Social impact bonds (SIBs)

Social impact bonds (SIBs) are a way of funding social programmes using private investment. They link financial returns to the achievement of measurable social outcomes.

Despite the name, a social impact bond is not a traditional bond. It is a contract between government, private investors, and a service provider. Here is how it works: a government agency identifies a social problem it wants to address, such as reducing reoffending, improving school attendance, or preventing homelessness. Private investors put up the upfront capital to fund a programme designed to tackle that problem. A social enterprise or non-profit organisation delivers the programme. An independent evaluator then measures whether agreed outcomes have been achieved. If the outcomes are met, the government repays investors their capital plus a financial return. If the outcomes are not met, investors may lose some or all of their money. This structure is sometimes called a pay-for-outcomes or pay-for-success model.

In Australia, social impact bonds have been used across a range of areas. New South Wales was an early leader, trialling SIBs in out-of-home care, with the Newpin programme delivered by UnitingCare and the Benevolent Society's family preservation programme among the first examples. Victoria, Queensland, and South Australia have also run SIB programmes. For social enterprises, SIBs can provide access to patient capital, that is, funding that does not need to be repaid quickly, to deliver programmes that address deep or entrenched disadvantage. They can also help demonstrate the financial value of social interventions in a language that government and investors understand.

There are real complexities to be aware of. Designing a SIB requires significant upfront work to agree on what outcomes will be measured, how they will be evaluated, and over what time frame. This can be costly and time-consuming, and may favour larger, more established organisations over smaller or emerging social enterprises. There is also a risk that focusing on measurable outcomes can inadvertently narrow a programme's approach, leading organisations to work with people who are easiest to help rather than those with the greatest need, a problem sometimes called 'creaming'. Social impact bonds are also not suited to every social problem. They work best where outcomes are clearly definable, measurable within a reasonable time frame, and where the cost savings to government are large enough to justify the return to investors.