Governments would prefer to prevent people from cycling over and over through prisons, courts, homeless shelters and hospital emergency rooms. And they know that there are interventions that are proven to help and to save money. But these programs are expensive enough that cash-strapped governments usually can’t begin them. Cities are so stretched that they have nothing left over for prevention.

A brand-new financial instrument may provide a way out of this dilemma.

The idea is called the social impact bond .

— “The Promise of Social Impact Bonds,” The New York Times, June 2012

We believe that sustainable access to investment capital is critical to delivering long-term impact for populations in need. Many communities face a daunting array of complex social problems, such as high rates of crime, homelessness, and chronic disease. In many cases, social service providers in these communities have developed innovative, preventative programs that can make measurable progress toward solving these problems and generate real social and financial value to government. However, in the current fiscal climate, many governments face challenges maintaining financing for their current programs and obligations, making it difficult for leaders to consider investments in these programs. For certain issues, Social Impact Bonds can provide governments with the flexibility that they need to explore and expand these effective social programs.

A Social Impact Bond (SIB) is a specific type of social impact financing in which funds are raised from investors to provide social service providers with the working capital to deliver their services.

For example, a government may enter into a Pay-for-Success contract with an intermediary and its social service provider partners in which the government only pays if youth employment increases. The intermediary would raise the working capital that the social service providers need to operate the program from investors. If the services are successful in improving the rate of youth employment, then the government would pay for the successful outcomes. If youth employment does not improve, then government does not pay and investors risk losing their capital.

We view financial innovation as a means to an end. The end includes:

• Developing a more sustainable way to address our social challenges at a scale that meaningfully meets the demands of society;
• Encouraging greater adoption of evidence-based practices by the public and nonprofit sectors; and
• Driving increased government accountability by funding only positive outcomes.

We believe that the true innovation of SIBs lies in unlocking pools of investment capital that provide:

• Governments with the flexibility to support preventive services, which are often the first services to get cut in hard budget times even though the lead to reduced costs and better outcomes in the long term;
• Taxpayers with the security of knowing that their resources are expended only when solutions produce real results for society;
• Social service organizations with the stability of long-term funding sources that enable them to grow and focus on delivering proven, results-oriented services;
• Investors with the opportunity to earn both social and financial returns while putting their capital to work in service of society; and
• Underserved individuals with the highest-quality supports that they need to thrive.

We at Social Finance are uniquely positioned, as a market intermediary, to align incentives of these multiple parties and improve the chances of achieving outcomes through an optimally structured and managed project.

SIBs stand out from other financing instruments because of their ability to:

• Tap into a vast pool of investment capital to support often-underfunded social programs;
• Provide up-front funding to service providers in order to bridge the timing gap between their need for funds to implement PFS-based social programs, and their receipt of funds upon successful completion of the programs.
• Drive the design of collaborative projects, involving diverse stakeholders from the government, nonprofit, for-profit, and philanthropic communities;
• Focus on prevention-based programs rather than remediation services, to tackle the root causes of social ills
• Direct funding to the most effective programs by introducing market discipline in the form of investors who will support those programs most likely to produce positive outcomes.