As state and local governments consider a new financing mechanism to scale proven preventive solutions to social problems, research shows the potential and challenges.

There is considerable buzz in the United States about whether a new “pay for success” model of financing social solutions currently being piloted across the Atlantic could work on American soil. It’s called a social impact bond (SIB), and the first—in fact, the only so far—was launched in September 2010 by an organization called Social Finance UK. SIBs are structured to get proven solutions to scale with no risk to public budgets—governments pay for the solutions only if they work. But despite this risk shifting, a SIB’s structure involves several actors—each charging a fee or return. As a result, this tool is a more expensive way to scale programs than if government simply contracted directly with a service provider. These additional costs will be worth it in many cases, but SIBs won’t be suited to every situation.

Local government officials in Massachusetts, New York City, and elsewhere are now investigating how SIBs could be applied in the areas of homelessness and criminal justice. Interest in SIBs has been bolstered by the Obama administration’s focus in 2011 on pay-for-success programs and its 2012 announcement that two agencies would use funding competitions to support pay-for-success pilots. But with only one example of a SIB to date, and not enough time for it to have developed a track record, a number of questions remain open: whether SIBs will work, where they could be most useful, and how they should be structured.

As part of SOCAP, Social Innovation practice’s work in innovative finance and social impact assessment, they have conducted extensive research and interviewed more than 125 thought leaders in the government, nonprofit, and academic communities, as well as potential players in the SIB ecosystem, to determine the potential of SIBs in the United States. SOCAP's work was done in close cooperation with an advisory group that included representatives from all the stakeholder groups that will be represented in SIBs. 

The result of SOCAP's research has resulted in a full assessment of how SIBs would work, including how roles, responsibilities, and capacity would be defined within the system for each type of stakeholder in a SIB partnership. This article provides some context on SIBs, why they could be important, and who would have to be involved to make them work. In the coming months, SOCAP will issue a report with findings in these areas, as well as other research done to develop an in-depth view of evidence-based interventions in the areas of homelessness and criminal justice (which experts consider to be the best places to test the water for SIBs), an estimate of how many people could be helped by proven programs, a snapshot of current government spending on remediation efforts, and an assessment of whether service providers currently have the capacity to bring these solutions to scale.

The report will also include a pro forma analysis developed to evaluate the time frame and economics of a hypothetical SIB in juvenile justice to illustrate how an actual SIB might work, and it will discuss our plans to help build a set of tools to support the development of SIBs. STAY tuned!