The global financing landscape is currently undergoing large changes. New forms of financing like crowdfunding, peer-to-peer lending, faith affiliated funding sources and others, are rapidly gaining popularity. Also for the financing of social (and sustainable) initiatives, we see the emergence of a number of different developments. For example, a few large Belgian banks recently announced a joint launch of the first Belgian sustainable loan. In addition, the first social impact bond to finance solutions for youth unemployment was recently established. Clearly, private investors and public authorities have a commitment and interest in both making a direct impact on society as well as making a profit. These two poles are no longer at odds. With all the talk around these initiatives, we take this opportunity to take a closer look at social impact bonds and why we expect a strong rise in popularity in the future.
Creating the maximum social impact with limited public funds is a core responsibility for the government. However, it is not always possible to prove that the available public funds are being used effectively for the purposes of achieving the maximum social impact. Typically, three different causes can be distinguished as drivers for the search for new forms of public financing for social projects1.
A first aspect is the fact that the authorities have a tendency to opt for financing based on available funds, rather than focusing on the achievement of (measurable) results. Secondly, public funding is often managed retrospectively, with the financing being granted to existing projects which have often achieved a demonstrable impact in the past. In this way, new and more innovative projects, that possibly would have had a greater social impact than the existing projects, fall by the wayside in terms of public funding. Finally, the time frame for public funding is (all too) often firmly fixed in the short term. As a result social organizations often spend (too) much of their time on short-term fund raising. In addition, funding that is linked to performance will frequently only be disbursed once performance has actually been measured. Certain projects, such as social inclusion projects, really need the funding up-front, before the program even gets started. This logic leads us to the conclusion that a new funding model is urgently needed.
The demand for social investments has grown exponentially over recent years and has resulted in practically all the major Belgian banks offering social investment packages. Investors seem to be interested in getting both a financial and a social return on their money. Social impact bonds, in principle a form of public-private collaboration, could solve both issues. On the one hand it could provide a solution to the issues faced by the public sector while also offering a solution to the growing demand for social investment.
A social impact bond finances projects of social relevance based on a commitment to results. As such, the private investor (typically a bank) offers a specific amount of capital to finance a defined social program delivered by a service provider (typically an organization which aims to achieve certain social goals). If the service provider achieves the social impact - defined in advance - after a given amount of time, the results funder (typically a government body responsible for the policy governing the social program) reimburses the initial investment to the investor. The repayment will only be made if the social impact is actually achieved, which has the benefit that the financial risk is transferred from the government authority to the investor. It is also possible for an intermediary to become involved, to bring together a number of different stakeholders in the deal and to roll it over.
The diagram below illustrates the process of designing a social impact bond2. Given the innovative features of this financing model, the design of the social impact bond can vary widely, and may be tailor-made to suit the situation in which it must be used. It is therefore possible for existing social impact bonds to vary slightly from the model below.
Investors offer a capital sum to support a specific social initiative, for which a defined group of people have the need (for example micro-loans). The service provider will provide this specific social service to the target group, followed by an evaluation of the social impact of this service on the target group. The party funding the results, in most cases a government body, will reimburse the initial capital to the investor, including a previously agreed rate of interest. In order for this kind of agreement to be easily arranged, an intermediary is often brought in to bring together the different parties and negotiate the "terms and conditions" of the social impact bond. The conditions include the interest rates, the result that needs to be achieved, the funds required to make an impact, the timeline, etc.
The table below3 provides a brief overview of the benefits of this financing model for the primary stakeholders. However, this list is limited and can, of course, be extended to include further stakeholders.
KPMG notes that this innovative funding model can offer social projects a bright future. Last year the successful "Duo for a Job" social program was launched, thanks to Belgium's first social impact bond. Currently, around the world, around 322 million dollars are being collected for 89 different social impact bonds4. KPMG is convinced that a considerable number of social initiatives will see the light of day thanks to this new form of funding. Now it is up to the government to assign a portion of its budget to the issue of social impact bonds. Thanks to investment in preventive programs, instead of remedial programs, we will achieve substantial and measurable social impact results.
Internationally KPMG has extensive experience in setting up social impact bonds. For example, KPMG in Australia assisted a consortium of NGOs operating in foster care to set up a social impact bond, whereby the funders were identified from among KPMG's client list. In addition to structuring and setting up social impact bonds, KPMG also has experience in carrying out evaluations to assess the desired social impact and, in doing so, we have taken on the role of evaluator. KPMG has, for example, developed a set of qualitative and quantitative indicators as part of the design of a social impact bond in France. The primary goal for this SIB was to reduce unemployment by offering micro-loans to local entrepreneurs. KMPG also adopted the social return on investment approach to measure the economic impact.
1 Social Impact Bonds: a guide for state and local governments – J. Liebman, A. Sellman
2 The potential and limitations of impact bonds: lessons from the first five years of experience worldwide – E. Gustafsson-Wright, S. Gardiner, V. Putcha
3 A new tool for scaling impact: how social impact bonds can mobilize private capital to advance social good – Social Finance
© 2018 KPMG Advisory, a Belgian civil CVBA/SCRL and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.