Discussion paper Social Impact Bonds as a resource raising

instrument for Oxfam America Dec 2012

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THIS PAPER This paper considers the Social Impact Bond as a possible resource raising instrument for Oxfam America. The paper outlines the nature, history, advantages and risks associated with the Social Impact Bond. It goes on to outline recommendations to continue our investigation.

EXECUTIVE SUMMARY

1. INTRODUCTION

1.1 DEFINING A “SOCIAL BOND” While there are numerous social-orientated investment instruments/approaches, this paper speaks to the instrument most frequently referred to as a Social Impact Bond (SIB).

A social impact bond is an investment by an investor in a project that pays for the multi-year delivery of social service interventions with the expectation of improved social outcomes for the clients and cost savings/efficiencies for public agencies that can then be used to repay the bond. Investors will typically receive repayments if the intended social impacts and cost efficiencies of the project are achieved. The investment capital is used to commission service providers, with investors receiving a portion of the projected cost savings if the intervention is successful. They are unlike Government Issue bonds in that they do not necessarily promise a fixed rate of return or any form of debt security-i.e. the government will not repay the bond if the social mission is not attained.

An example: The pilot social impact bond in Peterborough Prison in the United Kingdom is a program to reduce reoffending rates of short term prisoners. £5m was raised from 17 social investors to fund a consortium of nonprofit organizations over six years to work with 3,000 prisoners after they are released to reduce their reoffending, measured by convictions. If the social impact bond delivers a drop in re-offending beyond 7.5%, investors will receive an increasing return capped at a maximum of 13% per year over an eight year period.

The process is summarized in the sketch below. The orange arrow indicating the point at which fund flows are repaid and investors achieve their return

In the context of a developing economy, outcomes other than lower public spending are required. In this instance the better social outcome may be increased status of the poor rather that savings in public spending. Hence a variation on the SIB model is needed: The bond is not recovered from the poor, but rather development agencies with poverty reduction or development mandates opt to guarantee the bond issue and ultimately repay the bond issue and thereby the socially interested investor..

This introduces Development agencies as guarantors repaying the SIB whist the poor retain the gains accrued through the investments made.

1.2 HISTORY SIBs are seen as a tool that governments are increasingly exploring to help attract private capital for public benefit and nonprofit organizations are considering in order to diversify sources of revenue. It started in 2007 when the UK Prime Minister’s Council on Social Action (a group of ‘innovators from every sector’ brought together to ‘generate ideas and initiatives through which Government and other key stakeholders can catalyse, celebrate and develop social action’) was asked to explore alternative models for financing social action. The group began to develop the idea of a Social Impact Bond. The first Social Impact Bond was announced in the UK on 18 March 2010 to finance a prisoner rehabilitation program. The work is has since been taken forward by a number of organizations including Social Finance, the Young Foundation, the Center for Social Impact in Australia, other NGOs and private firms.

In the United States, Social Impact Bonds have also generated interest. In February 2010, President Obama’s proposed 2012 budget stated that up to $100m would be freed up to run Social Impact Bond pilot schemes.[29] Then in 2012, Massachusetts became the first state to use a competitive procurement process to secure social innovation financing for social services1. The state legislature authorized spending up to $50 million on the initiatives. [30][31]

1.3 WHAT A SOCIAL BOND IS NOT SOCIAL IMPACT BONDS ARE NOT BONDS in the conventional sense. While they are time bound and they can offer a fixed rate of return. Notwithstanding the role of guarantors in the context of the developing economy, repayment to investors is usually contingent upon specified social outcomes being achieved and therefore in terms of investment risk Social Impact Bonds are more similar to an equity investment.

SOCIAL IMPACT BONDS ARE NOT GOVERNMENT GRANTS. Current government granting programs (generalized):

• Commit to funding arrangements that focus on inputs and outputs of social programs. • Provide funding to programs on a short-term, (sometimes) recurring basis. • Commission on the basis of cost of service, not value derived.

Current government granting programs do not (generalized):

• Have a longer time horizon • Leverage other private capital sources or cross-sector partnership opportunities • (significantly) Fund prevention methods • Use a set metric, aligned to the interests of multiple stakeholders, to measure the outcome of an

intervention. • Produce financial returns that can be reinvested into producing positive social outcomes. • Commission on the basis of ability to deliver positive social outcomes

2. EXPLAIN WHAT TYPES OF ACTIVITIES ARE MOST SUITABLE FOR A SOCIAL

BOND

                                                                                                                                       1  Bonds that bring social dividends, http://www.bostonglobe.com/opinion/2012/08/17/first-for-massachusetts-social-

Massachusetts Announces Nonprofit Partners in 'Pay for Success' Experiment , http://foundationcenter.org/pnd/news/story.jhtml?id=387700032

Whilst to date SIBs have largely been based on using the impact investing model to increase the level of prevention investment in niche social areas 2 in developed economies (the first diagram). The second approach (second diagram) can be used for social development in the context of the developing economy.

The critical characteristics of an eligible investment are:

PROVIDE SOCIAL ADVANTAGE (PREVENTION OR DEVELOPMENT) This is the reason for considering the investment in the first place.

SCALABLE The intervention must be of size to warrant the investment in preparing a SIB Issue. There is no prescription at this stage but assume a minimum issue of $USD5million with the intervention to be complete by year 5 and the repayment to be complete by year 10.

MEASUREABLE Being able to measure the performance of the investment is critical. Ultimately the payment against the issue (and the prospect of subsequent issues) is reliant on being able to show results. Programs that offer the opportunity for quantifiable measures will serve better. An outcome metric must be decided by all stakeholders

ENDORSED BY STATE The issue must be underwritten by the State. While the State may not take any active role in delivery of the intervention it will assume the risk of underwriter. For this reason the intervention should fit within Social Development Strategy or Economic Development Strategy of the State.

MARKETABLE Ultimately this Social Impact Bond will have to hold resonance with the market.

EXAMPLES FROM WITHIN THE OXFAM AMERICA PORTFOLIO Taking Savings-led microfinance (SLM) to scale.

• Would offer predictable and measureable increase in economic performance and investment at the ‘bottom of the pyramid’ with 70% of monies saved being re-invested in livelihoods, including agricultural inputs. Can be aligned to national agricultural strategy.

• 15% of monies saved being re-invested in consumption-orientated loans can be aligned with national social safety net strategy (In fact Savings-led Microfinance is the only privately funded SSN in the world that is funded entirely by the poor for the poor)

Taking Micro-insurance to new markets,

• Would create predictable and measureable incentive to greater local level investment

Taking SRI to scale

• Would offer predictable ad measureable increases in the national rice crop. (May be space to negotiate a hybrid of the two approaches as there is immediate opportunity for value to accrue in the value chain beyond the poor.

3. ANALYZE THE INCENTIVES FROM THE STANDPOINT OF THE DIFFERENT PARTIES

INVOLVED

                                                                                                                                       2  http://socialfinance.ca/social-­‐impact-­‐bonds    

GUARANTOR The likely guarantor for a program of this nature is the multi-lateral and bilateral development agencies and development banks with social development and economic development mandates

• There are several advantages from their perspective. Development agencies are able to leverage private sector investment to scale and accelerate their social and economic objectives

• They can heighten coordination between resource agencies and the agencies commissioned to deliver the services supported via the SIB.

STATE • The State will see accelerated and scaled interventions that are aligned to their strategy • Acting as underwriter is able to oversee implementation strategy.

INVESTOR SIBs are likely to attract Investors that are interested in achieving a dual social and financial return (i.e. impact investors). Specifically, investors interested in providing capital for socially aligned, evidence-based interventions. These investors may be motivated for a variety of reasons that could include: a specific social cause, early adoption or proof of concept for an emerging impact investing model, reducing the strain on public funds, or a financial vehicle with limited correlation to financial markets.

• These investors would understand the risk inherent in making a social investment and, importantly, the chance that they will not receive their principal back if the intervention is not successful in meeting its target objectives.

• Motivated investors could include community and family foundations and high net worth individuals. After a track record is established, other investors who are seeking blended returns could be interested in SIBs.

• The private sector would also find appeal in SIBs as it allows an interesting option in CSR, particularly if the SIBs are directed toward a sector in which the investor is active. For example the finance sector.

COMMISSIONED AGENCY • (such as Oxfam) will have access to significant, assured and long-term resources in order to deliver

services to the poor

SIBs are best suited to service providers that have a track record of successfully delivering interventions within a target population. Some of the characteristics shared by these providers include:

• In-house ability to collect data, track outputs and measure outcomes over a period of time. • Focus on prevention measures in a given issue area. • Ability to provide programs in collaboration with other providers, or have the ability to adapt quickly

to meet the needs of a complex population. • Existing capacity and expertise for multi-year and forward-looking planning, budgeting and financial

management that is necessary for the efficient utilization of upfront SIBs capital • Key indicators of financial health reflect levels of durability and sustainability reasonably required for

participating in longer term contracts • Operate in an intervention area where significant cost savings and downstream value creation

opportunities exist.

The benefits include

• A reliable source of funding for the life of the program • The ability to deploy capital in a flexible manner, not tied to funding constraints

• Opportunity to enter into collaborative, not competitive, long term relationships with other service providers offering similar or complementary services

• The ability to work across, and tap into support from, multiple sectors • If successful, potential to scale program through increased exposure and (potentially) new funding

sources. The table below provides some indication of the potential ‘worth’ that Oxfam would encourage if a $5million SIB was invested in SfC over 5years in Cambodia. In the first 5 years 200,000 clients would be reached and that would accumulatively control approximately $40 million. With no further investment we would anticipate that would accumulatively control $77million. (figures are estimate only).

4. ANALYZE THE RISKS FOR THE DIFFERENT PARTIES INVOLVED, ESPECIALLY FOR

OXFAM PROVEN ABILITY TO GO TO SCALE is critical because.

Repayment to investors is contingent upon specified social outcomes being achieved and therefore in terms of investment risk Social Impact Bonds are more similar to that of a structured product or an equity investment.

For this reason MEASURABILITY IS EQUALLY CRITICAL

BRAND ASSOCIATION WITH GUARANTORS AND INVESTORS Would have to put checks in place to ensure appropriate guarantors/ investors. This would be incorporated into the design of the bond itself, (check on this as option).

FAILING TO DELIVER AS A COMMISSIONED AGENCY/ NOT ACHIEVING SCALE This risk in considered in every intervention. SIBs should only be considered for interventions already proven at scale or substantial markets - if the intervention fails to achieve the targeted social outcomes, investors may lose trust in the approach and the organization may not be able to win future contracts

COMPLEXITY CREATED BY MULTIPLE GUARANTORS This is an issue of

PRIVATE INVESTORS MAY SEEK TO ASSERT CONTROL over service providers and interfere in order to influence the process to achieve ‘better’ social outcomes

WHAT IS THE PROCESS OF IMPLEMENTING A SOCIAL IMPACT BOND? Implementing a SIB requires feasibility testing, government procurement alterations, a capital raise and deal structuring, and a performance management strategy grounded on the acceptance of performance metric(s). Various roles and responsibilities are required in the implementation of the model. This can be illustrated in stages:

Stage 1- Feasibility

• Identifying and defining an appropriate outcomes • Identify appropriate guarantors • Identifying appropriate interventions and the availability of potential service providers • Analyzing potential returns to investors

Stage 2- Preparation for Implementation

• Developing a robust contract between public sector agencies and the social impact bond delivery agency

• Raising investment into the social impact bond

Stage 3 - Delivering Outcomes

• Identifying appropriate service providers • Monitoring and flexing interventions through the intervention period • Ensuring ongoing impact

A RECOMMENDATION AS TO THE SUITABILITY OF OXFAM AMERICA GETTING INVOLVED IN SOCIAL BONDS Oxfam America is particularly well positioned to investigate the application of SIBs in the development context. The OA portfolio includes a series of products proven in several markets… and proven at substantial enough scale to encourage State/Guarantor/Investor confidence in OA’s ability to deliver agreed outcomes.

That said, the approach is new and as Annie Olszewski, Harvard points out, “in a volatile economic market, attempts to attract investors to a new financial instrument must be approached with extreme caution and careful presentation.” - and this requires a set of competencies that OA (like most INGOs ) does not have. To this end a new group of intermediaries are emerging. In SEA we have identified Singapore-based Asia IIX as one amongst them with a professional profile and substantial experience. They have provided a preliminary proposal to work with OA on the development of a SIB based on SfC in Cambodia.