Social impact bonds, sometimes known as “Pay for Success” projects, are contracts with the public sector in which commitment is made to pay for improved social outcomes, which may result in public sector savings. Despite their name, social impact bonds are not bonds; they are public or private partnerships in which investors are repaid if and when improved social outcomes are achieved.

The first social impact bond, ABLE (the Adolescent Behavioral Learning Experience Program), was launched in 2012 as a partnership between Goldman Sachs, Bloomberg Philanthropies, and the City of New York, according to the Nonprofit Finance Fund’s Pay for Success.

How social impact bonds work

The mechanics of social impact bonds come down to a five-step process. First, investors make a long-term investment to a project designed to achieve a specific social outcome. For example, ABLE was aimed at serving over 17,000 youth at the Rikers Island prison and reducing the rate of recidivism by 10% or more. The investment then goes to a nonprofit that funds and oversees cost-efficient, evidence-based programs toward achieving the stated outcome. In the case of ABLE, the investment went to multiple nonprofit service providers who implemented Moral Reconation Therapy, “an evidence-based intervention that focuses on improving personal responsibility and decision-making,” according to the Nonprofit Finance Fund.

If all goes as hoped, the programs produce improved outcomes that reduce the demand for government services, which in turn helps the government (and thus taxpayers) save money by paying for programs that actually work. Only if the aimed outcome is reached do investors get their principal back along with return on investment (ROI).

Unfortunately, in the case of ABLE, the Vera Institute of Justice found that the program did not keep teenagers from having to return to Rikers “at all,” the New York Times reports. As with other investments, there is risk with social impact bonds and no guarantee on returns.

The debate on social impact bonds

Proponents of social impact bonds view them as a great opportunity for the public and private sectors to work together, while opponents view them as an ineffective model. Recently, a Stanford Social Innovation Review (SSIR) article proposed the middle ground and offered criteria for establishing which projects social impact bonds will work well. The authors, V. Kasturi Rangan and Lisa A. Chase, contend that the model is only appropriate for nonprofits that:

• can deliver and measure their social impact effectively, and
• can “translate that impact into financial benefits or cost savings that are traceable to the budgets of one or more institutions or government departments.”

Social impact bonds amount to innovative financing that may help state and local governments fund critical social programs by combining government initiation, private investment, and nonprofit implementation. Consequently, they have the potential to deliver measurable social benefits and save taxpayer dollars.

For investors, this may present an opportunity to reap the rewards of social improvements in communities they care about, taxpayer savings, and, if the program is successful, return on investment.