1. April 2015 Business & Government Relations, 1
Social Impact Bonds
By: Ethan Choy, Ross Higgins, and Spencer Bezirdjian
How to cite this guide: Choy, E., Higgins, R., and Bezirdjian, S. A New Horizon for Impact Investment: The Future of Social Impact Bonds. Business & Government Relations Management Guide.
Washington DC, The George Washington University. Prepared under the supervision of Professor Jorge Rivera as a basis for class discussion.
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A New Horizon for Impact Investment: The Future of SocialImpact Bonds
A New Way to Finance Social Programs
What’s it all about? A Social impact bond is regarded as a
performance-based investment bond. This financial vehicle is
considered to be a part of the new impact investment market. The first
SIB was launched in the UK on March 18, 2010 by then Justice
Secretary Jack Straw to finance prisoner rehabilitation programs. The
idea is quickly catching the interest of countries such as: UK, US,
Australia, and India. On February 2011, President Obama proposed his
2012 budget, which included $100m going towards SIB projects. What
makes a SIB different from other types of bonds is that it does not
offer a fixed return on investment. Rather, ROI is based on the
efficiency of the project outcome. SIB’s contain higher than average
risks to outside investors willing to fund the projects, but offer the
potential for increased profits. Due to this high-risk investment, SIBs
have often been compared to equity investments or structured
products. The table below depicts the differences among both social
impact bonds and traditional bonds:
SOCIAL IMPACT BONDS
❏ Payment is not upfront
❏ Returns can vary
depending on the success
level of the project
❏ Relies on private
philanthropy and capital
markets for upfront
capital
❏ Outcomes are observable
and measurable within 3
to 8 years
❏ A lot of time spent on
contracting
❏ Many external
intermediaries
TRADITIONAL BONDS
❏ Payment is received
when incentivized
❏ The government will
pay a fixed return
❏ Government pays
investors directly
through debt
❏ Easier to measure
outcome as service is
more heavily
regulated
❏ Not as many
contracts to be issued
❏ Divided among
different agencies
How they Work: SIBs work through a legal contract between a
government agency and a private sector financing intermediary
or external organization. By providing an in-depth scope and
comprehensive analysis as to why the external organization would
like to conduct an intervention, the external organization initiates
the proposal of a SIB to a government agency. The agency then
suggests the set timeframe, payment level, and desired outcome.
Once the “Pay for Success” contract has been approved and signed,
the external organization takes the responsibility to form secondary
contracts with outside investors and service providers. If the
outcome is achieved, outside investors will be rewarded with a
return according to the level of program performance. However, if
the outcome is not achieved, the government will not pay for the
service. Because the outside investors and financial intermediary
assumes 100% of the risk, they must insure that the scope of the
service or project is both measurable and achievable. In conclusion,
service providers carry out the intervention and are overseen by the
external organization.
Pettus, Ashley. "Social Impact Bonds." Social Impact Bonds Harness Private Capital to Tackle Social Ills.
Harvard Magazine, July-Aug. 2013. Web. 26 Apr. 2015.

2. April 2015 Business & Government Relations, 2
Why is it Useful? Social impact bonds offer an opportunity to
improve social outcomes by providing an alternative source of funding
to public programs. SIBs are an alternative because they provide a
means of conditional funding based on the achieved outcome
performance as opposed to traditional financial methods that simply
measure inputs and outputs. SIB’s have the ability to benefit the
community, the government, and the investors. The community
benefits from the implementation of a new program designed to better
their environment. The investors benefit if they are able to create a
program that provides efficient results. The government benefits
because SIB’s free up valuable time and save money in the long-run
due to the increased efficiency of the process.
Application in Government
SIBs offer a new, innovative initiative for governments to influence an
effective change in the services that they offer through the “payment
for success” plan. By allowing outside investors and businesses to
collaborate and offer a strategy of implementation, the government is
relieved from their duties and concurrent obligations while the
contracting businesses work toward achieving the desired outcome. By
signing a SIB contract, the government actually saves the taxpayers’
money in the process (the underlying returns will be discussed in
further detail). One of the largest benefits of the government in
accordance with the social impact bond stems fromtheir ability to only
pay the cost to third party affiliates if the service was effectively
carried out and the set outcome was achieved (“payment for success”).
However, the government involved in the procurement of the bond
must be in absolute compliance throughout the process. Without
complete compliance, the bond issuer and the rest of the contractual
systemwill collapse.
Application in Business
Similar to the
government, the
contracting businesses
must clearly define the
project or service in
which they are choosing
to implement. The chart
on the left is a simplified
model of a service’s
financial feasibility, as
assessed by a company’s
own ability to effectively
achieve the project. A
good reason as to why a
company may choose to
take on the complexities
of reinstating a social
service is because it offers a new profitable market niche if the
company involved can implement and perform the tasks effectively
(profitability statements will be assessed in greater detail).
Programs with Potential
SIBs are considered to be a versatile tool that is applicable to
various program areas. Their effectiveness is most evident when
they address issues that save the government money in the long-
term and whose outcomes can be easily measured. In essence, SIBs
do not tackle preventative programs that try to stop issues from
growing too severe. They likely address remedial programs that
involve a problem after it has occurred like prison sentences.
The Center for American Progress has defined prison recidivism,
workforce development, and homelessness as examples of areas that
could benefit greatly from SIBs. Preventative programs have been
proven to be effective ways to deal with longstanding social
problems while saving money down the line. The only problem is
that preventative programs are also the most likely to have budget
shortfalls and get budget cuts - enter private investors who seek a
social impact as well as a financial return.
Other Resources
The Center for American Progress: CAP is a public policy
research and advocacy organization. They are “dedicated to
improving the lives of Americans through progressive ideas and
actions.” CAP has clearly defined industries that can benefit from
SIB’s.
Rockefeller Foundation: is an organization whose mission is to
“improve the well-being of humans around the world.” The
Rockefeller organization gives detailed information about the
various governments who have invested in SIB’s and the potential
commercial capital these SIB’s can provide.
Harvard Kennedy School: HKS has set up a Social Impact Bond
technical assistance lab, which provides users with all the
information they need to know about SIB’s. HKS also hires
contractors who are looking to take on various SIB’s. A list of SIB’s
currently in process can also be found here.

3. April 2015 Business & Government Relations, 3
Contracting for Success
SIBs center around multiple contracts that lay out the general terms for a proposed program. Important topics that need to be
addressed in a SIB contract are the beneficiary population that will be receiving services, compensation levels, measures of success,
and a timeframe. A major challenge of these contracts is clearly defining the beneficiary population. The government agency needs to
make sure that the external organization doesn’t have the opportunity to simply target the easiest cases, but works toward be ttering all
those affected by the chosen issue, including the most vulnerable. The implications of these challenges mean that the contract is
pivotal to the success or failure of the project. Furthermore, due to the complex nature of social problems in addition to th e number of
stakeholders involved in SIBs, it is important that all participating parties understand the causes of the social issue. An effectual
contract will reflect this understanding and guide the external organization in its actions.
The New York Social Impact
Bond Agreement
The chart to the right shows the
number projections for the SIB
between New York City and MDRC.
With a 10% reduction in re-
incarceration, the government pays
MDRC its initial investment of $9.6m.
At this break-even point, the
government is still projected to save
$1m in long-term savings. If re-
incarceration rates are reduced by less
than 10%, then MDRC is only paid
half of their initial investment. Even at
this rate, the government is still
projected to save $1m in long-term
savings. Conversely, if re-incarceration
is reduced by 20%, the city will pay
MDRC $11.7m, a price well above
their initial investment. At this price,
the city is projected to save over $20m
in long-term savings. This projection
chart is just one example of how the pay for performance process works.
The Bright Future ofSocial Impact
Bonds
What is possibly the most alluring aspect of the
social impact bond is the potential influence
that it may bring across the three key global
markets. These markets make up the triple
bottom line or the three pillars of
sustainability. Each bar (or pillar) on the graph
to the left represents a different market. In
order from left to right these markets are seen
as: US philanthropic giving (social), global
social screening and stakeholder advocacy
(environmental), global managed assets
(financial), and impact investing potential
market size. As much as 1% of global managed
assets ($500 Billion) can be channeled into the
impact investment market as a source of capital
to fund programs and introduce new innovative
techniques and operations to effectively
conduct social services. In theory, that there
boasts a potential win-win-win across all
platforms. For this reason, social impact
investment and, more specifically, social
impact bonds have the capacity by 2020 to
reach a market size of $1 Trillion. Governments around the world are beginning to invest in this new market in hopes of deliv ering a
business-driven strategy that will deliver positive results for both the environment and the community.

4. April 2015 Business & Government Relations, 4
Social Impact Bonds
From Around The World
Today, we live in a society
that is globally connected. It
is almost impossible to be
uninformed about subsequent
events that eventually
influence other countries
around the world. By now,
most people are tuned into
social media and other forms
of communication to deliver
them the latest and greatest
news about current events
happening in countries
halfway across the globe. For
this reason, social impact
bonds can gain a considerable
amount of momentum as
think tanks, and other industry
leaders, collaborate together
to better the welfare of the
community. The map above,
outlines the volume and
interrelatedness of the various contracted SIBs all over the world. Each program is faced with the challenge of raising the standard of
social service and thus, setting in motion a more efficient
operating systemin the way that we conduct services.
“With promising new vehicles such as
socialenterprises,social impact bonds,
impact investments, and benefit
corporations, we have a chance to use
public and private investment in ways
that generate real, measurable social
impact.” - Deloitte GovLabs
The graph to the right depicts the amount of SIBs that have been launched since 2010. The United Kingdomis seen as the dominant
contracting country that is setting the pace for the rest of the world to follow. Since the first social impact bond was issu ed in
Peterborough, England in 2010, the UK has strived to issue nearly 25 SIBs. Because of an ever-increasing optimism in the social
impact market, the amount of social impact bonds that have surfaced has reached to match nearly that of the UK. Due to the fact that
SIBs are still a new investment method, the certainty of the installment and operations process is not completely smoothed, however,
after considerable application and research, the complex procedural contracting process will become just a bump in the green road of
social impact investing. Hopefully, we will all enjoy the fruits of these new financial vehicles that bring the rest of the world one step
closer to a new horizon of efficiency that is impact investing.

5. April 2015 Business & Government Relations, 5
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