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Socialising risk

By Cheryl Kernot - posted Tuesday, 7 December 2010

The Centre for Social Impact has been commissioned by the NSW Government to provide expert support to develop a pilot Social Impact Bond in New South Wales.

A Social Impact Bond (SIB) is a financial instrument that pays a return to investors based on the achievement of agreed social outcomes delivered by an NGO/NFP (non-government organisations/not-for-profit). They have the potential to re-engineer the relationships between government, not-for-profit organisations and social investors (comprising high net worth individuals and institutions). SIBs may provide the basis for addressing seemingly intractable social problems that often involve multiple agencies including NFPOs and where existing mainstream programs have failed.

In the US, SIBs have included infrastructure development projects in New York City and in the UK the pilot SIB has focused on funding a program that reduces the re-incarceration rates for short sentence prisoners.


One unique feature of Social Impact Bonds is the concept of socialising risk; changing the culture of reliance on government and freeing up the potential for social innovation.

Use of a SIB is advantageous for each of the stakeholders.

  • Government is able to access social investment capital for programs that will deliver significant future expenditure savings. SIBs are based on medium to long term agreed social outcomes (between three and seven years) which is preferable to the current emphasis on short term output based contracts. SIBs are therefore particularly relevant for investment in early intervention programs supporting social innovation and the scaling up and replication of proven innovations. SIBs are also particularly relevant where there is a strong body of evidence of the efficacy of a program - where the evidence may be derived from international as well as Australian evaluations. The operation of an SIB requires systematic ongoing measurement of the agreed social outcomes which will further strengthen the evidence base.
  • The NFP is provided with capital up front for investment in their programs. The focus on agreed outcomes means that the NFP is able to structure and refine its programs without further involvement from government, and thus provides them with higher levels of control and flexibility than current arrangements. SIBs are particularly relevant for NFPs that have already invested in social innovation and have established robust systems for monitoring and evaluation. SIBs constitute a new and additional funding source for NFPs and thus may provide access to a new class of social investors.
  • Social investors - both high net-worth individuals and institutions such as charitable trusts and foundations - may consider SIBs to be an attractive alternative to making grants where they can recycle their funds into other innovative programs, receive a financial return, and invest in proven programs with high levels of social impact. SIBs provide a mechanism to balance the financial return on capital and the achievement of social impact by accepting a lower than market rate of return - SIBs facilitate the achievement of blended value.

The Blended Value Proposition, advanced by Jed Emerson from Harvard, states that all organisations, whether for-profit or not, create value that consists of economic, social and environmental value components - and that investors (whether market-rate, charitable or some mix of the two) simultaneously generate all three forms of value through providing capital to organisations. The outcome of all this activity is value creation and that value is itself non-divisible and, therefore, a blend of these three elements. This thinking increasingly underpins emerging social finance discussions.

Social Impact Bonds also offer social investors the potential to develop a more engaged relationship with NFPs.

They are currently being piloted in the UK, where Social Finance (UK) acting as an intermediary launched the first SIB in March 2010, targeting reoffending by short sentence prisoners. Payments are directly linked to reductions in reoffending and the savings generated for the government. The programs are delivered by a number of NFPs and are based on agreed outcomes derived from well evidenced programs. Further pilots are being developed in the UK by the Young Foundation across a range of policy areas.


The Peterborough Prison example in the UK is based on reducing the reoffending rates of 3,000 short-sentence prisoners. If the NFP delivers a 7.5 per cent reduction over four to six years, then social investors will be paid a rate of 7 per cent on their investment. Better outcomes attract a sliding scale of return capped at 13 per cent.

The social finance landscape in the UK and the UK has developed significantly in the last decade to the extent that Social Impact Bonds are being touted as a possible new asset class.

We are seeing more of a focus on willingness from social investors to fund intensive early intervention programs, over a longer timeframe, and also more of a professional effort from NFPs to gather data and fund research and evaluation of their programs.

We’re beginning to see a more critical assessment of the experience of private finance initiatives and public private partnerships, learning when these do and do not add value.

In the UK in particular steady advances have been made within government in methods for assessing the impact of public investments on human capital, and bringing more systematic analysis of the links between spending and social outcomes such as crime reduction or health improvements.

This is an exciting development for Australia, but should not be seen as one absolving governments from reducing levels of funding rather it complements what is available and most importantly frees up NFPs to move away from output reporting to do the socially innovative things they do well.

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About the Author

Cheryl Kernot is Director of Social Business at the the Centre for Social Impact, UNSW Sydney. She was a Senator for Queensland and Leader of the Australian Democrats from 1993 to 1997 before joining the Australian Labour Party and becoming the Member for Dickson (Qld) in 1998.

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