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• a longer implementation period for greater service flexibility — the investor’s multi-year funding for the services gave the contractor more autonomy to flexibly implement the project tasks;
• not just a one-time fixation on results — monitoring was conducted regularly during the project, with monthly reports being provided to investors;
• visible social effect — the requirement to demonstrate social impact on an ongoing basis resulted in the continuous development of new methodologies to study the social problem being addressed, which could only yield a positive social outcome.
As we can see, the very first social impact bonds project offered the contractors plenty of room to develop efficient impact tools, and innovate in analyzing the social problem at hand, while investors received regular opportunities to monitor the project’s progress.
Since then, more than 30 social impact bonds have been implemented in the UK (A guide to Social Impact Bonds, 2017). In describing the British program of state support for social projects (Guidance on developing a Social Impact Bond, 2017), it is emphasized that the private contractor’s main interest is to develop innovations in the evidence-based approach for assessing impact effectiveness. Costs are treated as current costs multiplied by a percentage of the maximum rate of return. The estimated value of social change is added to the formula, based on the value of the social results achieved.
Academic researchers (Warner, 2013) argue that Britain’s experience shows the inevitable emergence of an industry of social impact evaluators and contract mediators who will ultimately become the main beneficiaries of these projects. Moreover, the effect on public policy turns out to be highly controversial, since projects are often limited by their context and are not reproducible. On the other hand, the project itself is a de facto instrument for privatizing state social functions within the framework of the New Public Management program. The contradiction here is that the social problem is broader than the ongoing project, or the project is too extensive, and would be cheaper to implement with the government’s tools. However, it is worth noting that the state is less flexible in inventing new problem-solving methods.
The authors quote (Warner, 2013, p. 313) a British investor who participated in a social impact bonds project:
"[These projects] involve high-risk investments with low or medium rates of return," which reduces the appeal for investors because, in addition to less than favorable financial conditions, they have to deal with the state which, by definition, is more demanding and more rigid than private sector players.
THE US EXPERIENCE. A TOOL WITHIN IMPACT INVESTMENT
McKinsey's U. S. office in 2012 came to the following conclusion about social impact bonds (SIBs): they are a social intervention assessment tool that allows the government to pay for results and investors to invest in things that actually make an impact. The introduction of SIBs in the United States began as an attempt to catch up with the British experience (Moodie, 2013). Design for the first projects started in 2013. Despite a higher volume of impact investment than in the UK, SIBs failed to immediately be adopted as a common tool in the United States. This is primarily because SIBs are not a type of investment, but rather a contractual mechanism that requires an experimental design.
Social motivation is an important aspect: the profit would be higher at the same risk level when working with commercial players.
Thus, Americans saw SIBs primarily as a tool within impact investing which facilitated the development of more efficient interventions in the social sphere and assessed their impact.
Like in the UK, the first social impact bonds project in the US was also focused on reducing the reoffending rate among ex-convicts. Goldman Sachs (2020) acted as the investor in partnership with the city of New York. The investment totaled $9.6 million, with the expectation that the entire amount would be repaid upon meeting the goals. If the results exceeded expectations, the investor would receive a financial return comparable to that of typical lending, pro rata to the performance above the target.
The Center for Public Impact (a BCG foundation) notes (2016) that large investors can offset the increased risks of participating in SIBs through economies of scale. Social motivation is another important aspect for the investor: the profit margin would be higher at the same risk level when working with commercial players. As of 2016, SIBs remained largely a British story, as more than half of them were conducted in the UK. Proponents of this format see the advantage of social impact bonds in outsourcing the financial and political risks of addressing social issues, while creating opportunities to improve social impact tools.
We should note that descriptions of the US experience in implementing SIB never mention that investments were repaid per the "costs x key interest rate + assessed value of the social impact" formula, just that the actual investment was recovered. In other words, the American funding model is less economically feasible than the British model.
THE EU EXPERIENCE. TOOL FLEXIBILITY
A policy brief from the European Parliamentary Research Service (Davies, 2014) describes SIBs as a way for public authorities to try out a social service without spending money on it in the absence of positive results, and without bearing political responsibility. The policy brief also considers this innovative tool as a part of social investment, with its respective cost allocation. For example, during the implementation of the European Commission's investment program, an agreement was reached (Fraboul, 2020) between BNP Paribas and the European Investment Fund with the aim of facilitating access to
