social impact bonds 102
DESCRIPTION
As a follow up to our 2/26/14 webinar, Social Impact Bonds 101, Robert Esposito and Shawn Pelsinger, two NYU Law and Social Enterprise Fellows, joined us to expand upon our original discussion with a deeper look into the growth of SIB's in the Unites States and the implications for the philanthropic sector. Our two experts took us through a number of recent developments around SIB's in the U.S., including the fate of guarantors, the growth of multiple-funding sources, the expanding position of investment banks for financing and the ultimate role of foundations and philanthropy. This was the second webinar in a four-part series with Public Allies.TRANSCRIPT
SOCIAL IMPACT BONDS 201
Shawn Pelsinger, Esq. & Robert T. Esposito, Esq.
Overview
! Quick Review of Social Impact Bonds
! The Growing Number of SIB Investors
! Government Procurement
! SIBs Beyond the Social Sector
Quick Review of Social Impact Bonds
! A Social Impact Bond is an innovaOve financing mechanism for Pay-‐For-‐Success contracts that is designed to shiS risk away from government, and towards private-‐sector capital to fund effecOve social service programs. The government only pays if these programs achieve predetermined, measurable goals.
! A SIB is a mul,stakeholder partnership in which philanthropic funders and impact investors – not governments – take on the financial risk of expanding proven social programs. Nonprofits deliver the social program to more people who need it; the government pays only if the program succeeds. – McKinsey, Financing Social Change
Quick Review of Social Impact Bonds
! Key Features ! Limited control on how external organizaOon carries out task;
! Government cooperaOon with external organizaOon; ! Agreed upon target populaOon and success metrics;
! Payments conOngent upon hiZng targets
Quick Review of Social Impact Bonds
Credit: Social Finance, 2014
The Growing Number of SIB Investors
! Single Investor
! Private Investors
! Government Investor
! Service Provider Investors
! Retail Investors
Overview
SIB Investors: The Single Investor + Guarantee
! The Rikers Island SIB, funded enOrely by Goldman Sachs Urban Investment Group ($9.3M)
! Bloomberg Philanthropies guaranteed 75% of Goldman Sachs’ investment
SIB Investors: The Single Investor + Subordinated Debt
! Goldman Sachs provided an iniOal investment of $4.6 million.
! Philanthropist J.B. Pritzker has contributed an addiOonal $2.4 million investment in the form of a subordinated loan to reduce risk to Goldman Sachs.
SIB Investors: Government Investor
! The Massachusejs SIB ! Juvenile JusOce Pay for Success IniOaOve will target at-‐risk young men in the probaOon system
! $11.7 million grant awarded by the U.S. Department of Labor
! The London SIB ! Department for CommuniOes and Local Government (DCLG) provided £5M in funding to improve outcomes for a group of 831 persistent homeless residents in London
SIB Investors: MulOple Investors
Closed/Private Investment
! The Peterborough SIB: 17 investors, sourced through private relaOonships, consisOng mostly of private foundaOons and individuals.
! The New York State SIB: First-‐ever SIB offering distributed via a leading wealth management pla4orm – Bank of America Merrill Lynch – to qualified private and insOtuOonal investors. More than 40 investors have parOcipated in this transacOon.
SIB Investors: Private Investors
Open Market Investments ! In Australia:
! Restricted to wholesale investors with income > AU$250,000 or AU$2.5m net worth
! The Newpin SBB raised AU$7M from 59 investors. ! The Benevolent Society SBB raised AU$10M in two tranches: " The $2.5M tranche involves 17 investors (no guarantee, returns capped at 30%)
" The $7.5M tranche involves 40 investors including NRMA Motoring & Services, Australian Ethical Investments and Commonwealth Bank of Australia (investment capital guaranteed, returns capped at 10%)
SIB Investors: Retail Investors
The Essex SIB
! The Allia ‘Future for Children Bond’ aimed at providing foster care was the first opportunity for retail investors to become involved in a SIB
! The Future for Children Bond was constructed of 78% loan to a social housing provider, 20% investment in the Essex SIB and 2% management fees. ! In order to safeguard against ill-‐informed investor mistakes, the Bond was an ‘advised’ product, which meant that financial advisors had to apply on behalf of investors.
! PotenOal for crowdfunded SIBs; but concerns about scalability and which governmental enOty enjoys savings benefits
SIB Investors: Private Investors
AcOvely Involved Investor
! Perth, Scotland SIB: Local investors have contributed between £5000 and £50,000 and are involved in the intervenOon.
! Perth YMCA recruited 12 investors – all local businesses or individuals – who were interesOng engaging directly in the project, providing both investment and skill resources.
SIB Investors: Service Providers as Investors
! The Benevolent Society SBB is an example of a service provider investor
! In the Massachusejs SIB, Roca has suggested it invest in addiOon to being a service provider
Government Procurement
! Three Processes for Government Procurement
! Request for Qualified Intermediary
! Whole Package
! Arranged Marriage
Government Procurement: Request for Qualified Intermediary
# Examples: New York SIB, ConnecOcut SIB # How it works:
# The Government (e.g., Department for Children and Families) issues only one Request for Proposal (RFP) seeking interested intermediaries
# The selected intermediary is then responsible for idenOfying appropriate intervenOon(s) and service provider(s) in conjuncOon with the Government
Government Procurement: The Whole Package
! Examples: Illinois SIB, Department of Labor SIB
! How it Works:
! Government awards grants to applicant groups with fully-‐formed partnerships in place. This partnership must include the roles played by these four enOOes:
" state/local/tribal government agency; " Intermediary; " investor(s); " and independent outcome validator
Government Procurement: The Arranged Marriage
! Example: Massachusejs SIB
! How it Works: ! Government issues a Request for Response (RFR) seeking intermediaries
! Government simultaneously issues a second RFR seeking service providers
! Responders may note pre-‐exisOng partnership with other organizaOons or service providers
! The Government will not accept joint applicaOons ! Government then arranges a partnership between selected Intermediary and Service Provider
SIBs Beyond the Social Sector
! Environmental Impact Bonds
! Health Impact Bonds
! Development Impact Bonds
SIBs Beyond the Social Sector: EIBs
! Environmental Impact Bonds (EIBs)
! MoneOzaOon of future cost savings – the bedrock of SIBs – is already prevalent in environmental finance
! PotenOal applicaOons to: ! Reduced CO2/GHG emissions ! Improved Water quality ! Increased use of renewable energy
SIBs Beyond the Social Sector: HIBs
! Health Impact Bonds (HIBs) ! May 2013 – The first health-‐focused SIB in the US is announced in Fresno, California, which has one of the naOon’s highest asthma rates (20% of children)
! The California Endowment awarded Social Finance and CollecOve Health $660,00 in grant funding to launch an HIB aimed at improving the health of low-‐income children with asthma
! Partners engage families of 200 low-‐income children with asthma to provide home care, educaOon, and support in reducing environmental triggers of asthma
! Savings accrue to the State, which benefits from reduced emergency treatment costs associated with childhood asthma
SIBs Beyond the Social Sector: Development Impact Bonds
! Similarities to SIBs ! Investors provide funds to implement social
interventions ! Service Providers work to deliver outcomes ! Outcomes Funders, primarily public sector agencies,
repay investors their principal plus a financial return if – and only if – independently verified evidence shows that outcomes have been achieved.
! DisOnguishing Features of DIBs: ! External development agencies are needed to provide
the outcome payment, or some portion of it, in partnership with a developing country government
SIBs Beyond the Social Sector: DIBs
! “The Development Impact Bond is almost exactly the same as the Social Impact Bond, the hojest idea in social-‐service provision (an oxymoron if ever there was one) of the last few years. One difference is who repays investors if the program succeeds. With a social impact bond, the government does. With a development bond, payment would fall to internaOonal donors such as foundaOons or government agencies such as Britain’s Department for InternaOonal Development or the U.S. Agency for InternaOonal Development.” ! -‐The New York Times, June 19, 2013
SIBs Beyond the Social Sector: DIB Case Studies ! Case Study 1: ReducOon of Rhodesian Sleeping Sickness in Uganda
! Case Study 2: AnOretroviral Treatment as PrevenOon of HIV and TB in Swaziland
! Case Study 3: Low Cost Private Schools in Pakistan ! Case Study 4: Access to Quality Secondary EducaOon in Uganda
! Case Study 5: SME Pipeline GeneraOon and Value CreaOon ! See, Center for Global Development & Social Finance, Inves,ng in Social Outcomes: Development Impact Bonds
Conclusion & Review
! The Growing Number of SIB Investors
! Government Procurement
! SIBs Beyond the Social Sector
! The CriOcal & Evolving Role of FoundaOons ! Playing the part of guarantor, investor, intermediary, and evaluator