York State project to train and employ formerly incarcerated individuals. Bank of America Merrill Lynch raised $13.5 million from private sector and foundation investors to finance this SIB, while Social Finance brought the partners together, structured the investment, and supported the capital raising effort.
This joining of private investors, governments, NGO service providers, and philanthropic facilitators is the essence of SIBs. Today, thanks in large part to The Rockefeller Foundation’s pioneering and ongoing support, SIBs are coming into ever-wider use. Dozens of U.S. states are now either executing SIB projects or pursuing new proposals, as are nations around the globe. Variations on the SIB concept, involving investments in other types of socially beneficial activities, are also taking hold. These variants include development impact bonds to promote investment in developing countries, green bonds to fund efforts combating climate change, and resilience impact bonds to support resilience-building projects—an area in which The Rockefeller Foundation is now also taking the lead.