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Social Impact Bonds: Foreign best practices

Social Impact Bonds

Social Impact Bonds

Social impact bonds (SIBs) are innovative, alternative forms of financing for social projects that are very much on the rise. The first Flemish social impact bond financed solutions for youth unemployment in Antwerp. The Flemish Government has also decided to ratify a decree on the introduction of social impact bonds to create a legislative framework in which new SIBs can be launched. For more information on how SIBs work and the rationale behind them, please read this article. 

This article elaborates on three existing international SIBs that could potentially be rolled out in Belgium. Each of these SIBs meet the feasibility requirements that were defined by the Brookings Institution based on five years of practical experience. A first condition is that the project result figures must attract potential investors and make it possible to determine whether the intended parameters have been reached. A second condition is a reasonable time horizon for the project to achieve its results. A third condition is that the project target group must be clearly identified and determined. The fourth, and final condition, is that there must also be clear coherence between the social objective of the project and the broader macropolitical and strategic policy of the government, which acts as a results-based backer.

The Flemish Government's ratification of the decree on the introduction of social impact bonds is in line with a worldwide trend: the number of SIB projects worldwide is significantly increasing. The section below highlights some successful social impact bond cases abroad.

Case 1: Microcredits

A first interesting SIB project that deserves some further explanation was used to finance Adie in France. This organization has agencies that mainly provide micro-loans to micro-entrepreneurs who have little or no access to the banking system and/or labor market. However, some people living in certain rural areas could not use Adie's services due to the lack of a local presence. As such, they failed to improve their social and economic situation. To tackle this problem, Adie set up the 'Contrat à Impact Social' (CIS) project. The social services provider for this SIB is Adie itself, which means that Adie is responsible for the project's operational implementation.

BNP Paribas RSE acts as a financial intermediary for this project, so it handles all financial flows. Another actor involved in the project is the public authority Ministère Collectivité territoriale agences de L'Etat. This public institution is responsible for compensating the investors via the financial intermediary based on the extent to which the project objectives have been achieved. The investors for this project are commercial banks and social funds. Together, they have invested €1.2 million in the project's implementation. Finally, the project is assessed by KPMG, which is responsible for defining and evaluating the indicators that measure the project's success.

The results-based contract for this SIB is to provide microfinance to 269 to 500 people living in one of the defined rural areas within three years. Two years after obtaining this financing, 172 to 320 of these beneficiaries need to have improved their professional situation with a newly established company or a new job that can be financed via the SIB. As the project is still ongoing, the results of this SIB are not yet known at the time of writing this article. An economic impact study carried out by KPMG in 2016 does show that each Euro invested in the Adie project generates €2.38 for society after two years.1  

The Adie project was eligible for the SIB's alternative form of financing as it clearly met all four conditions for a successful SIB. Its foundation is a clear results-based contract with the number of people receiving financing and the improvement of their professional situations as the criteria. The target group can also be easily identified: people living in rural areas with no access to Adie's services. A reasonable time horizon was set for the execution of the project: a three-year period for the experiment and a three-year period for its evaluation. The project was also within the broader scope of the macropolitical strategic policy of France.

In Flanders, the use of a similar alternative form of financing could significantly encourage entrepreneurship. The threshold to move into self-employment is currently very high for job seekers in Flanders. People who become self-employed are currently facing a major financial risk, as their unemployment benefit is lost from the day they set up their own business. Minister Philippe Muyters is therefore currently working on the development of a premium to encourage this population group to take the plunge2. In this Flemish context, an SIB could be an innovative way to finance a social program that encourages entrepreneurship in rural areas. 

Case 2: Reoffending in the UK

The first SIB project was launched in Peterborough in the United Kingdom seven years ago. This successful SIB aimed to reduce reoffending among short-sentenced criminals and to break the cycle these individuals are in. To achieve this, the umbrella organization One Service was developed. One Service comprises several social organizations and responds to the acute and complex needs of short-sentenced offenders. These acute needs mostly involve addiction, housing and health.

The Peterborough SIB was financed by 17 private investors, who invested a total of €5 million in the project. The public authority and financial intermediary was the Ministry of Justice, with the support of the Big Lottery Fund. It was also contractually stipulated that they would provide the private investors' return if the project met the requirements of the results-based contract. 

Seven years after the SIB's launch, the results proved a great success. Reoffending by short-sentenced offenders fell by 9%. This result far exceeded the 7.5% target stipulated in the contract. As a result, the 17 investors of the Peterborough SIB received their invested capital back, plus a return of just over 3% per year for the investment period. This positive result proves that this new form of public funding can achieve positive, measurable results for both society and private investors.

The four conditions for SIBs were all met in this case. The clear results-based contract requirements were easy to measure: reoffending among short-sentenced offenders had to fall by at least 7.5%. The seven-year time horizon to achieve the result was sufficiently short and well defined.

Belgium has also faced a high reoffending rate in recent years, according to an article by Knack3. The article says that an analysis of the data from the central criminal records shows that almost six convicts out of ten (57.6%) reoffend at least once. These figures show that Belgian convicts also need new innovative support to help them break the reoffending cycle.

Case 3: Type II diabetes in Israel

The World Health Organization (WHO) has categorized obesity as a global epidemic. Israel is also facing an increasing obesity problem among its population. Unless a radical change is made in the prevention policy, one third of all children now born in Israel will have diabetes by the age of 40. Israel recognizes and acknowledges the problem, but there is great uncertainty about how diabetes can be reduced. In the past, the usual prevention methods have not always led to the desired results. The country realizes that a new innovative diabetes prevention program is required, but preventive programs are often accompanied by great uncertainty regarding the results. That is why the Israeli government decided to finance the prevention program based on a SIB. 

Fifteen parties invested a total amount of €5 million in the project. The parties had very diverse backgrounds and motives, and included philanthropic funds, commercial banks and wealthy individuals from Israel and elsewhere.  

The SIB supports the program, which will last five years and focuses on a population at a high estimated risk of Type II diabetes. The participants will be subjected to a two-year program that aims to change their lifestyle through intense coaching. After this intense coaching, the participants' blood values will be monitored for three years to evaluate whether the prevention program has achieved its goal.

If the program proves successful, three different results-based backers will pay back the original investors plus a limited return. These results-based backers will see an immediate effect on their costs if the program becomes a success. The Health Maintenance Organizations (HMOs) will see an immediate reduction of their costs, because they will have to treat fewer diabetics. The National Insurance Institute will also avoid costs thanks to a reduction in disability benefits.

This project also meets the preconditions for setting up a successful SIB and has the potential to be rolled out in other countries. Care providers all over the world are looking for new effective and efficient ways to prevent diabetes.  

Conclusion

These three cases are just a few examples of the ever-growing number of SIB projects worldwide. KPMG is convinced that innovative social programs financed by SIBs can also help Belgians in difficult social situations. SIBs can be the necessary catalyst to bring about this change, particularly in policy areas where creative, innovative and out-of-the-box solutions are required. Financing future social projects in Belgium with an SIB should therefore be increasingly considered as a fully-fledged alternative.

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