US foundations raise pros and cons for growth of Social Impact Bonds

US foundations have raised concerns about the development of the market for Social Impact Bonds (SIBs) including ‘hype’, accurate data, terminology, skewed objectives and whether the capital is additional to existing money. The concerns are raised in a White Paper from Social Finance US, the non-profit organization for mobilising investment capital into social projects. The report also has foundations backing SIBs’ potential for financing and improving the efficiency of social provision and basing its results on clear success targets. SIBs are loan structures repaid on the success of a given social outcome, or not if the programme fails. They have been introduced in social welfare projects including prisoner recidivism and pre-school education. Foundations, which are able to invest in innovative, early-stage projects, were instrumental in the creation of the SIB market and have been key to its subsequent financing. The US SIB market, valued at $50m is the world’s largest in terms of committed assets. The White Paper, titled ‘Foundations for social impact bonds: how and why philanthropy is catalyzing the development of a new market’ interviews foundation staff and thought leaders to assess the role that philanthropic capital could continue to play in developing the SIB market in the US. Among their concerns, foundation interviewees cite slow progress and unexpected complexity in developing SIB transactions, notably because of silos within government at local, state and national levels.A lack of standardized, high quality data on the impact of social programs was also raised, with the concern that it could lead to unintended consequences and the misallocation of resources. Some interviewees expressed concern over the media “hype” of the SIB market in sharp contrast to the modest number of transactions to date, as well as whether they could actually be termed bonds at all. They also suggested that SIBs could be seen as a ‘cure-all’ to much more complex social problems that require deeper social change. Interviewees also questioned the long-term vision for SIBs, notably how long philanthropic capital might support the market before mainstream impact investors are involved. On the plus side, the foundation interviewees said that SIBs allowed government to pay purely for results and encouraged greater efficiency within the public sector. They said SIBs also brought together valuable stakeholder partnerships between government agencies, private-sector investors, service providers, beneficiaries, and intermediaries. The Social Finance White Paper said foundations were well positioned to encourage the adoption of better data systems and transparency in SIB contracts. US private foundations are required to give away at least 5% of their endowments annually and many use Program-Related Investments (PRIs) to deploy these funds as investors in socially beneficial projects. In 2009, the report says US foundations made over $700m in PRIs, compared to less than half as much a decade earlier, although this is small compared to the $40bn in grants that foundations spent in the same year.

Emma Tomkinson, a Social Impact Analyst, has a useful blog site charting the global development of SIBs at Link