No results, no payment — the gamble of the Social Impact Bond

A Social Impact Bond only works when four distinct parties are in place. Investors put up the money to run a support programme first. A service provider, typically a nonprofit, delivers the actual programme — job training, life-skills support, whatever it is — using that money. Once the programme has run for a set period, an independent evaluator with no stake in the contract confirms whether a predetermined indicator, such as a drop in reoffending or a rise in employment, was actually met. Only then, and only if it was met, does government, a local authority or a foundation repay investors their capital plus interest. If the target is missed, investors lose some or all of what they put in. The point of the design is to shift the risk of spending public money upfront away from government and onto investors.

Day one of this series introduced Peterborough as one example of a Social Impact Bond. Today returns to it, examining that success in detail alongside a case that failed. An outcome-based contract looks rational on its face — public money only pays for what actually worked. What that rationality does to the organisation on the ground, though, is invisible if you only look at the successes. Today covers both the light and the shadow.

Consider what this contract does to the support organisation on the ground, by tracing the flow of money. The provider itself runs the programme using money that ultimately comes from investors, but investors are repaid only after results are confirmed — meaning the provider has to cover its own day-to-day running costs until that confirmation arrives. A 2010 report by the US Government Accountability Office found that smaller nonprofits without cash reserves or lines of credit are put at particular risk by payment delays. A Social Impact Bond, in effect, builds that same delay directly into its contract design.

Evaluation carries its own burden too. Because an independent body has to confirm the indicator was met, the provider must keep daily activity records precise enough to withstand later scrutiny. A critical analysis published in Stanford Social Innovation Review in 2018 found that this kind of contract clearly raises administrative burden on the ground and reduces the day-to-day flexibility of the organisation running it. The next section starts with the case that worked — Peterborough, in detail.