Позитивные изменения. Том 2, № 2 (2022). Positive changes. Volume 2, Issue 2 (2022)

10. From potential to action: Bringing social impact bonds to the US. (2012, May 1). McKinsey & Company.

11. Guidance on developing a Social impact Bond. (2017). The Centre for Social impact Bonds. Retrieved April 22, 2022.

12. Koekoek, R. (2016, October). World's first binational Social impact Bondfosters Dutch-German collaboration. Medium.

13. Moodie, A. (2013, January 20). British social impact investing has left the US playing catch-up. The Guardian.

14. Ronicle, J., & Strid, А. А. (2021, January). Social impact Bonds in Latin America. iDB Lab's Pioneering Work in the Region Lessons Learnt. American Development Bank.

15. Social impact Bonds: how private finance can help transform public outcomes. (2016, September 11). Centre for Public impact. A BCG Foundation.

16. Urban institute. (2020). «What Role do intermediaries Play in Pay for Success?» Urban institute.

17. Warner, M. E. (2013). Private finance for public goods: social impact bonds. Journal of Economic Policy Reform, 16(4), 303–319 doi:10.1080/17487870.2013.835727.

18. Weller, A., and E. R. G. Pedersen. (2018). Pay for Success Literature Review: A PreCare Report. Copenhagen: Copenhagen Business School.

«Sandboxes» for Social Investments: how Social Impact Bonds Projects are Developing Globally

The impact investment market is growing all over the world, and its forms and types are becoming more elegant. If earlier investments in solving social problems could be more like spending CSR budgets – "give and forget", than the current state of the market dictates other rules. The new standard is accounting not only for invested funds but also for assessing the socio-economic efficiency of the results obtained. One of these «new» formats is the «SIBs» that came to Russia not so long ago – so-called from the English-language term Social Impact Bonds.

Ivan Smekalin

Analyst, Positive Changes Factory

TO TAKE, YOU HAVE TO GIVE

Social Impact Bonds are also known simply as social bonds (Weller & Pedersen, 2018). The phenomenon has other names as well, such as Pay for Success and Development Impact Bonds. Despite being called "bonds," these projects are not exactly bonds, but rather a subcategory of public-private partnerships. Social Impact Bonds are effectively a contractual and financial mechanism in which the return on investment occurs once the social effect is achieved.

Public-private partnerships are based on the interactions and commitments between three parties:

1. a public agency initiates the project and shapes the expectations for its social impact;

2. a contractor receives funding from investors and implements the social project to achieve the agreed results;

3. an investor provides capital for the contractor with the expectation of getting their money back from the state agency once the expected social impact has been achieved.

The complexity of social impact bonds is that they combine a service delivery model with project management, impact evaluation and an investment system (Andersen et al., 2020). While the key role for making decisions (and launching actual projects) in most cases belongs to public agencies, the projects themselves are funded and implemented by private-sector actors – and this creates grounds for controversy. Each party may have different interests, goals and performance indicators.

In particular, we can note the following potential contradictions present in social impact bonds (Weller & Pedersen, 2018):

1. public agencies tend to choose the lowest budget projects, which affects the quality of services provided;

2. this de-facto privatization of public services is hard to explain to the public: why not spend the money through the government institutions rather than channel it to private players?

3. during the project implementation phase, it is hard to choose between sticking to the original plan and being flexible to meet the goals;

4. greater risks for investors: under comparative risk levels, greater return can be achieved from investing under general market conditions than by dealing with the government.

MEDIATORS AND THEIR ROLE

It is important to note the role of mediators who handle the interaction within the triangle of stakeholders – the government, the contractor, and the investor. There are two types of mediators (Urban Institute, 2020): financial and expert. Financial mediators, also known as transaction coordinators, provide support for project planning, investor protection, and contract negotiation. Expert mediators review the project design, costs, and offer methods for researching the intervention's social impact.

The VEB.RF state corporation, one of the major social impact operators in Russia, represents (2021) the following list of stakeholders: the contractor, investor, public body, independent evaluator, and operator. This list correlates to the three key stakeholders and two mediators, as described above. However, the Russian mediator's role is somewhat limited compared to traditional expert mediators: specifically, it does not provide project review or assistance in designing the project prior to its launch. The Russian model also does not allow for a participant to guarantee the investor's interests, other than by the investors themselves. However, these two models are not the only options for implementing social impact bonds. Below we will examine project cases from different countries.

THE UK EXPERIENCE. DEVELOPING INNOVATION THROUGH AN EVIDENCE-BASED APPROACH

The world's first social impact bonds project was implemented in the UK (The Economist, 2013). In 2010, Peterborough, a town in Eastern England, launched a six-year privately-funded prisoner rehabilitation program. No payments from the state fund to investors were projected until 2014, and not until the Department of Justice acknowledged that the criminal reoffending rate within the pilot project area differed from the national average. What made the Peterborough case unique:

• a longer implementation period for greater service flexibility – the investor’s multi-year funding for the services gave the contractor more autonomy to flexibly implement the project tasks;

• not just a one-time fixation on results – monitoring was conducted regularly during the project, with monthly reports being provided to investors;

• visible social effect – the requirement to demonstrate social impact on an ongoing basis resulted in the continuous development of new methodologies to study the social problem being addressed, which could only yield a positive social outcome.

As we can see, the very first social impact bonds project offered the contractors plenty of room to develop efficient impact tools, and innovate in analyzing the social problem at hand, while investors received regular opportunities to monitor the project’s progress.

Since then, more than 30 social impact bonds have been implemented in the UK (A guide to Social Impact Bonds, 2017). In describing the British program of state support for social projects (Guidance on developing a Social Impact Bond, 2017), it is emphasized that the private contractor’s main interest is to develop innovations in the evidence-based approach for assessing impact effectiveness. Costs are treated as current costs multiplied by a percentage of the maximum rate of return. The estimated value of social change is added to the formula, based on the value of the social results achieved.

Academic researchers (Warner, 2013) argue that Britain’s experience shows the inevitable emergence of an industry of social impact evaluators and contract mediators who will ultimately become the main beneficiaries of these projects. Moreover, the effect on public policy turns out to be highly controversial, since projects are often limited by their context and are not reproducible. On the other hand, the project itself is a de facto instrument for privatizing state social functions within the framework of the New Public Management program. The contradiction here is that the social problem is broader than the ongoing project, or the project is too extensive, and would be cheaper to implement with the government’s tools. However, it is worth noting that the state is less flexible in inventing new problem-solving methods.

The authors quote (Warner, 2013, p. 313) a British investor who participated in a social impact bonds project:

"[These projects] involve high-risk investments with low or medium rates of return," which reduces the appeal for investors because, in addition to less than favorable financial conditions, they have to deal with the state which, by definition, is more demanding and more rigid than private sector players.

THE US EXPERIENCE. A TOOL WITHIN IMPACT INVESTMENT

McKinsey's U. S. office in 2012 came to the following conclusion about social impact bonds (SIBs): they are a social intervention assessment tool that allows the government to pay for results and investors to invest in things that actually make an impact. The introduction of SIBs in the United States began as an attempt to catch up with the British experience (Moodie, 2013). Design for the first projects started in 2013. Despite a higher volume of impact investment than in the UK, SIBs failed to immediately be adopted as a common tool in the United States. This is primarily because SIBs are not a type of investment, but rather a contractual mechanism that requires an experimental design.

Social motivation is an important aspect: the profit would be higher at the same risk level when working with commercial players.

Thus, Americans saw SIBs primarily as a tool within impact investing which facilitated the development of more efficient interventions in the social sphere and assessed their impact.

Like in the UK, the first social impact bonds project in the US was also focused on reducing the reoffending rate among ex-convicts. Goldman Sachs (2020) acted as the investor in partnership with the city of New York. The investment totaled $9.6 million, with the expectation that the entire amount would be repaid upon meeting the goals. If the results exceeded expectations, the investor would receive a financial return comparable to that of typical lending, pro rata to the performance above the target.

The Center for Public Impact (a BCG foundation) notes (2016) that large investors can offset the increased risks of participating in SIBs through economies of scale. Social motivation is another important aspect for the investor: the profit margin would be higher at the same risk level when working with commercial players. As of 2016, SIBs remained largely a British story, as more than half of them were conducted in the UK. Proponents of this format see the advantage of social impact bonds in outsourcing the financial and political risks of addressing social issues, while creating opportunities to improve social impact tools.

We should note that descriptions of the US experience in implementing SIB never mention that investments were repaid per the "costs x key interest rate + assessed value of the social impact" formula, just that the actual investment was recovered. In other words, the American funding model is less economically feasible than the British model.

THE EU EXPERIENCE. TOOL FLEXIBILITY

A policy brief from the European Parliamentary Research Service (Davies, 2014) describes SIBs as a way for public authorities to try out a social service without spending money on it in the absence of positive results, and without bearing political responsibility. The policy brief also considers this innovative tool as a part of social investment, with its respective cost allocation. For example, during the implementation of the European Commission's investment program, an agreement was reached (Fraboul, 2020) between BNP Paribas and the European Investment Fund with the aim of facilitating access to funding for social organizations. The project featured an investment of €10 million to support 1,000 students and 130 children.

An important feature of SIBs emphasized in the European experience is that this mechanism lowers the entry barriers for investors in the social investment sector, by offering the potential for recouping invested funds from the state. Further, the emphasis on measurable results allows investors to spend money on more expensive projects, as their impact will be more pronounced than that of conventional social investments.

German-Dutch cross-border cooperation is a good example of how an investor can benefit from a social issue. The idea of the project was to "provide Dutch workers with work opportunities in Germany," that is, to integrate labor markets in the cross-border regions of the Netherlands and Germany (Koekoek, 2016). Companies were effectively investing in the retraining and mobility of their would-be workers, achieving positive social and economic effects. However, this raises the ethical question of the state paying money to a private company that benefits from a social impact bonds project. In the context of the European Economic Community, the answer lies in the plain of European solidarity and the value of integration per se. But in other contexts, the rationale for similar projects seems much more complex.

SIBs have not been met with equal enthusiasm everywhere: for example, in Portugal this financial instrument essentially duplicated community social investment funds but with more reporting requirements, which resulted in too much bureaucracy and reduced the flexibility of project implementation (Ferreira, 2020).