Do Social Impact Bonds Work?


Ounce of Prevention, Pound of Cure

Governments spend a great deal of money and effort fixing things. They try to fix homelessness, fix poverty, fix crime. As any good mechanic will tell you, fixing things is expensive, and, as any good dentist will tell you, it is often cheaper to prevent problems than to try to fix them afterward.

Governments are not always good at implementing preventative measures. They are probably more risk averse than the private sector, and more likely to simply keep doing what they have done in the past. Preventative projects can be difficult and risky, and It may be more difficult to secure funding for these unproven projects.

This reticence is a bummer, because if these are genuinely good projects, they could both improve outcomes and reduce government costs. It is entirely possible that the cost savings would more than pay for the project.

If only someone else was willing to pay to try new programs.

How Do Social Impact Bonds Work?

A Social Impact Bond is an arrangement where investors fund programs designed to improve a societal outcome and save the government money. If this occurs, the government will reimburse the investors (often plus a bit) using a portion of the money it would have otherwise spent. Social Impact Bonds are linked with pay for success policies, but the two are not synonymous.

While there is no exact standard or formats for Social Impact Bonds, they typically have the following structure:

Investors who believe in a certain program provide money to fund it.

Program Operators take their money and use it run the program.

An Evaluator measures the outcomes of the program with respect to certain targets.

After the program The Government pays back the investors depending on how successful the program was at meeting pre-determined targets.  A more detailed illustration can be found here.


This is a picture of smiling children. It has nothing at all to do with Social Impact Bonds. When writing about anything having to do with social responsibility, pictures of smiling children, attractive landscapes, and water, are very important.


The British county of Essex has an issue with young people ending up in state care. This can get expensive, with costs running between £20,000 to £180,000 per person per year. In an attempt to reduce the number of young people entering state care to begin with, the county used a Social Impact Bond to fund a program that provides therapy for 380 individuals and their families. This therapy will help families better deal with some of the issues that lead children to end up in state care in the first place. The £3.1 million upfront cost of the program is being largely funded by social impact investors Bridges Ventures and Big Society Capital[1]. This money goes to[2] a group called Action for Children, which provides the actual therapy.

To determine what payments the investors receive, a comparison is made between those who have received treatment and a predetermined historical control group. For two and a half years after their referral into the program, each participant is tracked on a quarterly basis. The difference in observed days spent in care between the participants and the control group determines how much the government of Essex will pay to the Investors. As of fall 2016  82% of the 208 adolescents[3] who have received treatment remain with their families.[4]

Kent England Sky United Kingdom Landscape Scenic

This has nothing at all to do with Social Impact Bonds. But it is lovely.

Do Social Impact Bonds work?

Social Impact Bonds are new enough that this is a mostly unanswerable question.  Based on this report from SocialFinance, there are few Social Impact bonds that have been around long enough for payments to begin. Of the 22 early projects that SocialFinance reports on, 12 have made payments and 4 have fully repaid investor capital. This is a higher percentage than it might seem, as many of the projects are too new to be able to report results. Only one project, a project to reduce recidivism at Rikers island[5], has demonstrably failed to return value to its investors.

This appears to be a positive outcome. If very few social impact bonds pay out, then both the specific programs and Social Impact Bonds in general would fail. For Social Impact Bonds to work, there needs to be sufficient motivation for investors (even the socially minded ones who currently make up most of the Social Impact Bond investors) to invest. If Social Impact Bonds aren’t paying out, this source of funding will vanish. If social impact bonds are paying out, it means that they are achieving the measurable outcomes that they are designed to. If these outcomes are being achieved, the desired positive social change and associated cost savings, should be achieved as well.

Low Hanging Fruit

It may be that Social impact bonds are a deeply clever idea and there are lots of projects that provide opportunities for them to be used effectively. This would require many issues where early interventions can return cost savings down the road, and lots of places for social impact bonds to come in and make these interventions happen.

This might be true, especially in the early stages of Social Impact bonds. Many of the social impact bonds deal with similar issues such as homelessness or recidivism. If this is the case, Social Impact Bonds should be less successful as time goes on, as the easy improvements are all exhausted.

Not Enough Failure?

One of the motivations for social impact bonds is that they allow riskier, more unusual or innovative projects to be implemented. It seems only reasonable that many of these unproven projects should fail.

If they don’t fail, this is concerning. Some possible reasons for a lack of failure might be:

  • The riskiness of these projects has been vastly overestimated. This brings into doubt how the government and other institutions decide on what projects to undertake and the measures they use to evaluate risk.
  • Social Impact bonds are not driving risky innovative projects, but instead are only providing an alternative method to undertake relatively safe projects. This might mean that the projects are successful, but it seems like a key promise of Social Impact Bonds would be missing.
  • The measures of success of social impact bond funded projects are being artificially inflated. Even with third party evaluators and pre-determined metrics of success, most indicators can be manipulated. If money and success is on the line, the temptation to do what it takes to achieve this outcome will increase.


So far, It is not obvious what the failure rate should be, what is an appropriate rate of return for a social impact bond is, what sort of projects are best suited for them, and who are the appropriate partners, and how the answers to all these questions might vary across projects and issues.


Some water. This has nothing to do with Social Impact Bonds.

What Gets Funded?

Not every project is well suited to Social Impact Bond Funding. A necessary attribute for is to have a clearly measurable outcome.  There are many important issues for which this is not the case. Any program tackling a problem that cannot be easily quantified will not work for a Social Impact Bond.  If Social Impact Bonds work, they will funnel resources toward things that are measurable, and not necessarily the most important. Social Impact bonds will also lead to the funneling of resources toward the sort of projects that investors want to fund. This might channel resources toward projects that tackle very visible problems such as homelessness.

A Cautious Optimism

When I first heard about them (while researching this post) I thought they were super clever. I like the ‘you get what you pay for’ concept- if you pay someone to run a program that reduces recidivism, you’ll get a program. If you pay someone to reduce recidivism, you’ll get reduced recidivism. I also think the programs undertaken should be more innovative than traditional programs and possibly more effective for it.

As with nearly anything, there are issues and potential issues. Social Impact bonds only work in certain situations, but when used properly, they appear to be beneficial. One of the nice things about them, as an outsider, is that most of the risk is borne by the original investors.  I wish these investors the very best of luck in their investments. Maybe the rest of us will get something out of it as well.


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Sources, References, and Further Reading


Other Reading


[1] Due to a mostly fortuitous set of circumstances, there was a period of my life where I spent a great deal of time looking at Corporate Social Responsibility reports. These inevitably consisted largely of images of smiling children and attractive landscapes- all completely insufferable. The people who designed those reports appear to be well employed designing the websites for Social Impact investment firms.

[2] Via a SPV called Children’s Support Services Ltd

[3] I have No idea if that is a good number or not.

[4] For other examples of social impact bonds see Social Finance’s database of social impact bonds.

[5] Maybe a social impact bond to improve the Yelp rating would have been more successful.

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