What is a Social Impact Bond?

Let’s come back to that. For now, imagine a contract between a public sector body and some investors, in which the public body commits to pay for a specified outcome over the long term. In the meantime, the investor’s funds are used to pay for a range of work which leads to the outcome.

By enabling non-government investment to be utilised, this mechanism will lead to greater spending on things which government can’t afford to pay for up front. This could be a unique funding mechanism, which aligns the interests of key stakeholders around certain outcomes...

Government – the public sector pays later for the outcome, releasing payments which will at least cover the costs of the work. This enables investors to make a return. But investors carry the risk that the work may fail to deliver the outcome.

Investors – investment in this mechanism offers an opportunity to generate returns. Investors receive greater financial return as the outcome is delivered. If delivery exceed expectations, the return can be higher.

Those who do the work – this mechanism is used to pay upfront for the delivery of the work. This enables providers to get on with the job and even innovate in order to achieve the outcomes.

Sounds interesting? Definitely. This mechanism is the Private Finance Initiative – or PFI.

So what is a Social Impact Bond?