1. Social Impact Bonds By: Jasper Kim, Juris D. Ewha Womans University
Graduate School of Int'l Studies
Seoul, South Korea

2. How to use Social Finance for projects?
Problems:
- Government funding is limited
- Private sector entities are currently not fully economically incentivized to work with the public sector to fund Social Projects (schools, education, training, etc) due to focus on returning shareholder value
Solution:
-Secure funding vis-a-vis "Social Impact Bonds" (SIBs)
- SIB structure is a "performance-based" public-private partnership (PPP)
- Incentivizes the private sector to "invest" in development projects through buying bonds and potentially (but not guaranteed) receiving interest payments on the purchased SIBs
- SIBs can work because it "speaks the language" of the private sector to get them involved in development projects
- Converts financial market "greed" to "good"
- Focuses on providing "stakeholder value" rather than mere "shareholder value"

3. What are Social Impact Bonds?
A Social Impact Bond is an investment vehicle designed to encourage private funding for promising social programs
Taps into new funding opportunities
Private investors fund a program’s delivery and operations
Public sector commits to paying the contractor only if improved social outcomes ("success metrics") are achieved
Taxpayers only pay for interventions that work
Third-party evaluation confirms that outcomes have been achieved before investors can be paid
Concept is relatively new and represents an innovative financing model
A S o c i a l I m p a c t B o n d i s a n i n v e s t m e n t v e h i c l e d e s i g n e d t o e n c o u r a g e p r i v a t e f u n d i n g f o r p r o m i s i n g s o c i a l p r o g r a m s
T a p s i n t o n e w f u n d i n g o p p o r t u n i t i e s
P r i v a t e i n v e s t o r s f u n d a p r o g r a m ’ s d e l i v e r y a n d o p e r a t i o n s
P u b l i c s e c t o r c o m m i t s t o p a y i n g t h e c o n t r a c t o r o n l y i f i m p r o v e d s o c i a l o u t c o m e s a r e a c h i e v e d
T a x p a y e r s o n l y p a y f o r i n t e r v e n t i o n s t h a t w o r k
T h i r d - p a r t y e v a l u a t i o n c o n f i r m s t h a t o u t c o m e s h a v e b e e n a c h i e v e d b e f o r e i n v e s t o r s c a n b e p a i d
C o n c e p t i s r e l a t i v e l y n e w a n d N e w Y o r k C i t y w i l l b e t h e f i r s t i n t h e n a t i o n t o i m p l e m e n t t h i s i n n o v a t i v e f i n a n c i n g m o d e l

4. SIB Transaction: Parties Involved
* Social Project: identified that can be solved with additional resources that are not available from the within the government.
Government
SIB investors (philanthropic organizations, companies, states, IGOs)
Intermediary: (usually a financial institution) solicits private capital;
Parties: together identify performance "Success Metrics";
Private $ solicited, invested in programs through the (financial) intermediary;
Evaluator: determines if success measures are met (yes or no);
BOTTOM LINE:
If yes: Government funds the designated Project (reimburses investors plus profit (interest payments) if met);
If no: Investors fund the designated Project

5. How it Works
Key point: Government and Investors agree on a "success metric" relating to a development project/vulnerable group to determine who provides funding

6. Background on Social Impact Bonds
Social Impact Bonds were first proposed and implemented in the UK:
Problem. Social programs w/certain attributes are underfunded:
Programs with large up-front costs;
Programs that serve large numbers of people;
Risky programs
Solution:
Use private capital to finance these programs

7. An Example - the Peterborough Experiment (UK)
Peterborough is a prison in the UK.
Sought funds to provide reentry services to short- term prisoners leaving Peterborough;
Raised 5 million pounds from private investors;
Targets a 10% reduction in recidivism;
Will pay out 7 million pounds if > 10% to Investors
Or 0 if less to Investors
Experiment is underway.

8. UK Peterborough Prison Pilot
A short-sentence prison in Peterborough, England with one-year recidivism rate of around 60 percent.
UK Justice Ministry has contracted with a nonprofit intermediary named Social Finance to deliver services to prevent recidivism.
The government will make payments to Social Finance only if the reoffending rate falls by at least 7.5 percent compared to the recidivism rate in a group of similar prisons.
If payments are earned, they will be made in the fourth, sixth, and eighth years based on outcomes achieved in working with prisoners during three consecutive two-years periods.
Social Finance has raised $8 million from social investors to finance service delivery by another nonprofit, the St. Giles Trust.
Social Finance estimates that if this intervention is successful and scaled across the UK, reductions in incarceration costs would more than cover the cost of the services.

9. Advantages of Social Impact Bonds
Funds social programs that would otherwise not be funded.
Can increase reliance on demonstrated effective practice.
Increases reliance on "evidence" to determine success (rather than ad hoc or subjective judgments);
Government bears less risk and may have to provide less funding while delivering higher quality services
Can encourage innovation (may make government more willing to fund risky programs);
Potentially increases community-based service infrastructure (SIBs will likely focus on services delivered by the private sector).

10. Disadvantages of Social Impact Bonds
Beyond the headlines, extremely complex.
May discourage innovation (programs may be limited to those with a demonstrable evidence base).
May substitute private services for public services and private sector may prefer profit to pro-social goals
Private market may prefer to serve low-risk, low-need, low-reward populations rather than high-risk, high- need, high-reward populations.

11. Questions to be Answered
The central question going forward:
How can research inform the selection of SIB- funded interventions and bond pricing?

12. Key to SIB Success: Disaggregating Risk from Uncertainty
We define risk as a variation in outcomes that is observable;
We define unobservable variation as uncertainty.
Investors are typically willing to invest in risky propositions if risks can be scored;
Investors will be less likely to invest as uncertainty increases.
Development of a model that maximizes observable risk and minimizes uncertainty is critical to the success of SIBs.

13. How will Candidate Programs be Identified?
Large and growing body of empirical evidence about effective programs has largely not been adopted by government and philanthropy;
SIB funded programs must be chosen objectively.
Again, the model must maximize observable risk and minimizes uncertainty;
Focus then is on probability of success, not the local average treatment effect.

14. Who will the Candidate Programs Serve?
Probability of success is partly a function of who gets the program;
Would like to figure out appropriate scale from prior research (but we cannot);
Instead, focus on the size of the target audience;
For example, in City Z, there are 5,000 felons returning to the community annually;
Literacy issues? Medical or education programs needed? etc
Better answers reduce uncertainty.

15. How will performance targets be developed
And, and how can targets account for risks in such a way that both investors and government agents would participate?
Uncertainty exists around:
Program effects are heterogeneous;
Measurement issues, identification problems;
Costs are uncertain;
Benefits measurement is uncertain.
Better if performance targets include uncertainty at each stage of analysis and the answer is expressed as a probability.

16. How will effectiveness be measured?
New/ risky/ controversial programs should undergo a randomized controlled trial.
Conducted by unbiased, rigorous researcher;
From game theory – repeated games increase stability of equilibriums, so keeping the same researcher should build trust.
If a SIB funds a well studied program, performance measurement of model fidelity is sufficient.

17. Presentation Overview
What are Social Impact Bonds?
Challenges to Their Implementation
NYC SIB case study

18. Partners
Goldman Sachs funds the project’s delivery and operations through a $9.6 million loan to MDRC;
Bloomberg Philanthropies provides a $7.2 million grant to MDRC to guarantee a portion of the investment;
MDRC oversees the day-to-day implementation of the project and manages the Osborne Association and Friends of Island Academy, the two non-profit service providers that deliver the intervention;
The Vera Institute of Justice, an independent evaluator, determines whether the project achieves the targeted reductions in reincarceration;
The Department of Correction pays MDRC based on reduced re-admissions and the associated cost savings and MDRC then pays the private investor.
G o l d m a n S a c h s f u n d s t h e p r o j e c t ’ s d e l i v e r y a n d o p e r a t i o n s t h r o u g h a $ m i l l i o n l o a n t o M D R C ;
B l o o m b e r g P h i l a n t h r o p i e s p r o v i d e s a $ m i l l i o n g r a n t t o M D R C t o g u a r a n t e e a p o r t i o n o f t h e i n v e s t m e n t ;
M D R C o v e r s e e s t h e d a y - t o - d a y i m p l e m e n t a t i o n o f t h e p r o j e c t a n d m a n a g e s t h e O s b o r n e A s s o c i a t i o n a n d F r i e n d s o f I s l a n d A c a d e m y , t h e t w o n o n - p r o f i t s e r v i c e p r o v i d e r s t h a t d e l i v e r t h e i n t e r v e n t i o n ;
T h e V e r a I n s t i t u t e o f J u s t i c e , a n i n d e p e n d e n t e v a l u a t o r , d e t e r m i n e s w h e t h e r t h e p r o j e c t a c h i e v e s t h e t a r g e t e d r e d u c t i o n s i n r e i n c a r c e r a t i o n ;
T h e D e p a r t m e n t o f C o r r e c t i o n p a y s M D R C b a s e d o n r e d u c e d r e - a d m i s s i o n s a n d t h e a s s o c i a t e d c o s t s a v i n g s a n d M D R C t h e n p a y s t h e p r i v a t e i n v e s t o

19. Funding & Payment: The SIB Component of ABLE
Goldman Sachs will invest $9.6 million in the intervention, fully funding the ABLE program at Rikers Island during its implementation. This investment will be structured as a loan to MDRC, a leading non-profit.
The Goldman Sachs loan to MDRC will ensure successful implementation of the ABLE program at Rikers.
Bloomberg Philanthropies will make a grant to MDRC in the amount of $7.2 million over that same four-year period. This grant will be held by MDRC in a guarantee fund to back the loan.
Public sector: will be obligated to pay for these services only if the ABLE program achieves predetermined reincarceration reduction targets that produce cost savings for the City.
—In this model, government and taxpayers only pay for success.
Payments for services performed are tied to the program’s success and are made from DOC to MDRC. MDRC, in turn, repays its lender, Goldman Sachs.

20. Addressing Adolescent Incarceration in NYC
Issue: those who enter jail as adolescents (16- to 18-year olds) have a high likelihood of re-entering the system in the years following their release
–Nearly 50% of 16- to 18-year-olds who leave Rikers return within one year
Program: Adolescent Behavioral Learning Experience (“ABLE”)
– Provide evidence-based intervention to year olds in DOC custody at Rikers Island and after release in the community
– The goal is to improve social decision-making, problem solving and self-control skills management.
– Estimated roughly 3,000 adolescents served each year for 4 years
– The Osborne Association and Friends of Island Academy will deliver the intervention through trained facilitators working closely with DOE and DOC staff
– Part of Mayor’s Young Men’s Initiative and the City’s commitment to improving outcomes for young black and Latino men
Goal: to decrease participants’ likelihood of future criminal behavior and reincarceration
Budget: $2.4 million annually for 4 years

21. Payment Terms for Final Evaluation (4 Years of Investment)
Reduction in Reincarceration
City Payment to MDRC ($)
Projected Long-Term City Net Savings ($)*
≥20.0%
$11,712,000
$20,500,000
≥16.0%
$10,944,000
$11,700,000
≥13.0%
$10,368,000
$7,200,000
≥12.5%
$10,272,000
$6,400,000
≥12.0%
$10,176,000
$5,600,000
≥11.0%
$10,080,000
$1,700,000
≥10.0% (breakeven)
$9,600,000
$ ≥ 1,000,000
≥8.5%
$4,800,000
*Savings after repayment and continued funding for program delivery.

22. Thank you
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