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Social Impact Bonds

A social impact bond is a financing mechanism for social programs that shifts a program’s up-front costs and risks from the government to the private investor. Under a social impact bond, a private investor agrees to provide a social program with the funding it needs to deliver services. The investor is paid back by the government, with a fee, if an independent evaluation deems the program successful in achieving its objectives. The level of success that triggers a payment is decided when the social impact bond is negotiated. Since social impact bonds are only paid off by the government if a program succeeds, they are also known as “pay for success” arrangements.

Social impact bonds are designed to solve a number of common problems that emerge in funding social programs. First, many promising but untested approaches to solving social programs are risky for government to bring to scale. In this situation, social impact bonds allow private investors with a greater appetite for risk to take on financing instead. This adds extra fees for the government, but it eliminates the risk of funding a new program.

Social impact bonds are similar to performance-based funding, but social impact bonds use private investment and tie repayment to proven impacts rather than outcomes. For example, if a program aims to help formerly incarcerated individuals secure gainful employment, it is not enough that program participants become employed successfully. An objective, third-party program evaluation must show that the program elements in question are what caused the participants' job success.