The team at Social Outcomes has assisted in the design and implementation of several social impact bonds and payment by outcomes contracts in Australia, including one of two of the nation’s first, the Benevolent Society Social Benefit Bond. If you are interested in exploring SIBs, please contact us: hello@socialoutcomes.com.au. Information on Green Bonds is available from our impact investing page

State Governments across Australia, and numerous government bodies and investors around the world are moving towards contracting for social outcomes, rather than inputs or outputs. This is an important development in social service delivery. When social service providers are supported in delivering outcomes, they are better able to innovate in their service delivery. The emphasis is on what is achieved through their programs, not how. For instance, rather than count the volume of medication prescribed to chronically ill patients, a focus on outcomes counts the number of patients who recover from, or reduce their illness. This allows social service providers to innovate, and integrate a range of programs which are proven to assist in improving the health of these patients (say, mental health counselling, exercise regimes, stable housing environments, etc).

In their purest form, payment by outcomes contracts mean that social service providers are only paid when they meet agreed-upon outcomes. In this case, the service provider may require a source of working capital to deliver the programs until payment is made for achieving outcomes. Sometimes, private investors will provide this capital as an investment. The investor is then typically repaid by the contracting government body, known as the ‘outcome funder’. The investor stands to gain a return on investment, which may depend on the level of social outcomes achieved. These models are often referred to as social impact bonds (SIBs), or social benefit bonds in Australia.

SIBs are just one type of payment by outcomes contract. While SIBs are a powerful tool, they are also complex, and require a significant investment of time from all parties. As this relatively new sector develops, there are many other hybrid forms of payment by outcomes contracts, as shown in the diagram below.

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Typically under a payment by outcomes approach, government defines the specific outcomes they wish to achieve and fund, such as reduced re-offending rates of prisoners, reduced chronic health conditions, improved education, etc. A service provider is then selected based on their demonstrated ability to achieve the desired outcomes. The government entity does not design the service delivery model itself. This approach is a significant change in contracting relationships between government and the social sector. Under the current arrangements, contracts are usually created around input and output delivery, and government may micromanage the contract in a way that can unintentionally distract the provider from effective delivery. Payment by outcomes contracting focuses both government and service provider on the attainment of outcomes.

Clear measurement and evaluation of the outcomes achieved is essential to any contract. Government departments and/or a third party evaluation team measures and provides ongoing feedback over a 3 to 10 year period, allowing the provider to continually innovate and refine their programs, to improve the outcomes achieved.

The differences between payment by outcomes contracts and current models therefore include:

  • government focus on defining outcomes, not service delivery models
  • outcomes are defined based on empirical research and data, and robust problem definition
  • providers are given the space to innovate and design integrated service delivery models, which is their core strength
  • government focuses on data and measurement of outcomes over time
  • payment may be linked to the achievement of outcomes, depending on the ability of the preferred provider to take on risk

An overview video of Social Impact Bonds is available below.

 

Payment & Risk

Payment by outcomes contracts also have different risk-sharing mechanisms to traditional models. In an environment of increasingly restricted resources for social services, this risk-sharing benefits governments in several ways:

  • governments may only pay if and when outcomes are achieved
  • commissioning for measurable outcomes, thereby improving the quality of social services delivered
  • sharing the risk with providers and/or investors, if appropriate
  • cost savings to government if the program is preventative in nature
  • cost savings to government related to efficiency gains discovered through service provider innovation

 

Culture & Capability Change

An outcomes approach requires culture change among all parties. Government will need to transform its current procurement and contract management processes, as well as build new capability in data collection, analysis and measurement. Service providers will need to embed robust measurement frameworks into their organisations and programs, and their boards will need to build capability and openness to assess and take on greater risk. In the case of SIBs, investors will need to develop the ability to assess social risk and rate investments, in order to participate.

 

Australian State Government Frameworks

  • The Queensland government has committed to innovation and renewal programs that include piloting payment by outcomes, as outlined in the Queensland Plan and Social Services Investment Framework. In March 2016, Queensland Treasury accepted their first round of Expressions of Interest for social impact bonds in the State.
  • The ACT government is looking to move its contracting to an outcomes approach and has been quietly making considerable progress.
  • The South Australian government have undertaken a consultation on social impact bonds and contracted Social Ventures Australia to provide capacity building to both government and social sector participants.
  • NSW are two years into their Social Benefit Bonds pilot. In February 2015, the Office of Social Impact Investment (OSII) was established to facilitate outcomes based contracting. OSII is now reviewing interest from several service providers in the delivery of social impact bonds for specified issues. KPMG has written an evaluation report on the NSW social benefit bond pilots, and an overview of the Newpin and Benevolent Society bonds is available on their websites.

 

International Case Studies and Resources

Around the world there are now over 50 social impact bonds on a variety of social areas including homelessness, chronic disease, early childhood education, and youth unemployment. The approaches are as varied as the areas of social impact.

  • The world’s first social impact bond sought to reduce reoffending in Peterborough, UK. A report on the design and implementation of the bond can be found here, as well as this summary by Emma Tomkinson.
  • The Greater London Authority Homelessness SIB targets 830 persistent rough sleepers in London, through tackling underlying issues of homelessness, and providing access to relevant services. Two service providers for the program: St Mungo’s Broadway and Thames Reach. Launched in November 2012, the 3 year bond was valued at £5 million. A March 2015 evaluation of the SIB is available here
  • In Richmond, California, a US$3 million SIB is being developed to fund the rehabilitation of 20 abandoned homes per year, over 5 years. Currently, there are over 800 abandoned homes in Richmond – resulting in significant maintenance costs to government. The Bond will be used to purchase dilapidated houses and employ local workers to rehabilitate them into environmentally-rated homes. Homes are then sold on to first home-buyers.
  • The “Sweet Dreams” SIB  in Saskatchewan, Canada is dedicated house provides care & accommodation to single mothers with family who are at risk, supporting approx 20 mothers and children. The SIB is valued at C$1 million. Mothers are supported to finish their education and undertake work readiness training and find jobs whilst living in a stable home.
  • Chicago Public Schools and City of Chicago partnered with various experts to provide high-quality pre-school education to over 2,600 children in high-need communities over 4 years through the Child Parent Centre (CPC) education program. Graduates of the program were found to have more confidence, were less likely to need special educational services, and more likely to graduate high school. The program’s success is built on working with the whole family, both parents and children. Investment and program support was provided by: Goldman Sachs Social Impact Fund, the Northern Trust Company, J.B. and M.K. Pritzker Family Foundation, and Finnegan Family Foundation. This fact sheet covers the initiative in more detail.
  • Duo for a Job was launched in April 2010 in Brussels, Belgium. In this case young, unemployed migrants are matched with local recent retirees in various skilled professions. The two work together for six months as a ‘duo.’ The retirees provide training and job development skills, and assist the  young migrant in finding employment. The bond is valued at €400,000, with a term of 3 years. 320 target individuals are targeted for the intervention, aged 18-29. The performance metric is the number of migrants securing employment. The organisation is currently working with young job seekers newly arrived in Belgium (mainly refugees), and will progressively offer its services to all immigrant youth in 2014. More information is available here.
  • Collective Health and Social Finance USA are developing a Payment by Outcome (PBO) model for children with asthma in California. Having discovered that one of the most prevalent issues in asthma prevention was lack of awareness about asthma triggers and other medical directions, the model is being developed around quarterly home visits, education about triggers, environmental factors, and asthma action plans. Having local, community-selected participants (including Spanish speakers) run the health-care provision was crucial. It is estimated an expanded five-year program with 3,500 participants could yield $27 million in reduced costs. More information is available here
  • Development impact bonds are also now being created. The Centre for Global Development provides a helpful overview, with the Case for Development Impact Bonds exploring the mechanism in more detail. The first of this type is a bond to address sleeping sickness in Uganda, developed by DFID.

Social Finance US provides a variety of useful material on the social impact bonds in the US, and Social Finance offers similar insights on other initiatives in the UK. The UK Cabinet Office have published a guide to Social Impact Bonds.