SIB TRIB ISSUE No. 3

MARCH 2013

The Social Impact Bond Tribune NEWS, ANALYSIS & COMMENTARY ON ALL THINGS SIB

“All Due Respect”

“B” as in “Billion”

Dear Public Sector:

Scale Finance

Hello, nice to meet you. We understand you’re

“Scale” just might be the most reviled buzzword in the

exploring “Social Impact Bonds” and other kinds of “pay-

social sector lexicon. An innocent victim of indiscriminate

for-success” contracts with nonprofit organizations and

usage, scale has come to mean both everything and

private investors. Terrific. We’re the Social and Private

nothing, something that is desperately needed and

Sectors, and we’re here to help.

hopelessly unattainable. Virtually

Since we’re all going to be

every visionary social

working together for the first

entrepreneur ardently hopes his or

time, may we offer you some

her program will scale, while

friendly advice?

every level-headed executive

You picked a good time to get

director knows the safe answer to

involved. A lot of your colleagues

the question, “When will your

in the US and abroad have been

program reach scale?” is, “At least

jumping into SIBs with both feet,

twenty years from now.”

and we’re delighted to have you

We’ve got to stop thinking of

join them. But to be honest, many

scale as something abstract and

of them are unclear on some

diaphanous. If we continue to

pretty basic concepts. We hope

view scale as akin to chasing

you won’t mind if we make

smoke, it will never be achieved.

ourselves a bit of a skunk at the

Scale refers to something specific

garden party.

and important that can be measured and assessed. If we set a proper benchmark, we can

There’s No Recipe for Primordial Soup

devise an approach that is fit for that purpose, and we can tell

All this buzz about SIBs isn’t just hype. There’s something

whether we’re on course within

potentially significant going on

five to ten years’ time. While it remains to be seen

here, and a lot of smart, serious people are trying to make good things happen. But it’s

whether meaningful scale can really be achieved within

really important to understand that we don’t really know

such a time horizon, I’m convinced not only that it can, but

to do any of this yet.

that the time to try has definitely arrived. Herewith, some

Even in the UK, where SIBs started and are well ahead of the US, there are still no published results of any kind

thoughts on how to get started, an approach I’m calling “scale finance®.”*

from even the first pilot project launched at the Peterborough Prison in September, 2010. Preliminary Continued on page 2 ...

© 2013 Steven H. Goldberg

* Just kidding. Everyone knows you can’t trademark a descriptive name.

Continued on page 9 ...

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SIB TRIB ISSUE No. 3

PAGE 2

reports suggest the project seems to be going well, with

your constituents as their clients are. That’s how

many lessons learned and refinements made along the way,

democracy works.

but we won’t have any actual recidivism data until 2014. So

This close connection with your constituents gives you

we have no idea yet whether using SIBs to pay charities to

a vivid picture of the plight human service agencies and

meet released prisoners at the gate and provide them with

their clients are facing. Budget cuts are both unavoidable

comprehensive re-entry services reduces recidivism.

and devastating. You know that we’re not going back to

And that’s the SIB

the “good old days” (which

project that’s the farthest

didn’t seem so good then) for

along in the world. The only

a very long time, if ever. In

US project that’s been signed

fact, once Washington finally

and funded is the one New

finds a way through the

York City announced in

budget impasse, there will be

August (to reduce juvenile

massive downsizing in

recidivism at Rikers Island),

federal entitlement

and that hasn’t even

programs, and that will

launched yet. Everything

cascade down to the states

else in the US is still on the

just like it always does. The

drawing board.

real pain hasn’t even started

In other words, when it

yet.

comes to SIBs, everything’s

So even though you’ll try

up for grabs and nobody

your best to maintain

knows nuthin’. A lot of

funding for some social

competing ideas are

programs, you know this is

surfacing, ranging from

just a temporary holding

probably dumb to seemingly

action to try to cushion the

inspired, but it’s not easy to tell the gems from the stinkers.

blow while we transition from the creaky old system that

Many of us have opinions about which is which, but, at this

we’ve learned to live with over many years to a future that

point, no one can really say for sure.

no one can really see yet. We are far from consensus on

That’s not to say that every approach is as good as

how we’ll deal with the new normal of an aging

every other. Truth be told, the field’s pretty crazy these

population, increasing inequality, decreasing social

days. SIB soup is nothing if not primordial, and it’s hard to

mobility, and chronic unemployment that can’t be

know whether and what kinds of sustainable life might

overcome without more skilled workers than we currently

emerge.

know how to educate and train. A lot of people seem to think that SIBs and other kinds

“Nobody” Includes You

of “impact investing” might help bridge the gap between

We know that social services are something you care about a lot. You got into this business to help people who can’t help themselves, especially in hard times like we’re in now. Also, you actively support many of the organizations

Page 8 QUESTIONS ABOUT SIBS? That’s what FAQs are for.

that provide this help, like community health centers, emergency shelters and employment counselors. You attend their fundraisers and show up at their ribboncuttings. They, in turn, work on and donate to your campaigns, and they write letters to the editor and call your office to ask for your support and complain when you go astray. They’re good people, and they’re every bit as much

© 2013 Steven H. Goldberg

Page 15 LEGISLATIVE UPDATE UPDATE Greetings from Connecticut, Hawaii, Utah ... and PA? Page 20 WATCH THIS SPACE SIBs head to the G8 Summit.

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SIB TRIB ISSUE No. 3

inadequate government budgets that are supposed to

PAGE 3 Unfortunately, none of us, including you, is

provide a safety net for all, on the one hand, and

particularly happy with the results or how much it all costs.

philanthropy that depends on individual generosity, on the

So, now, we’re experimenting with a new approach that

other. Under the dire circumstances in which we find

uses private money first, and taxpayer money second,

ourselves, the idea that private investors might provide an

maybe. And by “maybe,” I mean “maybe not.” So who

entirely new source of billions of dollars in funding is just

calls the shots when you use someone else’s money to

too enticing to ignore.

provide what we hope will be more effective services, and

As a government official, be it elected or appointed,

then the government pays them back only if the services

political or civil servant, you have as much right to weigh

work? Who decides how the investors’ money is used and

in on this debate as anyone. But — brace yourself — you

who provides what services?

don’t have as much to say about how SIBs develop as you think. Allow me to explain. First of all, this strange new world of impact investing is going to involve a much bigger departure from business as usual than you think. Much bigger. There are pros and

Well, you say, taxpayers are ultimately on the hook, so you still have to protect their interests, which means you’re still in charge. Maybe, but unlike taxpayers, investors don’t have to give you their money. Social investment, like philanthropy, is a completely

cons galore, and a new level of complexity that will try

voluntary activity, but unlike philanthropy, it’s supposed to

everyone’s patience. But for impact investing to ultimately

be a rational, rather than an emotional or altruistic decision.

make a difference that actually matters to the people and

In fact, we hope that impact investors will have an

organizations you (and we) care so much about, it will only

incentive to make smarter, more “evidence-based”

happen as a result of one of those disruptive “paradigm

decisions about their social investments than they make

shifts” that upsets a lot of people whose livelihoods depend

about their charitable donations, and, perhaps, even

on preserving the status quo.

smarter decisions than government makes about allocating

As a rule, you sensibly prefer not to upset even one of

its budget. The thinking is that, because social investors

your constituents, let alone a lot of them. But anyone who’s

want to get their money back and make a small profit at the

hoping to solve or even diminish our fiscal troubles by

same time that they’re also helping people, they’ll choose

attracting private capital without making fundamental

their social investments very carefully.

changes in the ways we do business is just fooling

Would careful, rational investors let you control how

themselves. Those of us who’ve been toiling in this

their money is spent? Would they let you choose which

particular field for years think the optimism about social

nonprofits do the work, and which services they provide

investment is justified, but our collective hopes are likely to

and how? Would they let you decide whether the services

be disappointed if all of us, including you, don’t face the

“worked” and how much they get paid back?

fact that new money will only come with very different strings attached.

Yes, you say. If investors want to get paid by taxpayers, they have to accept their terms, which you and your colleagues set on their behalf.

Who’s Driving the Bus? Let’s start with one change that definitely will ruffle your feathers: who’s in charge? That is, who decides who gets a seat at the table and how other important decisions are going to be made? Who decides what gets funded and at what cost? When it comes to “pay for success,” who decides what success is, whether we’ve achieved it and how much investors gets paid? Under the current system, the government uses taxpayers’ money to buy social services from nonprofits so, naturally, you’re in charge, since taxpayers hired you to spend their money. Fine, that makes perfect sense.

© 2013 Steven H. Goldberg

Sorry, but investors won’t see it that way. Someday, if everything goes right and billions of dollars are flowing into impact investments, investors might make a lot of money from investing in social programs. If that day ever comes — and we have absolutely no way of knowing if it ever will — maybe then investors will “need” to invest in social programs to achieve their financial goals. But that’s not the case now. At this point, no rational social investor would make an investment with the hope of getting rich, or even of making a lot of money. Please allow me to underscore that last vital point. Profit-maximizing investors aren’t even thinking about

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SIB TRIB ISSUE No. 3

PAGE 4

SIBs, and we’re not even asking them to. They’d laugh us

any given year, unless and until an election shifts the

out of their cushy offices.

balance of power, in which case old programs are

Today’s social investors know that they’re guinea pigs.

threatened and new programs are favored.

Like you, they hope that this new way of funding social

This is how democracy works. Presumably, a

programs will be a more effective and affordable way to

government that constantly does a terrible job meeting

help people in need, so they’re exploring this unorthodox

society’s needs will eventually lose power, and the minority

approach the same way you are. But money isn’t a big

party always campaigns on the idea that it knows how to

factor yet.

do a better job than the chuckleheads who are currently

Stop laughing, please. We’re serious. Yes, we know the old saw that when anyone says, “It’s

running the show. But just because you convince voters to throw the bums

not about the money,” it’s about the money. But hear us

out does not mean that investors have to defer to your

out.

judgment about how to spend their discretionary money. Social investors would be very happy to earn generous

They pay their taxes like everyone else (or so we hope), but

financial returns from investing in nonprofits — someday.

if they think you’re going to waste their money, they’ll just

All of them know, however, that today is not that day.

hang on to it, thank you very much, and decide for

Their current expectations are considerably more modest.

themselves how to give it away. Philanthropy, after all, is

Researchers at Duke University recently reported that many

risk free: it’s guaranteed to be a 100% loss, but with a

social investors would be happy with “low single-digit

quantifiable tax deduction and plenty of civic adulation.

financial returns with clear social outcomes.” So if you happen to choose a nonprofit that has a strong track record of delivering a service that seems to work, maybe they’ll give you some of their money. If not, they probably won’t. 2 or 3% return just isn’t worth the aggravation. So even though you’re just doing your best to protect

Old Habits What’s government’s track record so far with SIBs? Truth be told, it’s mixed. The level of serious interest in SIBs is tremendously encouraging. The federal government

taxpayers and help poor people, you can hardly blame

and more than two dozen cities and states are seriously

potential investors for wondering why you get to decide

looking at SIBs. Several pilot projects are on the verge of

how to spend their money. They’re going to decide for

launching, and many more are lining up on the runway.

themselves whether you’re going about it in a way that

However, SIBs take a hell of a long time to get off the

seems to make sense, and there’s really nothing you can do

ground. Too long. The New York City project with

about that.

Goldman Sachs and Bloomberg Philanthropies took more

We hope you won’t think us rude if we point out that

than two years to launch, and the contract that was signed

government doesn’t exactly have a long history of spending

in August, 2012 still hasn’t been released. Massachusetts

money only on effective programs. Not only is there a lot

released a “Request for Information” in May, 2011, and

of research that shows that government-funded programs

selected two bidders in August, 2012 (yeah, it was a busy

haven’t worked all that well, but everyone (including you

month), but no contract has been signed yet. Cuyahoga

and your colleagues) knows that we usually have no idea

County, Ohio, issued a “Request for Response” on October

whether safety-net programs work because we never

29th with a deadline of December 14th; since then, radio

evaluate most of them. Indeed, government often doesn’t

silence.

even collect data about the results of its programs or who receives them. As you also know better than anyone, government

It’s not just us. In the UK, Essex County commissioners took 18 months to procure a SIB for “at-risk” children. Labour MP Hazel Blears recently complained that

doesn’t fund programs based on their effectiveness.

social investment is “painfully slow,” and Social Finance

Budgets are legislated based on fierce competition among

UK’s Toby Eccles, who helped invent SIBs years ago,

interest groups locked in a zero-sum game in which there’s

recently blogged, “Social Impact Bonds – why so slow?”

nowhere near enough money to go around. Most budgets

Sure, things will pick up as government gains experience,

are level-funded year after year, with small adjustments up

but spending two years to organize a 5-year contract for

or down depending on how much money is in the till in © 2013 Steven H. Goldberg

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SIB TRIB ISSUE No. 3

less than $10 million doesn’t sound like a paradigm shift in the making. Other things government does are also gumming up

PAGE 5 Investors don’t necessarily claim that they know something you don’t (okay, maybe some do), but they have plenty of reason to doubt that you know something they

the works. About a half dozen states are working on SIB

don’t. True, you can draft legislation, issue RFPs and write

legislation, but if you can find any commonalities among

“pay-for-success” contracts ‘til the cows come home. That

them, you’re a better man than I, Gunga Din. Connecticut

does not guarantee that investors will bite if the program’s

passed a bill in its last legislative sessions authorizing SIBs,

track record isn’t convincing or they don’t think the terms

but it’s in the process of amending it to require legislative

are fair.

approval of each and every contract. (That’ll work ...) Other states are balking at having an independent evaluator decide whether investors get paid. Instead, they want to make that decision themselves, which investors are going to love. Some states insist on using their standard contractual terms and conditions, with non-starter provisions like termination for convenience and strict limits on “overhead” expenditures.

This Is Rocket Surgery If you put yourself in investors’ shoes, you might

“Counterparty Risk” We would be remiss if we failed to point out that you’re part of the problem. This is what’s called “counterparty risk,” which is Wall-Street-speak for the common-sense idea that investors should think carefully about who they’re doing business with before they get their checkbooks out. Here we all are, trying to attract new funding for more effective prevention programs, and you want to conduct business pretty much as usual. You want to commission

concede that we have plenty of reason to be skeptical about

procurements to choose the providers, set the outcome

government’s ability to drive the bus on social investments.

targets, decide how much investors can make, and, if that

Let’s start with the basic “formula” for Social Impact Bonds

weren’t enough, you want to write one-sided contracts that

and other impact investments:

let you call the shots over the five-or-more-year life of the

1.

Find a social innovation that’s been proven to save

project. Not to mention, you’re probably unable or

more than it costs;

unwilling to pass legislation that says you have to pay the

2.

investors if they achieve the results.

Raise more money for one or more nonprofits than

they’ve ever had before from an entirely new set of

Perhaps this approach isn’t well designed to encourage

players that hasn’t ever invested in such organizations;

creative and adaptable ways of delivering innovative

3.

services to prevent expensive problems from happening

Draft an outcomes-based contract that conditions

payment on reducing the future demand for more

over a long period of time ...

expensive programs by an agreed amount; 4.

Manage the implementation for at least five years;

and 5.

Prove that the results wouldn’t have occurred

without the program. So, which part of that have you done before? None, right? Okay, for which part does government have special skills or expertise? Anyone? Buehler? Buehler? As Jerry Seinfeld might say, “not that’s there anything wrong with that.” No one has ever done that before. But the reason we’re exploring it now is that neither the public sector nor philanthropy has been getting the job done for quite a long time now. With the arrival of the financial crisis, we not only have a safety net that doesn’t work as well as it used to, but now we can’t afford it.

© 2013 Steven H. Goldberg

You Can Definitely Help At this point, several suggestions come to mind. First, it might make sense to involve investors sooner rather than later. Instead of waiting until after you’ve signed a contract, you might want to find out what they’d be willing to invest in and on what terms. We should warn you that this will turn out to be a chicken-and-egg problem since they don’t know much more, if anything, than you do. The only way around that is to invite them to figure it out with you. They need to answer the same questions as you do (along with other ones you don’t care about), and they’re not going to rely on second-hand answers from you or anyone else. “Due diligence” means they have to do their own diligence.

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SIB TRIB ISSUE No. 3

In England, two organizations committed to social

PAGE 6 Now there’s a heretical idea. 99.999% of the time,

investment, Big Society Capital and Bridges Ventures,

government keeps private parties at arms’ length, and for

recently made that point in a letter to the Minister in the

good reason. Politicians sometimes go to prison when

Cabinet Office responsible for co-ordinating government

“special interests” influence how public dollars are spent,

policy:

and we’ve devised an elaborate “procurement” system to “The Payment by Results model supported by external investment aims to transfer some risk associated with an innovative programme from the commissioner to the investor for an appropriate price. The investor provides the upfront capital required to deliver the services and bears the risk that the outcomes will be achieved. This risk is transferred at a price that takes into account the commissioner’s prospects of future savings with the investor’s cost of capital and opportunity cost of alternative investment. When the commissioner seeks to transfer greater risk, social investors will want to balance the possibility of losing a substantial proportion of their capital with the possibility of a greater return (that could be reinvested in future social projects). To ensure investor and commissioner appetite for risk transfer will ‘overlap’, investors should be involved as early as possible in the PBR procurement process – certainly at the conceptual or design stage. Involvement of delivery organisations is not the same thing as involving investors.”

Keep in mind that you want investors to kick the tires on SIBs and other impact investments. We’re all trying to do more with less, to prove that an ounce of preventions really is worth a pound of cure, and to find ways to attract private capital by “monetizing future government savings.” None of us has ever done any of that before, but maybe some new players can bring some fresh thinking that would help us sort it out. So think about making room for them at the table before you decide everything that will determine whether this is an attractive investment opportunity.

SIBs Aren’t Paper Clips And while we’re asking you to do things you normally

make sure that government makes unbiased decisions about purchasing “goods and services.” Inspectors general and citizen watchdog groups keep an eye on where the money goes. Who wants to take that kind of chance? Well, you do, if you really want to find more effective solutions to difficult social problems. The whole point of social investment is to bring innovative programs from the nonprofit sector into government and pay for them with private capital. What makes you think you can steward cross-sector solutions without the active and ongoing participation of the other sectors? When public agencies use taxpayer money to buy things from the private sector, fairness requires that all potential vendors compete on a level playing field. That’s why RFPs have to specify in advance what the government wants to buy. It’s fine for bidders to offer different ideas about better or cheaper ways to provide the goods or services, but ultimately the government has to make a fair and independent decision and manage the delivery. That works okay for widgets but not so well for the kinds of innovative prevention programs we’re talking about here. We’re all looking for long-term, creative solutions to complex social problems that have defied all attempts at remediation for decades. Government’s not just out of money, it’s out of ideas, too. And their aren’t any off-the-shelf solutions. Just because a program is “evidence-based” doesn’t mean that it works everywhere or all the time. Is procurement a good vehicle for supporting risktaking and innovation? Maybe not, since it doesn’t even work that well for buying widgets. A recent survey by the Nonprofit Finance Fund found that “only 14% of nonprofits receiving state and local funding are paid for the full cost of services” and “just over 60% reported overdue government payments.” In a 2010 Urban Institute study of nonprofit

don’t even have to consider, let us suggest something else

government contracting, 76% said that the complexity and

that you normally would never, ever do: share control of

time required for reporting on contracts and grants was a

the project with us. Not just at the beginning, when you’re

problem, 75% said that the application process was too

developing the project, but over the entire five or more

complex and time consuming, and 58% said that

years of the investment.

government changes to contracts and grants were a problem.

© 2013 Steven H. Goldberg

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SIB TRIB ISSUE No. 3

In the UK, a recent investigation by the National Audit

PAGE 7 That doesn’t mean that investors get to call the shots,

Office of police department procurement practices found

either. There are general laws that will still apply to SIBs,

that, due to complex procedures and a lack of timely and

like safety and privacy regulations, and they have to be

reliable data, “the Department is not able to assure the

followed. Also, these programs serve vulnerable

taxpayer that the £1.7 billion the police service spends on

populations, like elderly poor people and at-risk children,

[non-IT] goods and services is value for money.”

so government can’t abdicate its responsibility to protect

Let’s be honest: we’re exploring social investments

them just so investors can get paid back. And, yes,

because government doesn’t know how to meet important

someday taxpayers might have to pay the investors back, so

public needs. Under this new arrangement, nonprofits and

you have to protect them, too.

investors will have much greater financial and operational

Good social investors understand that all of these

risk than government. If government wants more effective

considerations have to be balanced. They’re not looking to

solutions that taxpayers don’t have to pay for out of pocket,

call all the shots, but they want to be involved early and

you and your colleagues are going to have figure out how

often, or they won’t put their money at risk. So, we need to

to actively involve the people who are taking all the up-

figure out new ways of contracting that aren’t artificially

front risk. Investors aren’t likely to pay for untested

constrained by one-sided terms and conditions that don’t

projects they don’t have a say in developing or managing.

make sense and aren’t legally required. Business unusual requires us to rethink “the way things have always been

An Offer They Can Refuse Another thing: the kinds of one-sided contracts that governments write when they’re paying the bills aren’t going to work for these risky investments. When a government agency offers take-it-or-leave-it contracts, nonprofits take them because they have no choice; investors probably won’t because they do. Rational investors will

done” so we can accomplish things we haven’t been able to so far. It would be oh-so-helpful if you could tell your lawyers to consider new forms of contracting that are unconventional but not illegal.

“Appropriations Risk” One more thing, and it’s not a small one: you have to

expect that the people who know what they’re doing will

promise to pay investors back if they fulfill their contractual

have a say in how their money is spent, because they only

obligations. We mean really promise, as in, you can’t

get paid back if the project hits its target a long time from

change your mind later on when it comes time to

now.

appropriate the money five or more years from now. Not

A SIB isn’t like a missile that gets fired once and takes five years to land. Rather, it’s like a ship trying to navigate across oceans before there were sextants and marine clocks,

just you, of course, but whoever happens to be sitting in your chair when the time comes. Yes, we understand that one legislature generally can’t

constantly correcting course by reference to changing

bind a future legislature about spending money down the

celestial markers. Investors need to know that the captain

road. And we know that “sovereign immunity” prevents

can tack if the wind changes or take evasive maneuvers if

investors from suing a state to pay them if the legislature

there’s an iceberg on the horizon, and that some guy back

hasn’t appropriated the funds. Appropriations authority is

on dry land with no sea legs can’t second-guess or overrule

the quintessential legislative power, enshrined in every

him.

state constitution, and you can’t and won’t compromise it.

Again, this is a good thing. All of us hope that this new way of doing business, in which the parties actively

Fine, we get it. But you understand, we’re sure, that investors aren’t

collaborate and make consensus-driven decisions based on

going to buy a pig in a poke, either. When their lawyers

how things are actually going as shown by real-time

conduct their due diligence, they’re going to tell their

performance data, might lead to more effective and less

clients in the loudest and clearest possible terms, “You

expensive results. SIBs won’t work if you insist on the kind

realize the government doesn’t have to pay you back no

of unilateral control that you have when taxpayers are

matter what the contract says, right? Even if you far exceed

footing the bill. You can’t shift risk without sharing control.

the outcomes set in the contract, the legislature doesn’t

Governance matters.

have to appropriate the money to pay you. They don’t even have to take a vote if they don’t want to. It’s

© 2013 Steven H. Goldberg

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SIB TRIB ISSUE No. 3

PAGE 8

completely in their discretion and there’s no way of

sweet spot in there somewhere, if we can avoid talking past

knowing what a group of legislators who might not even be

each other and get working collaboratively to find it.

in office will do many years from now. That’s a major risk

Social investment favors the collaborative and the

you have to consider before you make this

resourceful. We look forward to working with you to

investment.” (Obviously, Congress isn’t helping, what with

renew the American Dream.

all their debt ceiling, fiscal cliff and sequester shenanigans.)

Sincerely yours,

You can see this presents a dilemma for everyone

The Social and Private Sectors

involved. Investors want to make social investments in good prevention programs, and they’re willing to take the risk that they’ll lose some or all of their money if they don’t make the outcomes targets. That’s the nature of SIBs and these other new-fangled “impact investments” that everyone’s so excited about. But they’re not likely to invest if they’re worried you’ll reneg on the contract if they do hit

For Newbies

Questions About SIBs?

the targets, especially if it saves government the money it It’s easy to forget that SIBs have a very steep learning

needs to pay them. You can’t just take the savings and run. Fair’s fair.

curve, and that waves of newcomers are just starting out. Fortunately, the Center for American Progress has written

Co-Figuring Out “CoDevelopment”

the definitive (for now) Frequently Asked Questions. Here’s the link: http://goo.gl/YLCmi.

It won’t be easy, but we can figure out a way to provide investors with enough assurance that they’ll get paid back without abrogating the appropriations rules. Massachusetts did the responsible thing by enacting “full faith and credit” legislation, but that’s a heavy political lift. If, as a practical matter, that option isn’t available in your state, you have to consider alternatives that will satisfy reasonable social investors. Many states are establishing various kinds of trust funds and reserve accounts, but that’s probably not going to be enough to encourage the kinds of large investments we’re going to need to expand programs to a meaningful extent. You have an important role to play us gets to engage in wishful thinking.

ISTOCK/OTMARW

in establishing a better and fairer new normal, but none of We might not know what that new normal looks like, but it won’t look like the last fifty years. You’re in competition with every other city and state that’s thinking about SIBs. You’re all chasing many of the same providers and the same investors. They’re going to look for the best government partners who understand that SIBs aren’t

Frequently Asked Questions: Social Impact Bonds Kristina Costa, Sonal Shah, Sam Ungar, and the Social Impact Bonds Working Group December 5, 2012

business as usual. Governments, investors and nonprofits need to have a

W W W.AMERICANPROGRESS.ORG

much deeper and more realistic understanding of how and why they each think and act the way they do. There’s a

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... continued from page 1.

Our Glass is Less Than 5% Full After more than two decades of development, it is fair to say that the once-disputed experiment known as “social entrepreneurship” has proved the skeptics wrong. Social entrepreneurship has amply demonstrated its ability to produce innovative solutions to crippling social problems that have transformative potential. Thanks to the sustained efforts of venture philanthropists and their grantees, we now know — albeit at varying levels of confidence — how to dependably prevent or materially reduce such long-standing social problems as premature births and problem pregnancies, child abuse and neglect, lagging early educational progress, acute asthma attacks, unnecessary and protracted foster care placements, highschool truancy, youth disengagement, juvenile incarceration, prisoner recidivism, and chronic homelessness. This may come as something of a surprise, however, since every one of those problems remains as pervasive as ever. As I lay out in my book, even the most effective social innovations have not become available to more than a very small portion of the people who need them. Effective programs don’t scale and, generally speaking, scaled (governmental) programs aren’t nearly as effective as we’d like. So while we know how to produce social

innovations that “work,” we certainly don’t know how to “scale what works” to produce systemic change. All sides of the political spectrum are frustrated by our inability to scale. EARN’s Ben Mangan complains in the Stanford Social Innovation Review about “rationalized mediocrity” and “stifling incrementalism” that allow nonprofits to “declare success despite the fact that our impact is embarrassingly small compared to the size of the problems we are trying to solve.” Over at Bloomberg.com, Charles Murray of the American Enterprise Institute responds soberly to President Obama’s call for universal “high-quality preschool” with this hard truth: “As of 2013, no one knows how to use government programs to provide large numbers of small children who are not flourishing with what they need. It’s not a matter of money. We just don’t know how.” For all the tremendous progress social entrepreneurship has made, we still find ourselves at the very lowest end of the adoption curve. I can’t find an effective social innovation developed in the last two or three decades that’s available to more than 5% of the eligible population. And, with very few exceptions, almost none of the exemplary nonprofits that have developed these effective programs have realistic plans for “crossing the chasm” and reaching even 20% of the total need.

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SIB TRIB ISSUE No. 3

When we treat scale as a moving target that’s always

PAGE 10

approaches to serious social problems are always a good

receding over the horizon, we can’t devise realistic ways of

thing, no matter how many people they reach. Trying to

getting there. So what’s an achievable definition of scale,

grow by 20% a year is an admirable and worthwhile

and how can social investment help us pursue it in a

endeavor, and capable organizations should be encouraged

deliberate way?

to measure their performance against such accountable goals. The social sector would be vastly more productive if

“Scale” is the Prog ressive Dissemination of Social Innovation for Systemic Transformation “Scaling” is the explicit and active pursuit of systemic social change. It comprises a set of activities designed to eliminate the gap between the demand for and the supply of effective social programs. It has two essential elements, both of which are expressed in relative terms: size and time. By themselves, efforts to merely “grow,” “expand” or “replicate” programs are not scaling, unless the success of those efforts is measured against the total need. If you’re trying, for example, to double in size or grow by 20% a year, that’s not scaling, unless the explicit target is to get as close to 100% as humanly possible within a reasonable period of time. Once we adopt that (more or less) objective benchmark, it becomes possible to develop and assess scaling strategies. If your goal is to gain substantially universal adoption, then strategies like “creating a movement,” “government takeover,” “reaching a tipping point,” and “going viral” can’t work because they can’t be measured or assessed relative to an essentially fixed destination. Almost always, these kinds of terms refer not to scaling but to something magical, like saying “and then a miracle happens.” Now, I am not wading into the endless debate about whether organizations themselves need to grow to achieve scale or entrepreneurs should expand innovation through knowledge sharing and the like. Any approach that works is fine with me, as long as the actual objective is systemic change within a time horizon sooner than “someday.” Scale poses the question, are you trying to substitute your effective approach for the ineffective way that most people are served now? Are you actively working under a well-developed plan to accomplish systemic change on a time horizon that transforms the lives of the current generation of beneficiaries? Do you consider yourself unsuccessful to the extent the glass is not yet full? Now I may be a scale junkie, but I’m not a scale snob. Scale isn’t imperative for every program. More effective © 2013 Steven H. Goldberg

many more nonprofits increased their impact using those kinds of yardsticks. (Two masterful books explain how: David Hunter’s Working Hard & Working Well, and Bob Penna’s The Nonprofit Outcomes Toolbox.) But for a highly select group of organizations, growth alone — whether steady, rapid or accelerating — is not enough. It will not lead to the kind of systemic change of which they just might be capable and which could bring a preventable or manageable social problem under control. For a few programs that are demonstrably superior to the status quo and addresses such devastating social needs that it would be unconscionable not to make it universally available, we have to be willing to say that the time has come to really scale, and to be dissatisfied until we do. In those cases, we must acknowledge that the sector is failing its most important goal. You’ll have noticed, no doubt, that I’m conspicuously avoiding exactitude. What’s so objective and measurable, you might well ask, about “more or less,” “substantially” and “essentially”? For all my loft aims, I’m staunchly realistic. I know we’re never going to completely prevent child abuse or house every single homeless person. Not only can’t we solve pervasive and long-standing social problems entirely, we can’t identify every single person facing such problems or even those that could benefit from an effective intervention. But precision is not the point. Because we know how to respond to some of these problems to an extent that we never could before, we must now ask how can we disseminate those innovations that “work” to the greatest extent possible. Before we can know how to fill the glass, we must first have some idea of just how big and how empty the glass is now. Whether we count the volume exactly or supply 100% of the water needed isn’t important. Right now, we don’t even ask how big the gap is, nor do we try to fill it, because we find the task overwhelming, and not without reason. Scale is a relative term that is roughly measured by how far you have left to go, as opposed to various ways of talking about growth that just ask how far you’ve come. Again, trying to go farther than you have is always [email protected]

SIB TRIB ISSUE No. 3

commendable. But if you have the means to climb the

PAGE 11 The only way to do so, I concluded, was by changing

mountain, then you should ask how tall it is, how close you

their strategy from incremental growth (handfuls of schools

are, and what and how long will it take to reach the

at a time) to step-change growth (at the district or

summit. When you’re less than 5% of the way there, as we

metropolitan level), as in line 5. This would be similar to

are now, just going farther isn’t good enough if you’re

the sector-based growth that the Omidyar Network’s Matt

capable of getting to the top, or even nearly so.

Bannick and Paula Goldman have proposed. (See SIB Trib No. 1)

Scaling in Practice Few nonprofits not only commit themselves to solving

I didn’t realize it at the time, but now I see that “scale finance” could enable that kind of exponential growth.

massive social problems, but actually develop plausible strategies and plans for doing so to which they hold themselves publicly accountable. Here are some examples: National Center on Time and Learning On October 2, 2007, NCTL announced a goal that “in ten years at least one million children in high poverty communities will attend schools that have redesigned their school day to expand learning time and a majority of schools with this new school design will cut the achievement gap at least in half.” In 2011, I published a paper in the Philadelphia Social Innovations Journal that assessed the feasibility of this worthy goal. I believed (and still do) that NCTL could reach that many students, but not in the way it seemed to be going about it. Looking at their existing growth rate (line 1), I didn’t see any realistic way to increase their incremental growth (lines 2, 3 and 4) to reach

Year Up Year Up’s mission is to close the opportunity divide for disengaged urban youth. In June, 2011, it published a prospectus for an “Opportunity Campaign” to raise $55 million “to increase Year Up’s capacity to close the Opportunity Divide on a national scale.” Part of its strategy is to develop a “Million-Person Model” “that can grow rapidly to serve many more young adults across the United States ..., with a focus on innovations that allow for greater scale.” The prospectus notes parenthetically that “serving all 1.4 million young adults in our target population would require us to raise $11.2 billion in private philanthropy each year.” Lest anyone think that Year Up had taken leave of its senses, the prospectus characterizes that as “an infeasible fundraising burden.”

the goal in time.

© 2013 Steven H. Goldberg

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SIB TRIB ISSUE No. 3

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Nurse-Family Partnership

understanding of what we must do to create a system of higher education that can reach much higher levels of attainment, and make real progress toward the 60% goal.”

In August, 2010, NFP published a “State Needs Assessment” document that is notable for its candor about what it will take to move the needle for Medicaid-eligible young women who are pregnant with their first child: “In NFP’s experience, improving public health outcomes on a population basis depends on making home visiting and other effective programs and services widely available to a particular community in need. Small scale implementations rarely result in measurable public health improvements at a community level; States should aim over time to offer Nurse-Family Partnership to the majority of eligible women and families who are most at risk in order to achieve measurable improvements in their health, development, education, and well-being.” Stepping away from vague generalities, NFP provides a detailed table comparing “the [estimated] total NFPeligible population by States (first-time low income mothers), and ... the current service capacity of all established NFP programs in that States.” It proposes that “the gap between current capacity and Statewide eligible population provides a broad target for multi-year, incremental, Statewide expansion of NFP services.” The table shows what it would take to grow each of its current states to reach 50% of the eligible population (versus what I estimate to be its current reach of about 3% nationwide).

Lumina Foundation On February 3, 2103, the Lumina Foundation published its 2013-2016 strategic plan for “Goal 2025.” The

Can SIBs Enable Scale? A few big thinkers have started to connect impact investing to true scale. In their fine book, Impact Investing: Transforming How We Make Money While Making a Difference, Antony Bugg-Levine and Jed Emerson play out a metaphor first proposed by Jessica Freireich and Katherine Fulton in the Monitor Institute’s seminal report, Investing for Social and Environmental Impact. They remind us that the 1980 Initial Public Offering of what was then called the Apple Computer Company “transformed the trajectory of a previously unheralded financial innovation” to such an extent that “what was previously viewed as a crazy approach is now a standard component of investment portfolios, known as the very mainstream concept of venture capital.” So, they ask, “What Will Be Our ‘Apple IPO’?”: “What will be impact investing’s Apple IPO? In what geography or sector will the concept of impact investing for blended value find a success so compelling that it commands attention, overcomes the skeptics, and propels us into the mainstream? ... This ‘IPO’ will occur when we can point to a compelling social or environmental challenge that impact investment-backed enterprises solved at a level that would not have been possible for government or mainstream markets alone.” Could scale finance develop the social-sector

new document updated its 2009 strategic plan which was

equivalent of the Apple IPO? Could such funding expand

“based on the goal that 60% of Americans obtain a high-

our best social innovations to reach at least 20% of the

quality postsecondary degree or credential by 2025.”

eligible population in a defined geographical area over five

Lumina described the 2009 goal as “audacious but

to ten years, while maintaining established levels of

attainable,” and it reiterated in 2013 that “the goal has

effectiveness?

always been more than a vision statement—we believe it

I can’t pretend to know whether this can be

must be attained, and we believe it can be attained.” The

accomplished until we try, but I do believe there are two

revised plan advances eight actionable strategies to help

basic steps to getting started: selecting the right programs

produce an additional 23 million degrees, certificates and

and designing the right transactions in ways that satisfy the

other high-quality credentials:

following eight conditions:

“Between 2009 and 2025 lie 16 years. Our first strategic plan covered the first quarter—the first four years—and this strategic plan will take us halfway to 2025. We have set the stage for reaching the goal, but we believe over the next four years we must do two things: develop a clear © 2013 Steven H. Goldberg

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SIB TRIB ISSUE No. 3

Program Selection 1. Evidence. The intervention must have a “top-tier” evidence-base such that fundamental questions about effect sizes and attribution have already been answered to an extent that all stakeholders consider sufficient for this purpose. These questions would not be revisited as part of any pilot project. 2. Fidelity. There must be a reliable framework for implementing the innovation in substantial compliance with all key performance indicators. Fidelity to the model would be a primary consideration in assessing project success, since the evidence base adequately demonstrates what the outcomes will be when the program is delivered properly. 3. Capacity. Scale finance would be reserved for mature programs with clear potential for exponential growth. The service providers must have “growth-ready” leadership, finances, operations, and performancemanagement capabilities. It must also have a robust delivery network of significant scope that reliably provides the innovation at high levels of effectiveness at the current scale of operations. 4. Data. Robust and comprehensive data must be available on the affected population, existing services, costs, and social impairments, as well as on the outcomes, impact, cost, and potential savings of the innovations. While pilots cannot proceed if there are major gaps in the data, they can and should integrate and analyze disparate data that have not been aggregated fully. 5. Savings. Rigorous cost-benefit analysis must demonstrate that the innovation “math” has the potential to be financially self-sustaining at scale. Again, the reliable © 2013 Steven H. Goldberg

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results about cost, impacts and savings from existing research would be incorporated as givens and not be reconsidered as part of any pilot project. Designing the Transaction 6. Origination. Alongside these exceptional providers, investors, advisors and intermediaries would be full and active participants from day one. Government engagement can wait until social entrepreneurs and investors confirm that the proposed transactions are financeable, with specific funding sources and structures identified. They would then originate financeable transactions with low operational risk for consideration by governmental and non-governmental payers. 7. Size. Transaction sizes must be large enough (north of $50M) to (a) amply cover all direct service costs, as well as necessary working capital for infrastructure, intermediation, performance and risk management, and course corrections, and (b) pay investors > 5% return. Those fixed costs kill the ROI for smaller deals. 8. Governance. The project must have effective crosssector governance and payment mechanisms that avoid unnecessary legal or technical requirements that undermine the social and financial objectives of the project itself. The formation of the project and its legal and financial structure would be developed “on a clean sheet of paper” and not by reference to governmental procurement processes or standard terms and conditions for public service delivery contracts. Of course, any contract would have to comply with all applicable legal requirements, subject to any modifications the legislature might enact in SIB enabling legislation.

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In order to shift gears from growth to scale, we should

PAGE 14 scale-ready programs, could the answer to the maximum

begin by asking highly successfully social entrepreneurs to

feasible growth question be expansion that costs hundreds

come up with their “maximum feasible growth rates”: the

of millions per year now? Could an “Apple IPO” get us

percentage of need they could realistically meet within a

there?

time horizon that investors would accept and without

Andrea Phillips doesn’t think so. Andrea was on the

compromising their results if money were not the primary

team at the Goldman Sachs Urban Investment Group that

limiting factor. Scaling these exceptional programs isn’t just

closed the $9.4 million SIB with New York City, the first and

a matter of adding money. Read Gerald Chertavian’s

so far only SIB in the US. She offered an estimate of the

wonderful book, A Year Up: How a Pioneering Program

potential size of the SIB marketplace at a January 16, 2013

Teaches Young Adults Real Skills for Real Jobs-With Real

panel discussion entitled, “SIBling Revelry: Are Social

Success, to see what it takes Year Up to place urban youth

Impact Bonds the Next Big Thing?” hosted by the Hudson

on career paths to the middle class. Read Lumina’s eight

Institute’s Bradley Center for Philanthropy and Civic

strategies or NFP’s detailed manuals on “Implementation

Renewal:

Overview & Planning,” “Guidance for Implementation and Quality of the Nurse-Family Partnership Program” or “Expanded Data Collection, Reporting and Quality Improvement Strategies.” Try out NCTL’s frameworks for assessing teacher collaboration and enrichment programming, or its classroom time analysis tool. If you asked these social entrepreneurs, “if money were no object, how big and how fast could you grow over five to ten years and maintain the same results you get now?”, I think they’d be happy to come up with an answer. I’m fairly confident the answer would not be large enough to reach anywhere near half of the population-in-need, but it might be 10 or 20% in two or three states, which would far exceed anything they’re actively working on now.

How Much Would Scaling Cost? Ah, the hardest question of them all. Based on the very

“So in closing, a couple words about whether this is scalable or replicable. What I would say is I am cautiously optimistic. I don’t think three years from now we are going to have a $500 million dollar bond market that’s tradable in Social Impact Bonds, but I do think five years from now there will be a sort of healthy marketplace where financial institutions like Goldman Sachs are providing the capital for these types of initiatives. And it will be a growing market and a scaling market. Right now, $10 million is probably a good size for one of these deals. I hope five years from now they’re $100 million dollars.” Keep in mind that she’s talking about the entire SIB marketplace: $100 million in five years. On that trajectory, when could $100 million grow to even $1 billion, let alone the several billion that a handful of our best organizations could deploy each year? I suspect Andrea’s answer might well be, “At least twenty years from now.”

few scaling plans available, it would unquestionably cost

Now, Andrea works at Goldman Sachs and I work in

billions of dollars per year to fully scale each one of these

my basement, so if I were you, I’d listen to her. But since

rare programs. Even I accept that SIBs and pay-for-success

I’m not you, I can think differently.

financing won’t have that kind of capacity any time soon,

Two words, my friends: “scale finance.”

even though there’s clear evidence that several of these programs produce short- and medium-term savings that exceed their costs. But didn’t JP Morgan say that the emerging — and much broader — “asset class” of “impact investments” “offers the potential over the next 10 years for invested capital of $400bn–$1 trillion and profit of $183–$667bn” within just five global sectors: housing, rural water delivery, maternal health, primary education and financial

“One word: plastics.”

services? For SIBs, it’s not premature to ask if we even have visibility to our first billion. Can scale finance get there anytime soon? For the strict parameters I’ve defined for

© 2013 Steven H. Goldberg

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SIB TRIB ISSUE No. 3

CA, CT, HI, MA, MD, NJ, PA[?], UT

Legislative Update Update SIBs and pay-for-success are gaining attention in legislatures around the country. Everyone seems to be thinking about the same general instrument, although with dizzying variations. I suppose this is what Louis Brandeis had in mind when he called states “laboratories of democracy.”

Connecticut I begin with discouraging developments in the Nutmeg State. After passing a pretty good budget implementation bill [see SIB Trib No. 1], the General Assembly seems to be encountering some rough political headwinds. The amendment would define “savings” as “a reduction in state expenditures” as a precondition for payment to investors. While the parties to a SIB contract might be able to reduce the demand for expensive safety-

PAGE 15

each such contract. Does this sound like an expeditious “legislative review process”? “Prior to entering into an outcome-based performance contract with a social innovation investment enterprise, the secretary shall request approval of such contract by the joint standing committees of the General Assembly having cognizance of matters relating to human services and appropriations and the budget of state agencies. Each committee shall have thirty days from the date such request is received to convene a meeting to vote to approve or disapprove such contract, If such contract proposal is altered, amended or otherwise changed, the secretary shall resubmit such request, and each committee shall have thirty days from the date of such resubmittal to convene a meeting to vote to approve or disapprove such action. If a committee does not act on the initial request or the resubmittal of a request within the specified time frame the request shall be deemed to be approved by the committee. If such committees do not concur, the committee chairpersons shall appoint a conference which shall be composed of three members from each joint standing committee. At least one member appointed from each joint standing committee shall be a member of the minority party. The report of the committee of conference shall be made to each joint standing committee, which shall vote to accept or reject the report. The report of the committee of conference may not be amended. If a joint standing committee rejects the report of the committee of conference, that joint standing committee shall notify the secretary of the rejection and the contract shall be deemed [rejected]. If the joint standing committees accept the report, the committee having cognizance of matters relating to appropriations and the budgets of state agencies shall advice the secretary, denial or modifications, if any, of the contract proposal. If the joint standing committees do not so advise the secretary during the thirty-day period, the contract proposal shall be deemed approved.” But there’s more. All service providers must “receive a

net services (like incarceration), only the legislature can cut

percentage of any return on investment.” The math might

the budget. This leaves open the possibility that investors

work in some transactions, but probably not in most. Keep

wouldn’t be paid if they met the outcomes targets but state

in mind that the nonprofits would already be guaranteed

expenditures weren’t reduced by a corresponding amount.

full funding for all services to be provided over the multi-

The amendment would also impose rather unusual conditions on the authority of the Secretary of the Office of

year life of the contract. The contract must establish “an objective process” for

Policy and Management to enter outcomes-based contracts.

evaluating whether the outcomes have been met. That’s the

That is to say, he’d need approval from the legislature for

idea, of course, but making that a statutory requirement is

© 2013 Steven H. Goldberg

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SIB TRIB ISSUE No. 3

PAGE 16

just going to invite litigation over whether the process is

children ages zero to five to reduce federal and state

sufficiently objective.

expenditures related to those services.”

Finally, the Secretary would be required to conduct a

The Hawaii bill provides the most contemplative and

“fiscal analysis” of projected savings “in specific

poignant expressions of legislative intent we’ve seen to

governmental service areas related to achievement of

date:

specific, quantifiable performance benchmarks.” In other words, a contract could be challenged on the ground that the Secretary’s analysis didn’t adequately demonstrate how separate and specific outcomes produced separate and specific savings in separate and specific departments. Good luck with that. With all due respect, Connecticut, you’re being led into a brick wall. This kind of “death by a thousand cuts” exemplifies why investors worry about “counterparty risk.”

“The legislature finds that a new social and financial landscape and competition for scarce public dollars have required a sometimes painful prioritizing of government functions to provide for the public good in a fiscally prudent manner.  Legislators across the United States have been searching for new and creative ways to ensure that necessary programs and services do not suffer, but in the shuffle, programs that focus on prevention, that have yet to demonstrate effectiveness, have silently been languishing in the shadows. Impact investment--investment in nonprofit organizations and companies that address social issues--has grown to fill this void.  While the majority of impact investment has focused on microfinance, farming, and other fields for which return on investment is relatively obvious, social impact bonds may be an option more uniquely suited to a state government's efforts to address issues within the social sphere.

Hawaii The state motto of Hawaii, shown above on the state quarter, is “Ua Mau ke Ea o ka ʻĀina i ka Pono,” which, according to Wikipedia, means, “The life of the land is perpetuated in righteousness.” Given the legislature’s recent action on SIBs, another apt expression might be “the purgatory of the Social Impact Bond is perpetuated by the feasibility study.” Or, maybe, it just needs a better proofreader. House Bill No. 1402 would “require the executive office on early learning, in consultation with the department of budget and finance, to conduct a study on the feasibility of using social impact bonds as a means of funding early learning programs and services within the State.” More

The legislature further finds that social impact bonds connect private investors with government entities to fund social programs and services with no initial outlay of taxpayer funds.  Also referred to as pay-for-success contracts, social impact bonds rely on defined and measurable outcomes to determine the rate of return, if any, on the money invested.  In essence, the bonds bring together investors, nonprofits, and government to finance preventive programs expected to lead, in the long run, to overall cost savings.” The bill matches its evocative expression of need with commendably sensible study parameters. “(1) The potential pool of investors likely to invest in social impact bonds both within and outside the State;      (2)  The State's capacity to effectively administer a social impact bond program;      (3)  Nonprofit organizations with the capacity to make effective use of funding supplied through social impact bonds and with the likelihood to meet predefined and measurable outcomes based on the following factors:           (A)  The economic feasibility of programs and services provided;

particularly, the study must consider SIBs “as a means of encouraging private investment in early learning for © 2013 Steven H. Goldberg

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SIB TRIB ISSUE No. 3

          (B)  The degree to which the programs and services will advance statewide and local strategies and objectives;           (C)  The degree to which the programs and services will maximize the leverage of other state funds; and           (D)  The degree to which the programs and services align with the goals and objectives of the executive office on early learning, the improvement of social outcomes, and the stimulation of private sector investment and expansion;

PAGE 17 Given the many risks inherent in impact investing, this amendment might suggest that Hawaii has decided not to act in haste. Assuming that SIBs have not long since vanished from the Earth, I think we can safely say that SIBs should be feasible by the new legislative deadline. Unless, of course, “2030” is a typo for “2013” ... If so, then Hawaii has done a rather fine job of scoping a SIB feasibility study.

     (4)  The size and characteristics of the target population that would benefit from early learning programs and services funded through social impact bonds;      (5)  The projected financial value of the improvements that may result from social impact bond investments, including projected public sector savings and projected returns to investors;      (6)  The availability of metrics to analyze projected financial value and impacts beyond financial savings and returns, such as social outcomes;      (7)  Statutory changes necessary to effectuate a social impact bond program and any potential statutory prohibitions that may prevent such a program from being implemented; and      (8)  Any other issues as may arise in the course of conducting the study.”

Utah With apologies for a bit of East Coast snobbery, you know SIBs have arrived when Utah fell just two votes short of passing a bill. But for those missing votes, the “ResultsBased Early Education Act” would have created an RBEE Board with the power to enter “results-based contracts” with funds from an RBEE “Restricted Account” for “high quality preschool programs” and “home-based educational

The bill also directs the agencies to consider the development of a SIB pilot project, taking into account such factors as “the solicitation of donations from philanthropic organizations and other private sources; bond contract terms and conditions, including pre-defined public sector savings thresholds; and metrics to project and measure financial and social outcomes.” When it comes to a legislative body designing a feasibility study for SIBs, this bill is probably just about as good as it gets. The authors display an exceptionally deep understanding of this new instrument, including its primary technical complexities, and they exercise the right degree of policy oversight without telling the experts how to do their jobs. One specification gives me pause, however. The original bill stated that “This Act shall take effect upon its approval.” The Committee on Finance introduced an amendment “[c]hanging its effective date to July 1, 2030, to facilitate further discussion.”

© 2013 Steven H. Goldberg

technology programs” (both as defined in the Act). The authorized contracts would have been new to the SIB scene. Most SIBs in the US and the UK involve multicontract arrangements with separate agreements among governments and intermediaries, intermediaries and investors, intermediaries and providers, and so on. Utah proposed “a contract entered into by the board, a private investor, and a provider of early childhood education that may result in repayment to a private investor if certain performance outcome measures are achieved.” The Board would “distribute funds in the restricted account ... to one or more investors that the board has entered into a contract ... if the independent evaluator determines that the performance-based results have been met.” Direct state control would also be the order of the day when it comes to investor payments. “At the end of each year of a contract, the independent evaluator shall determine whether the performance outcome measures set in the contract have been met. If the independent evaluator [email protected]

SIB TRIB ISSUE No. 3

PAGE 18

determines ... that the performance outcome measures have

providers, intermediaries and investors are obligated

been met, the board shall determine what the repayment to

to meet agreed outcomes, with the freedom to choose

the private investor for that year would be, but not pay the

whatever means they deem most expedient to do so.

private investor until the end of the fourth year of the

The premise is that the parties bearing the financial risk

contract.... After the fourth year, the board may pay the

and the subject-matter and operational expertise have

private investor on an annual basis, if the independent

incentives to deliver effective solutions, without the

evaluator determines that the performance outcome

restrictions and micromanagement that are often

measures set in the contract have been met.”

imposed by traditional contracts. Autonomy is

The Restricted Account is capped at $10 million, and

reinforced when the state contracts with an

payments to investors are “subject to legislative

intermediary and the intermediary contracts separately

appropriation.” For the fiscal year beginning on July 1,

with providers, inasmuch as the state has no legal

2013 and ending on June 30, 2014, the bill would have

relationship with or authority over the providers. That

appropriated $1 million “from resources not otherwise

wall is breached when the state contracts directly.

appropriated, or reduced from amounts previously

2.

appropriated.” Try as I might, I can’t parse that language,

with investors. SIB contracts are not like municipal

but I think it basically means leftover money in the agency’s

finance agreements, in which a credit-worthy state

budget that hasn’t already been spent.

borrows funds from financial institutions under well-

The bill doesn’t establish specific outcomes that the

Similar risks arise when the state contracts directly

established terms and conditions within a mature

programs must achieve, but it does establish a framework

market having normalized risks and returns. Without

for the contracted outcomes. The independent evaluator is

any operational track record or industry benchmarks,

required to assess a number of factors, including “the pre-

the Utah approach would require two parties without

and post-assessment results of the assessment, designated

specialized expertise to negotiate the terms for a new

by the board.” It requires the Board to “determine a

financial instrument on their own. If the bill eventually

uniform assessment that: (a) is a nationally norm-based

passes, I suspect Utah might find this a more complex

measure of age-appropriate cognitive or language skills; (b)

and difficult undertaking than they anticipate,

has established reliability; and (c) has established validity

although I understand there were some discussions

with other similar measures and with later school

with financial institutions that might have endorsed

outcomes.”

this novel approach.

The Board would be required to annually report the

3.

Should the time come, it will be interesting to see

terms of the contract, including “the name of each private

if investors are willing to have their names, investment

investor; the amount of money each private investor has

amounts and returns publicly disclosed.

invested; the performance outcome measures set in the

4.

contract by which repayment will be determined; and the

the California legislation, the requirements that the

repayment schedule to the private investor if the

evaluator assesses outcomes and determines payments

performance outcomes are met.”

on an annual basis might prove problematic. One of

Finally, a local education agency “may not use funds

As I’ve mentioned in SIB Trib No. 2 with respect to

the challenges SIBs are designed to overcome is the

awarded pursuant to a contract issued under this part to

short-term focus that government and philanthropic

supplant funds for an existing high quality preschool

funders bring to chronic social problems. By tying the

program, but may use the funds to supplement an existing

achievement of long-term outcomes to multi-year

high quality preschool program.”

contracts, SIBs give intermediaries and providers time

For whatever use it might be to the sponsors in The Beehive State, I offer the following editorial comments: 1.

One of the reasons that most SIBs place

to improve their service delivery and make mid-course corrections based on real-time performance data. Thus, for example, the Peterborough contract authorizes

operational control of providers under a separate

success to be measured over a three-year average if the

intermediary contract to which the government is not a

one-year recidivism targets aren’t met. SIB

party is to distinguish pay-for-success contracts from

investments made in years 1 and 2 might not bear fruit

traditional human service contracts. In the former, © 2013 Steven H. Goldberg

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SIB TRIB ISSUE No. 3

PAGE 19

until year 3, but the Utah bill wouldn’t seem to allow

it puts Maryland on the board without taking positions that

that.

are likely to antagonize anyone.

5.

Like every state considering SIB legislation except

The bill defines a SIB as “a contract between the State

Massachusetts, the Utah bill carries significant

and a private or nonprofit organization in which the

appropriations risk which might discourage investors,

organization provides up-front funding for a project aimed

mitigated perhaps by the small size of the transactions

at a particular social objective, with repayment and earned

involved. I can’t understand, however, why the bill

interest continent on achievement of specified social

provides that the Board “may” pay the investors if the

outcomes and financial savings to the State.” It directs the

independent evaluator determines that the

state board of education to issue an RFP in 2013 for SIBs to

performance outcome measures set in the contract

“improve education for children in the State,

have been met. If there’s money in the Restricted

prekindergarten through grade 12,” and authorizes the

Account, i.e., if the Legislature has appropriated

board to “implement one or more Social Impact Bonds.”

funding, payment should be mandatory if the contract

The proposed legislation imposes only minimal

has been fulfilled. I think you’re missing a “shall,”

procedural requirements. The RFP must include “specific

Utah.

goals,” “objectives and performance criteria,” and “a plan to reach the targeted audiences.” The board must consider

I’ll close with a couple of “attaboys.” First, the

proposals that “are suited to achieve an improvement in

language prohibiting private investment from supplanting

education,” “have measurable performance criteria,” and

other funding for early childhood education should

“provide financial benefit to the State.”

assuage concerns that SIBs will “cannibalize” existing state

And that’s that. Difficult questions about private

budgets and private grants. Second, the “uniform

investment, evaluation of outcomes and repayment

assessment” to be used for the outcomes determination

mechanisms are left for another day. For those of us who

looks like a thoughtful effort to connect private investment

complain that SIB legislation is often needlessly intrusive,

with evidence-based programs. The language seems to

Maryland teaches us to be careful what we wish for.

provide reasonable and objective parameters without precluding early childhood experts from exercising their professional judgment for specific programs.

[Forgive me, Mar ylanders, but what is up with your state flag?]

Maryland The Maryland legislation is notable for two things: its

Pennsylvania The Quaker State’s playing it cool. On February 27th, the PAHouseNews reported that State Rep. Dwight Evans (D-Phila., not to be confused with Red Sox eight-time

brevity and its inoffensiveness. The bill acts as kind of a

Golden Glove winner Dwight “Dewey” Evans, whose 11th-

anodyne primer that captures in just two pages much of the

inning double play made possible Carlton “Pudge” Fisk’s

prevailing wisdom about how states should develop SIBs.

walk-off homer that won the sixth game of the 1975 World

It doesn’t break new ground or really get the job done, but

Series®) “unveiled” PFS legislation that would “propose a 21st century way of thinking” to supplant “an archaic and

© 2013 Steven H. Goldberg

[email protected]

SIB TRIB ISSUE No. 3

PAGE 20

ineffective system of wasting scarce taxpayer dollars” and “accentuate the best and the brightest ideas instead of the shopworn and expensive ones.” Whoa. Talk about raising expectations! Alas, as this issue of The SIB Trib went to press (press “send,” that is ...), the actual bill had not yet been filed. Stay tuned.

SIBs Make the G8

How Do You Pronounce “Lough Erne”? On February 10, 2013, Prime Minister David Cameron announced that he’s putting social investments on the agenda for the G8 summit to be held in Lough Erne, County Fermanagh, Northern Ireland. From The Telegraph:

THE SOCIAL IMPACT BOND TRIBUNE Dedicated to the proposition that: • large-scale private investment in high-quality SIBs • can substantially reduce some of our most incapacitating social problems • by scaling proven prevention programs delivered by growth-ready nonprofit organizations • that fully or substantially pay for themselves from recoverable government savings. Please note that I may have been directly or indirectly involved in any of the items covered here in a variety of formal or informal capacities. I don’t speak on behalf of any other organization; all views are entirely my own. Steve Goldberg Caffeinated Capital, LLC 53 Enslin Road Needham, MA 02492 [email protected] 781.898.5025

© 2013 Steven H. Goldberg

“Britain and other developed nations face a shared challenge – sorting out our debt problems and achieving economic growth. We need to do this at the same time as improving public services and tackling our deepest social problems.... That’s why this Government has placed such an emphasis on social innovation from charities, social enterprises and other businesses. Making this work requires a new kind of financial investment to help grow a bigger, stronger society. Britain is a global leader in this field. “We launched the world’s first social investment bank Big Society Capital and we invented the world’s first social impact bond to help fund payments by results in public services where government only pays for what works. “There is growing interest in Britain’s social investment model around the world. So I want to use our G8 presidency to push this agenda forward. We will work with other G8 nations to grow the social investment market and increase investment, allowing the best social innovations to spread and help tackle our shared social and economic challenges.”

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