Social Impact Bond Technical Guide for Service Providers

November 2013

This guide was developed by the MaRS Centre for Impact Investing, with funding from the Ontario Trillium

Foundation and the Government of Ontario.

While several organizations and individuals were consulted during the development of this guide, its content

represents the views of the MaRS Centre for Impact Investing and does not necessarily reflect the opinions or

policies of these contributors. We would like to thank The J.W. McConnell Family Foundation and Social Finance

UK for their contributions.

Authors:

Ivy So and Adam Jagelewski

Editorial and policy contributions were provided by:

Antonio Miguel, Jessica Leifer, Sarah Doyle and Anne White

The MaRS Centre for Impact Investing recognizes the pioneering efforts and thought leadership of Social Finance

UK in developing the Social Impact Bond model, which informed the content of this guide.

For questions or comments, contact Adam Jagelewski at ajagelewski@marsdd.com.

An agency of the Government of Ontario.Relève du gouvernement de l’Ontario.

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Table of Contents

1. Introduction / 03

1.1 Context / 03

1.2 What is a SIB? / 04

2. What gaps do SIBs address? Characteristics of suitable interventions / 06

3. How may SIB financing impact a social service provider? / 08

3.1 Benefits and risks of SIBs for social service providers / 08

3.2 Potential roles for social service providers / 10

3.3 Examining the role of intermediaries / 10

3.4 Contracting models—special purpose vehicle versus direct contracting / 12

3.5 Relationship with investors / 13

3.6 Governance structure / 14

4. How to get from idea to action? Developing a SIB concept / 16

4.1 Initiating the SIB development process / 18

4.1.1 Defining social issue and target population / 18

4.1.2 Determining outcomes and assessing government interest / 19

4.1.3 Identifying interventions and outcome metrics / 22

4.1.4 Financial modelling and analysis / 25

5. What can service providers do to advance SIB development? / 26

6. Conclusion / 28

Appendix A: Summarized key questions for SIB development / 29

Appendix B: Learning resources / 30

Appendix C: Bibliography / 30

Endnotes / 31

Figures, Case studies, Lessons from abroad

Figure 1: The basic SIB model / 05

Figure 2: Special purpose vehicle (SPV) / 12

Figure 3: Direct contracting / 13

Figure 4. An example of SIB governance structure / 14

Figure 5: The paths to SIB development (from the perspective of a social service provider) / 16

Figure 6. Visualization of SIB economics (simplified) / 25

Case study A: Contract relationships in the Peterborough SIB / 12

Case study B: Identifying a target population—London homelessness / 20

Case study C: Children’s Aid Society (New York City) cost savings estimation / 21

Case study D: McKinsey & Company illustrative SIB financial model / 26

Lessons from abroad: How big is big enough? / 07

Lessons from abroad: What functions have intermediaries played in SIB development? / 11

Lessons from abroad: How does the SIB development process unfold? / 17

Lessons from abroad: Metrics and evaluation methodologies in existing SIBs / 24

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1. Introduction

The Social Impact Bond (SIB) is emerging internationally as a model to align the interests of public, non-profit and private sector stakeholders to achieve positive social outcomes in our communities.

The MaRS Centre for Impact Investing is producing a series of technical briefs on SIBs to share detailed information on the model and its most effective usage. This series includes a brief for each of the key SIB partners: government, social service providers and investors. It is our hope that these guides will streamline the exploration and/or development process for SIBs and reduce barriers to procurement, service implementation or the placement of capital within this new model.

SIBs represent a shift in the public and social sectors toward evidence-based policy and funding for outcomes, rather than program activities or outputs. Understanding this environment, demonstrating evidence and measuring outcomes are becoming increasingly relevant for social service providers seeking to attract funding for their programs.

While innovative financing models such as the SIB hold promise for sourcing additional capital to tackle pressing social challenges, careful consideration is required to assess the suitability, risks and implications of SIBs for each social issue. This paper will discuss the practical issues for social service providers interested in exploring and engaging with SIBs. We will address technical questions currently misunderstood and issues that may impede social service providers from engaging with SIBs to introduce or scale the delivery of their service. Some relevant questions include:

• What are the characteristics of programs that are suitable for SIBs?

• How might SIB financing impact a social service provider?

• What is the SIB development process for a social service provider?

While social service providers operating in a SIB structure may take multiple forms, from for-profit social enterprises to charities, this paper focuses on implications for non-profits providing social services to a population in need.

We aim to update our thinking and methodologies as the market for SIBs continues to develop in Canada. We welcome your questions and comments.

1.1 Context

Fiscal constraints, a shift toward funding on the basis of outcomes and an emerging impact investing marketplace are driving the development of new, innovative financing models in the social sector.

Fiscal reality: Governments and social service providers are operating in a new fiscal reality. While Canada has recovered from the 2008 financial crisis faster than other G7 countries, significant economic and fiscal challenges will be faced for some time to come. Governments will continue to contend with budget pressures, due in part to increasing demands on social services from an aging population, with the result that a climate of fiscal restraint is likely to remain a reality over the long term. At the same time, sponsorships and donations to support the social sector have experienced declines. While the total amount of charitable donations in Canada returned to an upward trend following a notable drop in 2008 and 20091, non-profit organizations and charities have recognized a need to explore new revenue-generating models to achieve financial sustainability.

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Shift toward funding for outcomes: This fiscal climate creates an imperative to ensure that investments yield their intended results, driving governments and other funders to shift their focus and reporting requirements away from program activities and outputs toward outcomes. Conversely, this places an onus on social service providers to demonstrate evidence of program outcomes and impact.

For the same reason, there is a growing need for innovative programs that improve outcomes at the same or lower cost, resulting in better services for Canadians and better value for public investments; however, governments tend to be risk-averse and may be reluctant to fund new programs.

Emerging impact investing marketplace: Investment models are developing that offer alternative financing vehicles and sources of capital to governments and social service providers. Over the past five years, the concept and practice of impact investing has matured significantly. Impact investing refers to the placement of capital with the intent to generate positive social or environmental impacts as well as financial returns. It appeals to socially minded investors and institutions looking to diversify their portfolios. While relatively nascent in Canada, the practice is moving to the mainstream.

This context provides an impetus for multi-sector collaboration. SIBs are designed to provide governments with a tool for shifting the risk of investing in innovative new programs to the private sector, to provide social service organizations with a new source of upfront capital to grow their programs, and to provide investors with blended value investment opportunities.

1.2 What is a SIB?

The SIB has the potential to deliver better social outcomes by scaling up prevention-based programs that reduce the need for expensive remedial programs. The SIB model is a pay-for-performance contract in which a government agrees to pay for improved social outcomes delivered by an intervention that tackles root causes (rather than providing remedial treatment) with the potential to generate downstream savings for government. To fund the service providers delivering the prevention-based intervention, investment is raised from private investors. If the intervention is successful and achieves the contracted social outcomes, the government will provide a return to investors from a portion of the projected cost savings realized from improved social outcomes. In other words, the investors provide the upfront capital to scale up the intervention, and receive a financial return if—and only if—the specified positive social outcomes are achieved as a result of the intervention.

A SIB is a partnership model involving five principal actors:

The service provider(s): Delivers social intervention to a specified target population.

The investor(s): Provides upfront capital to fund the program delivery and bears some or all financial risk.

The government or commissioner: Provides payments to investors if agreed outcomes are met. These payments repay the principal plus a financial return that depends on the degree to which outcomes improve.

The SIB delivery organization2 (intermediary): The counter body to the outcomes contract with government. While the SIB delivery organization role can be assumed by various parties (for example, an intermediary, a special purpose vehicle or the main service provider), the role of the SIB delivery organization includes brokering relationships between key stakeholders, sourcing capital, leading deal construction and managing ongoing performance of the SIB program. In some cases, the SIB delivery organization may identify and select service providers.3

Third-party evaluator: Conducts independent evaluations of the achievement of outcomes.

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Figure 1: The basic SIB model

The general structure of the SIB model functions as follows:

1. An outcomes contract is negotiated where the government agrees to pay for social outcomes.

2. Based on the outcomes contract, the SIB delivery organization raises funds from investors, who provide upfront capital for the social service intervention.

3. The social service providers agree to deliver services and receive funds to address the social issue for a target population.

4. Outcomes are evaluated and/or validated by an independent, third-party evaluator.

5. If outcomes are achieved, the government repays the investors for the achieved outcomes through the SIB delivery organization. In most cases, the positive outcomes result in cost savings for the government and a portion of these savings is passed on to the investors as outcome payments. These payments repay the principal plus a financial return. The financial return depends on the degree to which outcomes improve.

As the SIB market has matured, variations on this basic model have been developed.

Investors

Services

FundsProcessEvaluator

Government commissioner

Payments based on defined outcomes

Returns dependenton outcomes

Outcomesmeasurement

Target population

contract

OutcomesSocial ImpactBond deliveryorganization

5

1 2

3

4

Serviceproviders

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2. What gaps do SIBs address? Characteristics of suitable interventions

The SIB is not a panacea for capitalizing all social sector programs. In many cases, traditional funding streams will remain most appropriate. For instance, services with few quantifiable benefits associated with the transfer of risk to private investors are not suitable for a SIB model. Also, heavily regulated services may offer little scope for innovation. Further, in instances where the achievement of the desired outcomes is a near certainty, it may not make sense to incur the associated costs of raising working capital and delaying payment until outcomes are verified.

However, there are social issues that require new approaches and where a SIB may be suitable. The criteria can be summarized as follows:

Preventive approach: SIBs may be suitable for early or prevention interventions that reduce the need for costly remedial interventions paid for by government. The cost savings generated from tackling the root cause of a negative outcome provides financial incentive for governments to capture this value and look for new ways to fund it.

Under current fiscal pressures in public and social sectors, there are limited funds for preventive interventions. For example, currently only 0.35% of Ontario’s health budget is spent on health promotion and prevention.4 The SIB model is intended to open up new sources of capital to finance interventions that deliver positive outcomes for our communities in the medium and long term.

Quantifiable outcomes: Evidence of impact is important for both government and investors. Governments will want to quantify the social benefit and potential savings generated from the positive social outcome. Investors will want confidence that the intervention will meet the stated social objectives. However, not all social interventions can demonstrate a quantifiable social outcome; the ones that have more qualitative impact may not be suitable for a SIB financing model.

A successful SIB model requires a direct attribution of outcomes from the intervention. This requires an evaluation methodology that controls for impact from external (exogenous) factors and that can evaluate the intervention’s results against a comparison or counterfactual.

As an example, the SIB commissioned by the Essex County Council in the UK funds the delivery of Multi-Systemic Therapy (MST) to adolescents and their families at the edge of care or custody. For more than 30 years, MST has consistently demonstrated positive outcomes with chronic juvenile offenders. Based on the program’s success, randomized clinical trials were conducted to explore the feasibility and effects of adaptations of MST with other target populations. This includes two completed research studies with maltreating families.5

Innovative intervention: Organizations with a track record of success and an ability to be flexible and innovative when needed are strong candidates for SIBs—specifically, in the case of interventions that create positive outcomes but are not currently funded at scale through core government budgets. Despite their cost saving potential, the innovative nature of these programs may be deemed as risky compared to existing programs funded directly from core government budgets. In these scenarios, the risk transfer to private investors provides a low-risk way for the government to scale up these interventions by promising to pay only when outcomes are demonstrated.

Track record of success: Evidence-based interventions are excellent candidates for the SIB model. In many cases, community-level innovation takes place at a small scale and SIBs are well suited to expand what has been demonstrated as successful.

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Kristin Misner, Chief of Staff to New York City’s Deputy Mayor for Health and Human Services, describes the balance that a SIB should strike between innovation and evidence: “The sweet spot where there is sufficient evidence an intervention is likely to work, but not enough confidence on either the budget or city side to spend new dollars when the city or state is already spending money on treatment.”6 The SIB model is not suitable in situations when government believes there is a near guarantee the program will achieve the social outcomes. Those interventions should be funded directly by government.

Ability to scale: Service providers should have the capacity to deliver the intervention at a scale that justifies the effort and costs of structuring a SIB. The target population served by the intervention should also be sufficiently large to require a dedicated service.

Lessons from abroad: How big is big enough?

Scale is crucial in generating sufficient cost savings to incentivize use of the SIB model. But how big is big enough? There is no

hard-and-fast rule to determine the appropriate size of the intervention: it depends on the cost-saving potential per client, the

capacity of the service provider to deliver at scale, the nature of the population, and the power of the evaluation methodology,

among other factors. A scan of the existing SIBs and those in development provides a sense of the range in size of some of the

current SIB applications:

• The world’s first SIB in Peterborough, UK, involves three cohorts of 1,000 short-sentence male prisoners (3,000

participants total) over a seven-year service period.7 Historically, about 60,000 prisoners are sentenced for short

sentences (less than 365 days) each year, and 60% reoffend within a year of release. The social and economic cost to the

UK is £7–10 billion a year.8

• The Essex SIB will fund a five-year program for intensive supports to approximately 380 adolescents and their families

with the goal of keeping them out of the state’s residential care program.9 The estimated cost of placing an adolescent in

residential care for one year is between £25,000 and £180,000.10

• The aim of the City of London’s SIB is to improve outcomes for 831 people who move in and out of rough sleeping

(sleeping on the streets due to homelessness). The estimated average cost to the public purse per individual is £37,000

over five years (net present value). This equates to more than £30 million over the five-year timeframe. In contrast, the

maximum cost of the SIB if optimum outcomes are achieved is £5 million.11

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3. How may SIB financing impact a social service provider?

The shift in monitoring, evaluating and reporting from outputs to outcomes may impact an organization’s operational model, performance measurement practices, organizational culture or partnerships. The specific impact will depend on the organization’s readiness for an outcomes-based approach to delivering social services and the organization’s role in the SIB structure. The following section explores benefits and risks of the SIB model, possible SIB roles for social service providers, contracting models, investor relations and governance structures.

3.1 Benefits and risks of SIBs for social service providers

The key benefits, risks and risk mitigation strategies for SIB social service providers are below.

Benefits

Long funding horizon: Dissimilar to most funding models, the SIB provides a stable and predictable revenue stream for social

service organizations. Upfront working capital is raised for the entire duration of the SIB program. Long-term funding allows

social service providers to improve their financial planning and resourcing, and operate on a timeframe required to achieve

the target social outcomes. Funding is not predicated on government budget cycles or granting timelines. Most SIBs have

implementation timelines of three to seven years.

Flexibility and innovation: In a SIB, success is not determined by the execution of particular programs or activities, but by

achieving a social outcome. As such, SIBs encourage service providers to be responsive to service user needs to deliver on

those outcomes. The model creates room for freedom and flexibility, innovation, and solutions-oriented thinking.

Culture of collaboration: SIBs do not focus on the discrete impact of separate programs, but on the overall impact of an

organization’s services. In so doing, they incentivize social service programs to work together to ensure the success of

their clients. This fosters a culture of collaboration across programs and service providers that have shared goals and offer

complementary services.

Growth capital to scale: SIBs provide access to growth capital to scale up operations and build organizational capacity.

Service providers that have realized success at a small scale but cannot access capital to expand their operations will benefit

from this opportunity.

Opportunity to demonstrate value: SIBs provide service providers the opportunity to demonstrate their value to

governments and other funders. If outcomes are achieved and government cost savings are realized, the social service

provider has a strong case for continued funding from core government budgets.

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Risks Mitigation strategies

Reputational risk: In the event a SIB program does not

achieve the required social outcome, the perception

of failure may negatively impact future funding

opportunities. For early pilots, the media attention

received by SIBs will heighten this risk.

• Prior to committing to SIB service delivery, social service

organizations should conduct honest assessments of their

ability to deliver on the specified outcomes.

• Service providers can advocate for graduated levels

of success in the outcomes contract to avoid an “all or

nothing” scenario.

• A robust performance monitoring and evaluation system

with intermittent reporting to enable “course corrections”

will increase the probability of success.

• Service providers should evaluate and communicate

the positive outcomes achieved, even in cases when

performance falls short of the outcomes set out in the

contract.

• Service providers can complement the social services with

activities that will improve receptiveness to innovation in

the sector.

Execution risk: SIBs often require the partnership

of multiple service providers to deliver on a single

social outcome. Multi-party, cross-sector initiatives

introduce new complexities for many organizations.

Execution problems may occur as a result of unclear

delineations of authority and accountability or poor

communication and information systems. Some service

provider SIB contracts may be terminated as a result of

underperformance.

SIBs can impose significant managerial, performance

and measurement burdens on service providers for

whom these activities are unfamiliar.

• Contracts should define lines of authority and

accountability and the arrangement to capture and share

data on progress toward outcomes. Strong communication

systems should be established.

• The SIB implementation design should include

considerations of assessments for course corrections to

ensure smooth execution.

• Organizations should be aware of the managerial,

performance and measurement needs related to a SIB, and

allocate resources or identify external supports for these

activities.

Perverse incentives (leading to undesired results):

The pressures to meet outcome targets may result in a

tendency for service providers to cherry-pick easy-to-

serve persons while neglecting needy individuals. This

may lead to undesirable results for the target population.

• Outcome metrics must be carefully designed to account for all

possible scenarios.

• Outcome metrics should dis-incentivize cherry-picking by

disallowing outcomes that can be achieved by recruiting

individuals that are most likely to succeed into the service.

Outcomes are often structured based on the results for an

entire population.

Sole reliance on SIB funds: SIBs are time-bound

funding mechanisms with no obligation from

governments or other funders for funding past the

defined period. SIB providers that neglect fundraising

activities over the duration of the SIB may risk losing

their donor and funder base.

• Service providers should maintain their plans for funding

and financial sustainability to fulfill their missions post-SIB.

• Service providers should engage in discussions with

governments and investors to plan for the transition period

post-SIB.

• Providers should leverage capabilities to seek out additional

sources of funding, including pay-for-performance

opportunities.

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3.2 Potential roles for social service providers

In most existing SIBs, service providers have taken two different roles: working as part of a collaboration in a “wrap-around” model, or scaling up their intervention and operating as the sole service provider. As the SIB model continues to adapt to address different social issues, new models and roles may emerge.

Wrap-around model: In this model a set of providers works together as a coalition to achieve the defined outcome for the target population. No primary service provider is identified, and the providers are each accountable to the performance standards specified in their contracts with the SIB delivery organization.

As an example, the Peterborough SIB in the UK consists of a set of four providers working together as “One* Service” to support short-sentenced prisoners released from HMP Peterborough, a prison in the UK — St. Giles Trust, Ormiston Children and Families Trust, YMCA and Sova. St. Giles Trust and Ormiston Children and Families Trust focus on an inmate’s immediate needs such as accommodations, medical services, family supports, employment and training supports, benefits and financial advice before and after his release from prison. Sova and YMCA assign volunteers to support the ex-prisoner and continue the work on longer-term objectives over the subsequent months.

A case management system was developed to allow all the partners to input information so that the One* Service can offer the best course of action for the client involved.12

Sole service provider model: In this model only one service provider organization is accountable for meeting the performance standards specified in the service provider contract.

As an example, the Essex County Council in the UK commissioned a SIB in 2012 to improve outcomes for adolescents aged 11 to 16 at risk of going into care. Action for Children, a leading children’s charity that supports the needs of the most vulnerable children and families in the UK, was chosen as the sole service provider to deliver Multi-Systemic Therapy (MST), the selected intervention for the target population,13 an approach used to break negative cycles of behaviour.14

3.3 Examining the role of intermediaries

Intermediaries play a key role in the design and execution of SIBs. The role and responsibility of an intermediary varies depending on the capabilities of other stakeholders in the partnership and may include:

• Brokering partnerships among stakeholders

• Engaging government commissioners

• Conducting a feasibility study for the SIB model

• Developing the SIB operating model and business plan

• Mapping existing service provision

• Structuring the SIB model

• Developing contract terms

• Engaging potential investors

• Overseeing performance management throughout the life of the SIB program

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An organization providing services to the target population can also be an intermediary if it has the capability to broker partnerships, devise a holistic strategy, structure transactions and raise capital for the SIB. However, involving an external intermediary with core competencies in these areas offers significant benefits:

• Developing a holistic strategy with a bird’s-eye-view perspective

• Bringing expertise and experience in feasibility analysis, deal structuring, risk assessment, financial fitness and/or performance management

• Identifying partnership opportunities and brokering relationships in the intermediary’s network

• Leveraging previous experience to lead negotiations on behalf of service providers or other stakeholders

• Building upon existing relationships to engage investors and raise capital

• Fostering collaboration throughout the development and execution of the SIB

Lessons from abroad: What functions have intermediaries played in SIB development?

Feasibility analysis and contract negotiation: Social Finance UK, an intermediary, worked with Essex County Council (ECC)

on a six-month feasibility study to investigate the potential for a SIB to fund services for vulnerable children, young people

and their families. Following the feasibility study, ECC announced their intention to procure a SIB and published tender for an

outcomes contract. Social Finance UK selected service providers, worked with investors and engaged in bidder dialogue with

ECC on behalf of Children’s Support Services Limited (CSSL), the special purpose vehicle created for this SIB. Social Finance UK

acted on behalf of CSSL in contract structuring and negotiation, and currently plays an advisory role.15

Financial advisory and capital raising: In New South Wales, Australia, UnitingCare Burnside was contracted as the delivery

provider in a Social Benefit Bond (the term for a SIB in Australia) to strengthen families and prevent children from entering

out-of-home care. Social Venture Australia, the intermediary, has taken on a financial advisory role. It will market the bond to

potential investors with the assistance of the government and UnitingCare Burnside.16

Program and investment management: MDRC, an education and social policy research organization, is serving as the

intermediary in New York City’s Rikers Island SIB. MDRC is best known for mounting large-scale demonstrations and evaluations

of policies and programs targeted to low-income people. The SIB will fund a cognitive behavioural therapy program called Moral

Reconation to be delivered to adolescents at Rikers Island correctional facility by The Osborne Association and Friends of Island

Academy.

MDRC piloted the program from February to June 2012. In spring 2012, MDRC issued a Request for Proposal for a service

provider and selected a team made up of The Osborne Association and Friends of Island Academy. The program launched in

January 2013, with all adolescents at Rikers beginning to receive the intervention services. MDRC is overseeing the project

implementation of this SIB, which funds the program’s full-scale implementation.17

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3.4 Contracting models—special purpose vehicle versus direct contracting

The foundation of a SIB is an outcomes contract between the government commissioner and the SIB delivery organization. This SIB delivery organization can be a social service provider or a special purpose vehicle (SPV), a legal entity created for the SIB that allows it to contract with various parties. An SPV provides increased flexibility and risk mitigation for some stakeholders.

Figure 2. Special purpose vehicle (SPV)

ServiceProvider(s)

Flow of funds

Contractual relationships

Government commissioner

Outcomes payment

paid from government to

SPV as per outcomes contract

Outcomes contract

signed between

government and SPV

SPV contracts with

service provider(s) to

deliver services

Working capital from

investors to service

provider(s), through SPV

Specialpurposevehicle

Investor(s)

Invest directly into SPV

SPV model: The SPV is a legal entity created specifically for the SIB. It may take the form of a limited partnership (LP) or limited liability company (LLC). In the future, other legal structures may be explored.

In the SPV model, the government commissioner contracts for outcomes with the SPV. The SPV contracts with service providers and, in some cases, an intermediary to undertake advisory or other services. Payments are made from the government to the SPV if the contracted outcomes are achieved.

SIB investors typically invest directly into the SPV and have ownership of the entity. The SPV is governed by a board of directors comprised of representatives from the investor organizations. The board oversees the monitoring of the performance of the SIB program and holds the service providers accountable to the performance standards specified in their contracts.

Government commissioners may prefer to contract with an SPV as it allows for additional flexibility. If the service provider consistently underperforms during the term of the SIB contract, the SPV can terminate its contract with the service provider per the terms of the agreement, and replace it with a new service provider to deliver on the social outcomes.

Case study A: Contract relationships in the Peterborough SIB

The outcomes contract is between the government commissioner (Ministry of Justice) and Social Impact Partnership, the

SPV. Social Impact Partnership contracts with service providers and also contracts with Social Finance UK, the intermediary,

to undertake advisory and performance management work. If the specified outcomes are achieved, the outcomes payments

are made from the government to Social Impact Partnership, which is structured as a limited partnership; SIB investors have

ownership of this entity by investing directly into the SPV. Social Impact Partnership is governed by a board of directors,

comprising representatives from the investor organizations, which oversees the monitoring of the SIB program’s performance

and holds the service providers accountable.18

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Figure 3. Direct contractingFlow of funds

Contractual relationships

Government commissioner

Outcomes payment paid

from government to

service provider as per

outcomes contract

Outcomes contract signed

between government

and service provider

Outcomes payment

passed from service provider

to investor per investment

term sheets

Working capital invested

directly from investor

to service provider

InvestorServiceprovider

Direct contracting model: In this model, the government commissioner contracts directly with the service provider. Working capital is invested directly in the social service provider. Outcome payments are made from the government to the service provider if the outcomes in the contract are achieved. These payments are then passed from the service provider to the investors according to the terms of their contract. If the government-contracted outcomes are not achieved, then outcomes payments are not made to the service provider and will not be passed on to the investor. In this model, intermediaries are contracted directly by the service provider, the government or the investors. An SPV may still be used as a legal structure to engage in the financial transactions in this scenario, but only if it is created, owned and managed by the service provider.

Most existing SIBs employ an SPV rather than a direct contracting model. The SPV model provides better flexibility for both government and investors. In the case of underperformance, this model enables the contract with the service provider to be terminated, lowering risk for investors and increasing the attractiveness of the investment. In addition, direct contracting may impose a large administrative burden and significant demands on the social service provider for financial and contracting expertise.

A third option is to develop a SIB delivery organization as a partnership between the investors and the service providers. This model is most suitable when the service is focused, a single provider can deliver the intervention, and the government wishes to exercise authority over which organization will be the lead provider.

Another potential variation is a joint venture between investors and government as the SIB delivery organization. Such a structure would require careful consideration, particularly around issues of governance and intervention.19

As the SIB market develops, these contracting structures will likely evolve. Service provider organizations should understand the risks and implications of different contracting models for their organizations when considering their participation in a SIB.

3.5 Relationship with investors

Some critical literature on SIBs suggests that profit-maximizing motivations of investors may pose a risk for service providers. This section will analyze the relationship between these two stakeholders and discuss implications for social service organizations.

• Working capital: One of the benefits of the SIB model is that it provides upfront funding for service providers. This working capital may be released in a phased approach or all at once, depending on the

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specific arrangement of the service provider’s contract. Service providers should ensure the arrangement meets its cash flow needs and improves, not limits, its balance sheet.

• Profit orientation and alignment with service provider’s goals: Although private investors are seeking a financial return through the SIB model, their financial motivations should align with the service provider’s goals. Both parties are seeking to achieve the contracted social outcomes that lead to cost savings large enough to justify a return on investment for the investor, but due caution should be exercised in defining metrics and the measurement of outcomes. The metrics and evaluation methodologies must address the social issue and align with service provider interests.

• Termination: The contract between the government or SPV and the service provider may include terms for termination. Under the SPV model, depending on the contractual requirements, investors can replace service providers that underperform. To allow for the benefit of flexibility for the service provider to achieve the outcomes, performance targets should be meticulously designed to avoid conflict with the SIB’s outcomes focus.

While it may be tempting to base a service provider’s performance levels on achievement of the social outcomes specified in the SIB’s outcomes contract, this is likely not appropriate. The SIB model is fundamentally based on the transfer of risk from the government to private investors who may be rewarded for assuming the risk. While the service provider should be held accountable in cases of underperformance, it should not be obligated to take on the risk related to outcome achievement. Even for top performing service providers, a SIB may not achieve the government-contracted social outcomes.

Examples include adherence to project budget, key operational performance indicators such as volumes of referrals, and requirements related to data collection used for outcome measurement.

3.6 Governance structure

The appropriate governance structure depends on the specific model and engagement of SIB players. In a SPV model, responsibility for performance rests with a manager with oversight from an external body.

Figure 4. An example of SIB governance structure 20

Government commissioner’s

contractmanager

Regular contract

review

Regular reporting

and board meetings

Monthly reporting

and regular contract

review

Serviceprovider

SPVperformance

manager

SPVboard ofdirectors

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The roles and responsibilities of this example governance structure:

• Government commissioner’s contract manager: Oversees and manages the contract between the commissioner and the SPV. Regular monitoring of the outcomes contract may include quarterly or monthly meetings with the SPV performance manager and/or the service provider to ensure that operational and contractual requirements of the outcomes contract are being met or are on track to be met.

• SPV performance manager: Monitors and supports the delivery of outcomes against targets and contractual key performance indicators, and ensures effective data analysis and reporting to investors to facilitate informed decision-making. The SPV performance manager represents the SPV’s interests to ensure service provider compliance with quality standards and contractual obligations, including service delivery, staffing levels and compliance with security and data protection plans. The performance manager, although not directly involved in service delivery, will spend time in the locality where services are being delivered. The SPV performance manager supports the service delivery partner in managing stakeholder relationships and linking into the local community.

The performance manager is often responsible for liaising with stakeholders to ensure ongoing support for the intervention. He or she can foster shared learning, troubleshoot problems, regularly analyze data and monitor performance to facilitate changes for continuous improvement to ensure that the program is on track to achieve the target outcome.

• Service provider: Is accountable to the quality standards and contractual obligations set in the contract with the SPV. The service provider works with the SPV performance manager to fulfill data and reporting needs to facilitate changes for continuous improvement. Meetings and discussions with the SPV performance manager should focus on performance, expenditure and service improvement.

• SPV board of directors: Comprises investors in the SIB. The SPV board of directors meets regularly to review reports from the SPV performance manager on operational performance and any issues that arise. Contract modifications and executive decisions like the release of funds to the service providers are made by the SPV board.

In some cases, an advisory board, consisting of experts in the social issue area, may also be created to provide recommendations to the SPV board of directors.

Although service providers are accountable to the SPV board of directors, the board of directors’ scope of governance applies only within the contract of the specific SIB project. Non-profit organizations are ultimately governed by and accountable to their own board of directors.

Governance structures should be modified to suit the needs of the intervention and stakeholders. Prior to committing to delivering SIB services, social service organizations should be comfortable with the governance structure proposed, the reporting mechanism and other requirements.

16

4. How to get from idea to action? Developing a SIB concept

The service provider’s role in SIB development will vary depending on the maturity of the local SIB market. Today, many social service organizations have become involved with SIBs by responding to government requests for proposals. Other organizations have taken a proactive approach by developing SIB proposals and

submitting them to government for consideration.

In a nascent market where innovation is readily practised, the path to SIB development is not confined to one specific approach. While governments have indicated strong interest in exploring this model and may be conducting analysis on suitable social issues from their perspective, service providers also have the opportunity to analyze the feasibility of applying the SIB model to their interventions, and may proactively engage governments to consider their proposals. Figure 5 illustrates two paths to SIB development.

When governments initiate the SIB development process, service providers often have an opportunity to submit a concept as part of the government’s process in identifying potential opportunities. Interested governments may conduct further concept feasibility analysis on the submitted opportunities, and eventually open tender for a related outcomes contract as a result of this analysis.

Alternatively, service providers may initiate the process by proactively developing their SIB concept and engaging government through the presentation of a proposal or business case. The business case may enable government leaders to assess the SIB’s feasibility and open tender for a related outcomes contract.

Figure 5: The paths to SIB development (from the perspective of a social service provider)

LaunchSIB

program

Outcomes contract

signed

Preferredbidder(s)selected

Governmentopens tenderfor outcomes

contract

Government assesses

SIB concept feasibility

Government initiated process:

Respond to a government call for SIB concepts, directly or through

an intermediary

Service provider initiated process:

Define an issue area and target population; engage government

on a SIB concept, directly or through

an intermediary

An intermediary may:

– support development of the intervention, outcomes measurement framework, SIB structure, and financial model

– support due diligence

– identify investors and establish in-principle commitments

– respond to the public tender

Raise capitalby finalizingin-principle

commitments

Provide financial advisory, deal structuring, contracting

advisory and other services

17

Depending on the size and scope of the outcomes contract, the government’s procurement process may take shape as an open competitive process or one that is more closed. In some cases the government may undertake a pre-procurement engagement with potential SIB providers (investors and service providers) and offer advanced notice of a probable forthcoming contract.

Once the government indicates its intent to procure, the social outcomes service providers may work with an intermediary to prepare the SIB model in response to the government’s tender. In some scenarios, the government may wish to engage service providers and intermediaries separately; in this case, service providers would submit responses to the government directly.

Lessons from abroad: How does the SIB development process unfold?

Essex County: The SIB development at Essex County began in December 2010 with a feasibility study to examine the

suitability of a SIB model to address the problems of vulnerable young people and their families by Social Finance UK, an

intermediary. Following the Essex County Council’s announcement of its intent to procure a SIB in February 2012, Social

Finance UK posted a public expression of interest to identify service providers for the SIB. Acting on behalf of the SPV

created for the SIB, Children’s Support Services Limited, Social Finance UK reviewed service providers. The selection process

considered the organization’s ability to deliver Multi-Systemic Therapy, the chosen intervention for the SIB, as well as its

organizational capacity, among other factors. Ultimately, Action for Children was selected. It was through expression of

interest that this service provider became involved with the process. The award of the outcomes contract was announced in

November 2012.21

Massachusetts: In May 2011, Massachusetts put out a Request for Information (RFI) on social innovation financing.22 In

January 2012, the state issued two sets of Requests for Responses (RFRs) for social innovation financing pilots, one on

homelessness and one on youth. For each social issue two RFRs were released, one for a service provider and another for

an intermediary. The successful bidders from each RFR won the rights to negotiate with the government toward contract

agreements.23

Children’s Aid Society, New York: In late 2011, the Rockefeller Foundation granted funds to Children’s Aid Society, a non-profit

that provides comprehensive supports to families to help low-income children, to plan a SIB that could scale up its successful

juvenile justice program. This grant supported the initial research, modelling and population-targeting projects to develop a

SIB focused on aiding young people involved with the justice system. Children’s Aid Society submitted SIB proposals to the

New York State government for consideration.24

18

4.1 Initiating the SIB development process

The following sections are designed for social service providers who wish to initiate the SIB development process. This would occur when government has not offered detailed guidance on issue areas and target populations of interest to address through a SIB.

In a government-initiated process, the government determines a specific social issue and/or target population to address through a SIB, which it states in its tender documents for an outcomes contract. In this case, service providers should begin their work by identifying fit with their programs and consider engaging an intermediary to prepare a response to the government’s tender.25

The service provider-initiated process can be separated into four stages:

1. Defining the social issue and target population

2. Determining outcomes and assessing government interest

3. Identifying intervention and outcome metrics

4. Conducting financial modelling and analysis

Non-profit social service providers will need to have the resources or internal support to progress through the four outlined stages. Organizations may seek external support with social finance expertise to augment their capacity to undertake this work.

What if a SIB is not feasible? Not all social issues or interventions are suitable for a SIB model. Organizations may discover partway through the development process that a SIB model may not in fact be implementable. Nevertheless, the associated learning should be valuable for the social service organizations, as the exploration of models like SIBs allows stakeholders to consider innovative funding models and expansion strategies. Further, the consideration of outcomes and advanced performance measurement systems, a key component of the development process, is increasingly relevant for social service organizations, regardless of their participation in a SIB.

4.1.1 Defining social issue and target population

SIBs work to tackle social issues encountered by specific populations. When developing a SIB proposal, non-profit organizations must first consider the social issue to address. Social issues may be prioritized based on their fit for a preventive approach, the propensity for quantifiable outcomes, or the potential for government cost savings or cost avoidance as a result of addressing the social issue.

The second consideration is whom the SIB program will help, or the “target population.” An ideal target population is a group underserved or ineffectively served in the current system, with poor outcomes associated with significant government expenditures to address the symptoms of the experienced social challenge.

The target population should be easily identifiable and accessible for intervention. Accessibility is important to ensure that services can be adequately delivered and outcomes can be adequately measured. A fine balance must be struck regarding the population’s size: it should be small enough that improvements in the population’s outcomes are realizable, but large enough to necessitate a dedicated service. The population must also be sufficiently large that the effect of the program could demonstrate a statistically significant result for the participating sample. The goal is to define a target population whose outcomes could be significantly improved by a prevention-based service. The social issue faced by this population should align with the organization’s mission.

19

4.1.2 Determining outcomes and assessing government interest

Once the target population is identified, the organization must determine the outcomes that need to be improved for the population and assess the government’s interest in the proposal. Defining the positive outcomes to be achieved is crucial in defining the objectives and scope of a SIB project. When determining outcomes, social service organizations should consider the following questions:

1. What outcomes need to be improved for the target population and what would a successful intervention achieve?

2. How does the outcome correspond with government cost savings or cost avoidance?

3. What is the government’s appetite in achieving these outcomes through new finance models?

An important step in the process of developing a SIB concept is identifying which government departments and jurisdictions are responsible for the specific social outcomes and bear the costs of the social challenge. These are the relevant government stakeholders for the SIB’s development. Government stakeholders need to understand the current downstream costs that are incurred by the target population due to the poor outcomes. An estimate of the costs currently imposed on these departments and jurisdictions as a result of the social issue should be developed. Where possible, the current and historical rates of downstream services and related costs should be estimated.

For example, if the social issue identified is homelessness, and because homeless individuals often use shelters, health services and even criminal justice services, organizations should estimate the rates of service and related costs of shelters, emergency room visits, inpatient and outpatient services, substance abuse-related treatments and detention in police cells. Sources of data for these estimates may include government budgets, historical rates of services, market rates and previous studies and reports on the social issue. Organizations may wish to reach out to academics, researchers or data hubs such as Statistics Canada in this exploration.

20

Case study B: Identifying a target population—London homelessness

London’s (UK) SIB for rough sleeping will run for three years. It is intended to improve outcomes for a cohort of 831 people

who move in and out of rough sleeping and tackle the fundamental issues that often prevent them from benefiting from

existing service provision.

The cohort comprises Londoners recorded as seen bedded down on the streets in the previous quarter, or living in a

rough sleeping hostel and seen bedded down on the streets at least six times over the previous two years in the Combined

Homeless and Information Network (CHAIN) database. CHAIN is a comprehensive database that records individuals’

demographic information, support needs and movement in and out of rough sleeping and hostel accommodations. The

database is unique to London.

It is estimated that the average cost of the cohort to the public purse is £37,000 per person (net present value) over five

years. For 831 cohort members this exceeds £30 million over a five-year period. If optimum outcomes are achieved, the

maximum cost of the SIB will be £5 million. The diagram below illustrates an identified gap in services specifically targeting

the “in between” rough sleepers.

TARGET POPULATION SERVICE PROVISION SOCIALNEED

POPULATIONDEFINITION

All rough sleepersin London

Individuals rough sleepingfor one night

Most entrenched rough sleepers:seen sleeping rough in 5+ years out ofthe last 10, and/or seen rough sleeping 50 times or more over the last 10 years.

No Second Night Out project(59% of rough sleepers had only one night out)

Target population of London homelessness SIB (approx 800)

“205s” Initiative: targeting approx 250 of the most entrenched rough sleepers

Rough sleepers “in between”: seen in the last quarter or at least6 times over the last 2 years.

Source: UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). Greater London Authority: Homeless people. Retrieved from http://data.gov.

uk/sib_knowledge_box/greater-london-authority-homeless-people

Antonio Miguel, Social Finance UK (personal communication), 2013

21

Case study C: Children’s Aid Society (New York City) cost savings estimation

In 2011, Children’s Aid Society conducted analysis to determine how to scale up a successful juvenile justice program. They

then analyzed several factors to determine the scale of the costs related to the reincarceration of a young parolee population.

However, Children’s Aid Society recognized that a more stringent definition of cost savings could also be used to reflect the

fact that the agency does not reduce its budget proportionately for each person who avoids prison. Centralized administra-

tive costs rarely decrease, so a few empty beds in a prison might not be associated with significant cost savings.

Data requirement Data source Data

point

How many people does the problem affect?

Percentage of young parolees

that return to prison

Report from New York State’s Department of Corrections and Community Supervision on

people released from prison, including rates of return to prison for young people released

50%

Number of people 24 and under

that were released to parole

supervision in New York City

New York State’s Division of Criminal Justice Services puts out annual data reports, including

data on the number of parolees under supervision. Children’s Aid worked with state researchers

to break down the number of new parolees each year by age to confine it to youths 24 and under.

1,648

in 2011

To estimate the number of people the problem affects, multiply the number of young people on parole by the reoffending rate: 50% x 1,648 =

824 young adults return to prison

How many resources do each of these people demand?

Average length of time the

young adults stay in prison

Data from state 228 days

To estimate the number of days in prison from the reincarceration of young adults: 228 x 824 = 187,872 days in prison

Total annual budget spent on

prisons, divided per inmate

Price of Prisons New York, Vera Institute of Justice Fact Sheet $60,076

per inmate

per year

How many resources do each of

these people demand?

= $60,076 / 365 $164

per day

To estimate the cost of 187,872 days in prison: $164 x 187,872 = $30.9 million

The Vera Institute of Justice’s Cost–Benefit Analysis Unit had previously analyzed marginal costs for New York State prisons,

determining the average cost per bed was $129 per day, assuming a minimum of 200 beds per year saved. Thus, Children’s Aid

assumed that each day a person avoided prison would result in savings of $129.

Multiplying this rate by 187,872 days (number of days the young parole target population spends in prison), Children’s Aid estimated

that the state spends close to $24.2 million on this population.

Children’s Aid recognized that the Corrections Budget is not the only one affected by a reduction in reincarceration; there are other

cost savings possibly realized by parole offices, courts and prosecutors. However, the reduced time in state prison was deemed to

be the primary cost driver, and was the focus of their cost estimate.

Source: Golden, M. (2013, January). Developing a Social Impact Bond: Lessons from a provider. New York: The Children’s Aid Society.

22

4.1.3 Identifying interventions and outcome metrics

The design process of a SIB model provides an opportunity to partner with organizations with complementary interventions that can work together to produce the desired outcome. In many cases, more than one intervention will be needed to produce the desired social outcome. Once an intervention has been identified, a scan of other social services that support the same target population should be conducted, along with an assessment of whether additional interventions are required to produce the desired outcome. If they are, consideration should be given to building a SIB program that delivers wrap-around services provided by multiple service providers.

All SIB stakeholders must agree on the mechanism for assessing whether the social outcomes have been achieved. The identification of suitable metrics to make this assessment is a key determinant of whether a SIB is the appropriate instrument for addressing a particular social issue.

The metrics should be structured to work with those in the entire scope of the population, rather than a subset of those that are most likely to succeed. The metrics should also guide the service provider to do what is best for the individual. For example, while binary metrics such as whether or not a child enters care may offer a clear-cut measurement, they may also lead to a perverse incentive. It may be possible that a short time in care is the best solution for a child and their family to break from a highly charged situation, but counted as a failed outcome under a binary metric (i.e., whether a child enters care). Designing the metric as a frequency of occurrence—such as the number of days spent in care—allows more flexibility to provide suitable services, and encourages service providers to work with the entire population, even the cases in which entering care for a brief period may be best for the family.

The measurement framework should be able to attribute the change in social outcomes directly to the SIB-funded interventions and account for some of the factors in the intervention that may affect the outcomes. This requires a comparison between the outcome that was achieved in the target population and a “counterfactual”—what would have occurred in the absence of the intervention—or “control” group. A number of evaluation methods can accomplish this.

Evaluation methodology What it looks like in action Considerations

Randomized control trial:

Individuals in the defined target

population are randomly allocated

to be a participant for the SIB

intervention, or to receive service as

usual. Outcomes for both groups are

compared.

An intervention targeting homelessness

recruits 2,000 homeless people. The

individuals are randomly assigned to one

of two groups: 1) treatment as usual, where

they continue to receive the services

regularly available; or 2) the SIB program

intervention. The impact of the intervention

is assessed by comparing the results of

both groups following the intervention.

• Those randomized to treatment as

usual are not able to receive the

SIB-funded service for the length

of the outcomes tracking period;

this may carry ethical implications.

• Double the number of participants

must be targeted and their

outcomes assessed since half will

not receive the intervention.

23

Evaluation methodology What it looks like in action Considerations

Regression discontinuity design:

Comparison of individuals with scores

just below or just above an eligibility

threshold for participation in the

SIB program. This methodology

is based on the premise that the

difference between candidates who

just miss and just make a threshold

are negligible, and thus comparison

of their outcomes post-intervention

reveals the impact of the intervention.

An intervention is targeted toward students

who scored below 50% on a diagnostic test.

The evaluation framework may be based

on comparison of the post-intervention

outcomes of students who scored just

above 50% with those of the students who

scored just under 50% pre-intervention.

• Applied in a SIB structure,

this may incentivize service

providers to focus their supports

on individuals close to the

threshold, even if those are not

the most needy clients.

• This methodology is only

applicable when individuals must

meet a quantitative threshold to

participate in the SIB program.

Difference in differences comparison:

Comparison between similar

populations with similar trends

related to the social outcome of

interest: one that is offered the

SIB program and one that is not.

The difference between pre- and

post-intervention outcomes for the

population receiving the intervention

is compared with the difference

between pre- and post-intervention

outcomes for the population that is

receiving treatment as usual.

Two prisons have very similar recidivism

trends. One prison receives the SIB program

intervention, while the other does not.

The difference in recidivism rates before

and after the intervention is calculated

for the treated population. The difference

in recidivism rates is also calculated for

the treatment-as-usual population over

the same time period. The difference in

these differences reveals the impact of the

intervention.

• The treatment-as-usual

group must be an excellent

representation of what would

have happened to the treatment

group, in the absence of the

intervention.

Historical baseline:

Comparison of post-intervention

outcomes to past outcomes for a

similar population using historical

data.

Based on data from adolescents at the

edge of care, a benchmark is generated

by reviewing historical case files of

children over a selected time period.

Characteristics such as age, needs and

mental health status are reviewed, and

those adolescents who would have been

suitable for the intervention are selected

into the comparison group. The benchmark

used is a data point of this comparison

group, such as the aggregate number of

days spent in care over a specified period

post-referral.

• This methodology does not

exclude individuals in the

comparison group from receiving

SIB interventions.

• Historical benchmarks require a

reasonably stable population with

a consistent level of outcomes

over a number of years.

• This approach is not suitable

for outcomes that could be

significantly influenced by

broader socio-economic trends

and external factors.

The selected methodology will be informed by ethical considerations, the stability of historical data, the availability of a suitable comparison population, and the cost and feasibility of gathering the required data. Outcome metrics that can draw upon existing data and computer systems are comparatively more feasible than those that require data collection from scratch, which can be resource-intensive and expensive. For example, while random control trials can be effective in isolating the effects of an intervention, they are very costly. Existing SIBs have adapted common measurement frameworks to address their needs.

24

Lessons from abroad: Metrics and evaluation methodologies in existing SIBs

Rikers Island, New York City: In this recidivism-reduction SIB, the outcomes metric is the number of days youths spend in

jail at 12 months and 24 months following their initial release. The counterfactual used is a historical comparison group that

did not receive the intervention. The evaluation will control for individual-level differences between the program and the

comparison group, as well as system-level factors.28

Essex County: In this children-in-care-reduction SIB, the primary metric is the number of days a child stays in care in a

30-month period following a referral. The “control review figure” is the average number of days spent in care by a comparable

group of children in the same period. This figure was established prior to the SIB’s development and is based on a historical

case file review of 650 cases with data tracked over 30 months.29 The results will be compared between those assigned to the

intervention and the control review figure.

Peterborough, UK: In this recidivism-reduction SIB, the primary metric is the reduction of reconviction events for three

1000-prisoner cohorts of short-sentenced male prisoners released from Peterborough prison. The comparison is anchored

on a frequency measure (the combined number of reconviction events) rather than a binary metric (whether the individuals

reoffend). The outcomes for each cohort of prisoners will be compared to a control group—a similar group of prisoners

identified through the UK Police National Computer. The control group is constructed using a Propensity Scoring Matching

(PSM) methodology, where each prisoner leaving Peterborough is matched to up to 10 prisoners released elsewhere in the

country based on similarity across a host of characteristics.30

London (UK) Homelessness: In this homelessness SIB, five specific outcomes are measured. The first outcome is a reduction

in rough sleeping, indicated by the number of individuals seen rough sleeping within the participating cohort as compared

to a historical baseline. This baseline was constructed using data on individuals who would have met the criteria for

participating in the SIB program had it been available in the past. Data comes from the Combined Homeless and Information

Network (CHAIN), a database that enables data-sharing among social service providers on rough sleepers in London, which

helps these providers act quickly and effectively to help those they encounter. CHAIN records when individuals are seen

sleeping rough on the streets, and when they enter and leave hostel accommodation, along with data on support needs and

demographic information.

A second outcome is reduction in accident and emergency visits. For this outcome, outcome payments are made for annual

reductions in each cohort as compared to a baseline drawn from the National Health Service (NHS) Hospital Episode

Statistics.

The remaining three outcomes are: sustained moves to settled accommodation outside the hostel system, reconnection of

foreign nationals to accommodations in their home country, and increased rates of employment. These outcomes do not have

a baseline comparison. Small outcome payments are made for moves into settled accommodation outside the hostel system,

moves to an address in another (likely origin) country, and a sustained period of volunteering or achievement of National

Vocational Qualifications Level 2 (work-based awards achieved through assessment and training). Data to measure these

outcomes include tenancy agreements and letters from landlords, pay slips, letters from employers, or income tax statements.31

25

4.1.4 Financial modelling and analysis

The financial modelling and analysis tasks are critical to the development of the business case for a SIB. The financial model aims to reflect the economics of the SIB, including:

• Current costs to government as a result of the social challenge experienced by the target population

• Estimated impact of the proposed intervention

• Cost of implementing the proposed intervention, which may include the costs of program evaluation, advisors, performance management changes, and intermediary services in addition to service provision

• Estimate of financial returns to investors

• Potential cost savings to the government

The cost of the proposed intervention informs the amount of funds required from investors each year (that is, the principal drawn down). This stage involves three key tasks for an organization developing a SIB business case. First, building on the analysis conducted in Section 4.1.2, estimate the current cost to government as a result of the social challenge experienced by the target population and the projected impact of the proposed intervention by estimating the reduced cost to government in the future state and calculating the difference between the current and future states.

Next, specify how the savings are distributed among government departments and assess the ability for stake-holders to “cash” these savings (that is, realize actual savings in budget lines due to a reduction in remedial spending). Finally, determine how the outcome payment will be sourced. This analysis offers a projection of the benefit to government as a result of the positive outcomes generated. The difference between benefits to government and total cost of the SIB program offers the net savings of the model. These net savings can then be broken down into savings to taxpayers, payments to investors, and/or success fees for the intermediary or other stakeholders.

In some cases, the required invest-ment may be less than the total delivery costs if early outcomes pay-ments are reinvested to fund service delivery. The calculation should also take into account inflation and other factors that could influence the delivery cost over the term of the contract.

Figure 6. Visualization of SIB economics (simplified)

Cost togovernment

Cost togovernment

STATUS QUO WITH SIB SERVICEPOTENTIAL COST SAVING

FROM SIB SERVICE

Savings retained bygovernment

Public sectorsaving

Cost of interventions

OutcomePayments

Investor returnImpact of SIB

Source: Social Finance UK, A Technical Guide to Commissioning Social Impact Bonds

26

5. What can service providers do to advance SIB development?The following key activities will help service providers spur the innovation and SIB development process:

• Explore learning resources and education opportunities: Service providers will benefit from the growing number of resources to learn about and engage with SIBs. To date, the following education and engagement opportunities have emerged to support SIB stakeholders: a learning module operated by the McConnell Foundation’s Innoweave learning platform, a vast array of thought leadership from Social Finance UK, a Pay for Success Learning Hub curated by the Nonprofit Finance Fund, reports and multimedia available on the MaRS Centre for Impact Investing Knowledge Hub, and a special series on SIBs from the Center for American Progress. A full list of these resources is in Appendix B.

Case study D: McKinsey & Company illustrative SIB financial model

In May 2012, McKinsey & Company published a report that included a pro forma analysis of a hypothetical juvenile justice SIB.

The following is an excerpt from their report, including the pro forma statement and the assumptions used. This provides an

example of an approach to build the financial model for a SIB. The full explanation of their analysis and assumptions can be

found in McKinsey’s report online.

Functional Family Therapy SIB pro forma:

52

It is important to note that the time frame for capturing taxpayer benefits varies depending on the nature of the intervention. An intervention like the one assumed in our pro forma analysis—FFT administered to 15-year-olds on probation—will pay off over the lifetime of the program partici-pants. There is a typical age range when youth are most likely to recidivate, and that period goes beyond the four- to six-year time frame of an ideal SIB.

In contrast, a SIB focused on scaling up Permanent Supportive Housing would begin to yield benefits almost immediately, because chronically homeless people housed in a safe and healthy environment would stop going to shelters and emergency rooms as soon as their living situation was stabilized. The cost-benefit time path would be much shorter due to the specific characteris-tics of the problem and its solution. WHAT THE ANALYSIS TELLS US ABOUT SIBs IN GENERAL

It bears repeating that this pro forma analysis illustrates only one SIB and does not represent SIB economics in general.61 It is not yet clear what the market will bear when it comes to intermediary management fees, success fees for the intermediary and for the nonprofit service providers, fees

61 Some respondents to the Massachusetts request for response have indicated they plan to develop pro forma analyses as part of their submission and make them public.

2. Cost of service provision

3. Cost of evaluation adviser

4. Cost of independent assessor

5. Management fee to intermediary

7. Principal drawn down

11. Savings to taxpayers

12. Success fee to service provider and intermediary

10. Cumulative net savings

14. Cumulative investor net cash flow

13. Investor net cash flow

1. Constituents treated

6. Total cost of SIB

8. Benefits to taxpayers

9. Net savings

Year 2

4,787

239

60

48

5,134

99

0

–9,429

–10,267

–5,134

1,500

5,134

584

–4,550

Year 3

4,787

239

60

48

5,672

167

0

–13,577

–15,939

-5,672

1,500

5,134

986

–4,148

Year 4

0

0

60

0

0

231

0

–12,268

–13,287

2,652

0

60

1,368

1,308

Year 5

0

0

60

0

0

295

0

–10,584

–13,287

0

0

60

1,745

1,685

Year 6

0

0

60

0

0

356

0

–8,539

–10,089

3,198

0

60

2,105

2,045

Year 7

0

0

60

0

0

394

0

–6,271

–10,089

0

0

60

2,328

2,268

Year 8

0

0

60

0

0

442

0

–3,719

–5,985

4,104

0

60

2,612

2,552

Year 9

0

0

60

0

0

491

0

–877

–5,985

0

0

60

2,903

2,843

Year 10

0

0

60

0

0

522

0

2,151

–1,009

4,976

0

60

3,087

3,027

0

0

60

0

0

525

0

5,194

–1,009

0

0

Year 11

60

3,104

3,044

Year 12

0

0

60

0

0

509

407

8,143

3,662

4,671

0

60

3,009

2,949

4,787

239

60

48

5,134

43

0

–4,879

–5,134

–5,134

1,500

Year 1

5,134

255

–4,879

14,360

718

718

144

15,939

4,074

407

–

–

3,662

4,500

Total

15,939

24,083

8,143

Thousands of 2010 dollars (inflation adjusted, undiscounted)

Exhibit 4.5: Functional Family Therapy SIB pro forma: breakeven for investors occurs in year 12

Source: McKinsey & Company. (2012, May). From Potential to Action: Bringing social impact bonds to the US. Retrieved from http://mckinseyonsociety.com/

downloads/reports/Social-Innovation/McKinsey_Social_Impact_Bonds_Report.pdf

27

Pro forma terminology and assumptions:

48

59 According to Washington State Institute for Public Policy calculations, it takes 8 years for the cumulative taxpayer benefits to equal the cost of delivering Functional Family Therapy (FFT) treatment to one program participant. Our 12-year time frame accounts for the SIB’s overhead costs and three successive waves of FFT participants.

UNDERSTANDING SIB ECONOMICS

The earliest SIBs will be under intense scrutiny. All involved will want to understand the economics of this new approach, how long the SIB will be in place, when performance milestones will occur, and when government can be expected to repay investors.

To understand the timing for investor repayment, we built off the cost-benefit time path for FFT alone and factored in administrative or overhead costs associated with SIB structuring. We imag-ined a SIB that delivered FFT to a total of 4,500 youths over three years —one cohort of 1,500 15-year-old youths per year. We made assumptions about the additional costs inherent in a SIB—that is, the fees paid to the intermediary, evaluation adviser, and independent assessor. Factoring in these additional costs, the SIB needs to run until year 12 (nine years after the delivery of the FFT program) to generate a reasonable level of taxpayer benefits, creating savings for government and a return to investors. The result is a 12-year SIB that costs $16 million.59 Exhibit 4.2 lists the assumptions we made in our pro forma analysis.

9. Net savings Benefits to taxpayers remaining after cost of SIB –

Term Definition Assumption

2. Cost of service provision Delivering intervention (e.g., therapist, quality assurance, case management, court processing)

Source: WSIPP1 estimates for delivering program to 913 participants in Washington state in FY2008 ($3,191 per participant)

3. Cost of evaluation advisor

Hands on SIB role monitoring progress and suggesting course corrections

5% of the cost of service provision, spread evenly over the years service is provided (~$240,000 p.a., ~$720,000 total)

4. Cost of independent adviser

Traditional role of analyzing results and reporting performance

5% of the cost of service provision, spread evenly over every year of the SIB (~$60,000 p.a., ~$720,000 total)

5. Management fee to intermediary

Up-front fee to intermediary to coordinate and oversee program delivery

1% of the cost of service provision, spread evenly over the years service is provided (~$50,000 p.a., ~$140,000 total)

7. Principal drawn down Funds required from investors in each year Principal drawn down as required over first 3 years ($16 million total)

11. Savings to taxpayers Average benefits to taxpayers retained by government 50% of net savings after costs of service provision and SIB structure ($4 million total)

12. Success fee to service provider and intermediary

Contingent fee to intermediary/service provider based on program s success

10% of any returns to investors after principal is repaid (~$410,000 total)

10. Cumulative net savings

Total net savings accrued to date since start of SIB –

14. Cumulative investor net cash flow

Total investor net cash flow accrued to date since start of SIB

–

13. Investor net cash flow Flow of funds from and to investors in each year based on average benefits to taxpayers

Payouts every 2 years, beginning in year 4, based on realized taxpayer benefits to date

1. Constituents treated Number of program participants 1,500 per year for each of first 3 years

6. Total cost of SIB Sum of costs of service provision, evaluation adviser, independent assessor, and management fee

–

8. Benefits to taxpayers Average benefits from program accruing to taxpayers (e.g., reduced government spending)

Source: WSIPP1 model estimates for youths on probation in Washington state provided by Pew s Results First project

Exhibit 4.2: Pro forma terminology and assumptions

Source: McKinsey & Company. (2012, May). From Potential to Action: Bringing social impact bonds to the US. Retrieved from http://mckinseyonsociety.com/

downloads/reports/Social-Innovation/McKinsey_Social_Impact_Bonds_Report.pdf

• Identify champions within the organization: Buy-in from the organization’s senior leadership is key in order to gather momentum for SIB and other social finance exploration. A champion from the organization’s board of directors and/or executive leadership team will help set the vision, build the case and engage key staff.

• Enhance evidence base for interventions: Interventions most suitable for SIBs have a track record of success in delivering and measuring social outcomes. Enhancing the organization’s performance monitoring and evaluation systems to measure social outcomes will increase an organization’s readiness to participate in a SIB.

• Seek support for developing the SIB concept: Developing a SIB involves defining the social issue and target population, determining outcomes and assessing government interest, identifying intervention and outcome metrics, and conducting financial modelling and analysis. These tasks require facility with program evaluation, quantitative analysis, finance, and business modelling. Service providers may consider engaging funders to financially support the development process, and partnering with external organizations that possess these complementary skills and expertise.

28

6. Conclusion

Innovative financing models such as the SIB hold the promise of sourcing additional funding to tackle pressing challenges facing Canadian citizens. The benefits to social service providers can be numerous. The SIB model offers a stable and predictable revenue stream by providing upfront working capital for the duration of the program, thereby reducing the financial risk for service providers and allowing for long-term planning. The focus on outcomes also offers service providers more freedom, flexibility and collaboration opportunities as compared to traditional, activities-based funding.

However, as with any new approach, the SIB model carries risk. Service providers should consider the impact of a SIB program on their organization’s reputation, risks related to multi-stakeholder partnerships and collaborative implementation, and the effort required to lead, innovate and trail blaze in this field. Participant organizations must ensure that SIB programs and the associated target outcomes are aligned with their visions, missions and values to avoid mission drift. SIBs should not be viewed solely as a financing mechanism and should not be relied upon as the sole funding source.

The MaRS Centre for Impact Investing is committed to mobilizing private capital for public good in Canada. This technical brief is one of a series of papers that the Centre is producing to enhance various stakeholders’ understanding of and capability to engage in outcomes-based finance in Canada. We welcome your questions and comments.

29

Appendix A: Summarized key questions for SIB development

Sections 4.1.1 to 4.1.4 outline the main steps to assess the feasibility of a SIB concept. The following graphic summarizes the steps to develop a SIB concept, and key questions for service providers to consider at each step. In practice, this process may not be linear. It will depend on realizing satisfactory answers to the questions posed at each step.

Key

qu

esti

on

s

• What social issue are we

trying to solve?

• Which populations are

affected by this social

issue?

• What is the size of these

populations?

• What are the needs of the

populations?

• How effective are the

current interventions for

the populations?

• How feasible is it to

measure the desired social

outcomes related to the

populations?

• From these considerations,

what are the most

appropriate populations

to consider in a SIB

model?

• What outcomes need to

be improved for the

target population?

• Which levels of govern-

ment and agencies are

responsible for the

outcomes and bear the

cost in the current

system? Which govern-

ments and agencies will

benefit if outcomes are

achieved?

• What are the costs of the

current negative outcome

for the government

department?

• What is the most appro-

priate way to connect

with the government

stakeholders to assess

their interest in using

innovative finance models

to pay for outcomes on

this social issue?

• What is the government’s

appetite in addressing the

social issue for this target

population through

innovative financing

models?

• How does the outcome

value (cost savings)

compare to the cost of

the intervention?

• What is the ability for

stakeholders to “cash”

these savings? How are

the savings distributed

among departments/

jurisdictions?

• What is the most suitable

length of investment

period for this SIB?

• What is the appropriate

rate of return given the

financial model and

investor appetite for this

type of risk profile?

Define social issue and

target population

Conduct financial modelling

and analysis

Determine outcomes and assess

government interest

Identify intervention and outcome metrics

• What interventions could

generate the desired

positive outcome for the

target population?

• Do these interventions

exhibit the characteristics

of suitable SIB programs?

• Are these interventions

sufficient in generating

the desired outcome?

What other interventions

or conditions are

necessary to produce the

desired outcome for the

target population?

• What metrics will be used

to measure the desired

outcome? How can the

outcome metrics be

designed to measure the

direct impact of the

SIB-funded interventions?

(For example, use of an

established baseline.)

• What is the availability of

data from existing

sources, and how feasible

is it to collect the

necessary data for the

evaluation?

• Do the outcome metrics

expose the model to

perverse incentives? How

can these be avoided?

30

Appendix B: Learning resourcesCenter for American Progresswww.americanprogress.org/series/social-impact-bonds/view• Special series on SIBs, including analysis of sample agreements

Innoweave Outcomes Financing Module www.innoweave.ca• Online learning module followed by workshops for community organizations—launching fall 2013

MaRS Centre for Impact Investing Knowledge Hub impactinvesting.marsdd.com/knowledge-hub• Reports, articles, multimedia on social finance topics, including SIBs

Nonprofit Finance Fund: Pay for Success Learning Hubwww.payforsuccess.org• Library of reports, articles, multimedia• Toolkit including suitability questionnaire, due diligence tools, contract samples• Network and provider directory

Social Finance UK: Thought Leadershipwww.socialfinance.org.uk• User guides • Example feasibility studies

UK Cabinet Office www.data.gov.uk/sib_knowledge_box• Tools, resources, case studies, templates, et cetera.

Appendix C: Bibliography Barclay, L., & Symons, T. (2013). Guide to SIB Development: Supporting Vulnerable Children. London, UK: Social Finance UK.

Essex County Council. (2012). First local authority to award SIB to help young people on the edge of care. Essex County, UK.

Golden, M. (2013). Developing a SIB: Lessons from a Provider. New York, NY: The Children’s Aid Society.

Harvey, C. (2013). Mainstreaming impact investing: Overcoming the hurdles, addressing the skeptics. Deloitte Perspectives. Retrieved from http://globalblogs.deloitte.com/deloitteperspectives/2013/01/mainstreaming-impact-investing-overcoming-the-hurdles-addressing-the-skeptics-.html

Jupp, B. (2011). A Technical Guide to Commissioning SIBs. London, UK: Social Finance UK.

McKinsey & Company. (2012, May). From Potential to Action: Bringing Social Impact Bonds to the US. Retrieved from http://mckinseyonsociety.com/downloads/reports/Social-Innovation/McKinsey_Social_Impact_Bonds_Report.pdf

Nonprofit Finance Fund and McKinsey & Company. (2012). Rapid Suitability Questionnaires. Retrieved from http://payforsuccess.org/provider-toolkit/rapid-suitability-questionnaires

Social Finance Inc. (2012). A New Tool for Scaling Impact: How Social Impact Bonds can Mobilize Private Capital to Advance Social Good. Retrieved from http://www.socialfinanceus.org/sites/socialfinanceus.org/files/small.SocialFinanceWPSingleFINAL_0.pdf

Social Finance Inc. (2013). Risk Management. Retrieved from http://socialfinanceus.org/sib/risk-management

Statistics Canada. (2011). CANSIM tables: Charitable donations—Canada, provinces and territories. Retrieved from http://www.statcan.gc.ca/daily-quotidien/130213/t130213a001-eng.htm

31

Endnotes

1 Statistics Canada. (2011). CANSIM tables: Charitable donations—Canada, provinces and territories. Retrieved from http://www.

statcan.gc.ca/daily-quotidien/130213/t130213a001-eng.htm

2 This stakeholder is referred to by varying terms in existing literature. The UK Cabinet Office’s Guidance on template contract

for SIBs and payment by results refers to this stakeholder as “the contractor,” while the Center for American Progress refers

to it as the “external organization.” Social Finance UK refers to this stakeholder as a “SIB delivery agency.” In Canada, the

term “agency” is commonly used to refer to an organization in the machinery of government that is responsible for the

oversight and administration of specific functions, such as the Canada Revenue Agency. The SIB delivery agency is typically

a body that is separate from government; as such, to avoid confusion we suggest that this stakeholder be referred to as “SIB

delivery organization” in Canada.

3 Sections 3.4 and 3.5 in this paper discuss the possible structures of the SIB delivery organization and the role of the

intermediary in more detail.

4 Ontario Chronic Disease Prevention Alliance, Make Ontario the Healthiest Province in Canada.

5 Multisystemic Therapy (2013, January). Research at a Glance. Retrieved from http://mstservices.com/outcomestudies.pdf

6 Ginn, J. (2013, April). Using Private Money for Public Good. Capitol Ideas, Council of State Governments. Retrieved from

http://www.csg.org/pubs/capitolideas/2013_mar_apr/socialimpactbonds.aspx

7 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). Ministry of Justice: Offenders released from

Peterborough Prison. Retrieved from http://data.gov.uk/sib_knowledge_box/ministry-justice-offenders-released-

peterborough-prison

8 National Audit Office UK. (2013 April). NOMS: Managing offenders on short custodial sentences. Retrieved from

http://www.nao.org.uk/report/managing-offenders-on-short-custodial-sentences/

9 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). Essex County Council: Children at risk of going into care.

Retrieved from http://data.gov.uk/sib_knowledge_box/essex-county-council-children-risk-going-care

10 Oza, S. (2013, February 4). Analysis of the Social Impact Bond in Essex, UK. Instiglio. Retrieved from http://www.instiglio.org/

analysis-of-the-social-impact-bond-in-essex-uk/

11 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). Greater London Authority: Homeless people. Retrieved

from http://data.gov.uk/sib_knowledge_box/greater-london-authority-homeless-people

12 Helbitz, A. et al. (2011). Social Impact Bonds - The ONe* Service, One Year On. Reducing reoffending among short

sentenced male offenders from Peterborough Prison. Retrieved from http://www.socialfinance.org.uk/sites/default/files/

sf_peterborough_one__year_on.pdf

13 In addition to funding the two MST teams from Action for Children, the investors allocated some of the working capital to

a fund called Evolution Fund. Managed by the SIB’s investors as advised by the intermediary Social Finance UK, this fund

is used for any supplemental services identified throughout the life of the SIB to provide increased flexibility for additional

services. However, the services of the SIB will be primarily delivered by Action for Children, which can be considered a sole

service provider in this SIB model.

14 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). Greater London Authority: Homeless people. Retrieved

from http://data.gov.uk/sib_knowledge_box/greater-london-authority-homeless-people

15 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). Essex County Council: Children at risk of going into care.

Retrieved from http://data.gov.uk/sib_knowledge_box/essex-county-council-children-risk-going-care

32

16 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). New South Wales Government: Children in out-of-home

care. Retrieved from http://data.gov.uk/sib_knowledge_box/new-south-wales-government-children-out-home-care

17 MDRC. Social Impact Bond Project at Rikers Island. Retrieved from http://www.mdrc.org/project/social-impact-bond-project-

rikers-island#featured_content

18 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). Ministry of Justice: Offenders released from

Peterborough Prison. Retrieved from http://data.gov.uk/sib_knowledge_box/ministry-justice-offenders-released-

peterborough-prison and Antonio Miguel, Social Finance UK (personal communication, 2013)

19 One of the benefits of the SIB model is reduced control and oversight by governments, which are often restricted by

bureaucratic processes.

20 Barclay, L., & Symons, T. (2013). Guide to SIB Development: Supporting Vulnerable Children. London, UK: Social Finance UK.

and Antonio Miguel, Social Finance UK (personal communication, 2013)

21 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). Ministry of Justice: Offenders released from

Peterborough Prison. Retrieved from http://data.gov.uk/sib_knowledge_box/ministry-justice-offenders-released-

peterborough-prison and Antonio Miguel, Social Finance UK (personal communication, 2013)

22 Massachusetts Executive Office for Administration and Finance. (2011, May 6). Massachusetts Pursues Social Innovation

Financing to Spur Innovation and Build on Program Success. Retrieved from http://www.mass.gov/anf/press-releases/2012/

mass-pursues-social-innovation-financing.html

23 Massachusetts Executive Office for Administration and Finance. (2012, August 1). Massachusetts First State in Nation to

Announce Initial Successful Bidders for “Pay for Success” Contracts. Retrieved from http://www.mass.gov/anf/press-releases/

fy2013/massachusetts-first-state-in-the-nation-to-announce-ini.html

24 Golden, M. (2013). Developing a SIB: Lessons from a Provider. New York, NY: The Children’s Aid Society.

25 The MaRS technical guide for government outlines the process for a government-initiated SIB development process.

26 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). Ministry of Justice: Offenders released from

Peterborough Prison. Retrieved from http://data.gov.uk/sib_knowledge_box/ministry-justice-offenders-released-

peterborough-prison

27 Emily Bolton, Jenna Palumbo, Social Finance UK. A Technical Guide to Developing a Social Impact Bond: Criminal Justice.

28 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 22). New York City: Adolescents departing Rikers Island

Correctional Facility. Retrieved from http://data.gov.uk/sib_knowledge_box/new-york-city-adolescents-departing-rikers-island-

correctional-facility

29 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). Essex County Council: Children at risk of going into care.

Retrieved from http://data.gov.uk/sib_knowledge_box/essex-county-council-children-risk-going-care

30 Antonio Miguel, Social Finance UK. (personal communication). 2013.

31 UK Cabinet Office - Centre for Social Impact Bonds. (2013, April 19). Greater London Authority: Homeless people. Retrieved

from http://data.gov.uk/sib_knowledge_box/greater-london-authority-homeless-people