Both governments and non-profit organizations need to take steps to ensure they can take advantage of the potential of social impact bonds (SIBs) as a vehicle for funding socially-useful ventures, according to a new report from the Mowat Centre.

The public policy think tank issued a new paper Monday, From investment to impact: The NFP experience with social impact bonds, which examines the phenomenon of social impact bonds, and whether they can provide a way to fund social programs with private capital.

Fixed Income Isn’t Working Like It Used To

To generate yield and manage risk for clients in today’s complex fixed-income
markets, take an active approach with active fixed income ETFs from
Franklin Templeton Investments.

Get active with Franklin Templeton ETFs: FLGA | FLSL | FLUI | FLCI

“Advocates see SIBs as a vehicle for innovation, while critics fear that they will be used by government to offload social spending,” it says. “In fact, it is still early days and the evidence is not yet available to determine their success, failure, threat or promise.”

So far, there has only been one SIB launched in Canada, the report notes. There is, however, growing interest in the idea, as governments increasingly look to “focus on directing resources to those programs and services that deliver the most positive social impact”; and, as the idea of “impact investing” grows among investors. “Through a structured agreement with government to pay the returns to investors, SIBs are designed to provide this mixed social and financial return to investors,” it notes.

For the model to have a chance at succeeding, the report suggests that the non-profit sector “needs to be at the table to help shape what SIBs will look like in Ontario. To do this effectively, they need to negotiate with a strong sense of what their needs are and how to structure a contract that will provide them with the appropriate resources, funding tools and competencies to achieve success.”

And, it suggests that the sector needs to lay the groundwork for these discussions by first conducting strategic self-assessments; defining the roles and expectations of participants in these arrangements to ensure that non-profits can focus on service delivery and achieving successful outcomes; and, establishing costing structures to ensure that programs funded through SIBs are effectively resourced.

Governments also have a role to play in getting SIBs off the ground the report says, “by ensuring the right conditions for development and demonstrating long-term commitment. This means creating the conditions for successful negotiation, building a strong evidence base, and ensuring that the process leads to better public policy.”

The report recommends that this process include: facilitating negotiations; promoting transparency and reducing future transaction costs by ensuring that negotiated contracts are shared openly by default; ensuring that the metrics used to evaluate outcomes reward real long-term social impact, not short-term gains; establishing best practices and collecting data that supports policy innovation and evidence-based policy-making; and, establishing a policy working group at the beginning of the SIB process to learn from the results and identify future policy opportunities.