An Intern’s Perspective: My Summer at Social Finance

This summer, I had the privilege of serving as the first [Harvard University Institute of Politics] Director’s Intern at Social Finance (SF), a Boston-based nonprofit organization dedicated to mobilizing investment capital to drive social progress.

Central to SF’s work is an innovative financing tool called the Social Impact Bond (SIB), a public-private-nonprofit partnership that has the potential to scale evidence-based social interventions, create taxpayer efficiencies, and generate financial returns for investors. SF structures and manages SIB transactions, and also helps governments and service providers develop the capacity to become stakeholders in these initiatives.

Today, there are four SIBs operating in the United States—directing $50 million in capital to the social sector—and over two dozen additional states and counties actively pursuing SIBs in their respective jurisdictions. These projects are aimed at addressing a diverse array of issues in areas such as health, education, homelessness, criminal justice, and workforce development.

The work I was assigned at SF was engaging and informative, providing me the opportunity to gain real insight into the emerging field of Pay for Success and Social Innovation Financing. In my role as a communications intern, I updated SF’s social networking outlets, marketing materials, and website on a regular basis and took on ad hoc responsibilities as they materialized. The most challenging and rewarding projects I worked on this summer involved constructing a comprehensive database of SIBs in operation and development around the world and writing a post for the SF blog that was later picked up and circulated by the global daily SIB Newsletter.

When I first walked into the office, I was surprised (as most visitors are) by the conspicuous absence of cubicles or partitions. Everyone—from Associates to the Vice President, Managing Director, and CEO— sits side by side at adjoining desks. As I bounced between temporarily available seats over the course of the summer, developing a deeper understanding of different projects and closer relationships with my fellow coworkers, I quickly realized the value of the open floor plan. This unique layout facilitates a collaborative work environment and speaks to the firm’s people-centric culture.

Throughout the summer, I received constant guidance and support from my supervisors, who were just as willing to answer questions in my seventh week as they had been on my first day. The team members, universally inspiring in their knowledge and passion, were always open to sharing their experiences and offering advice. Bonding occasions ranging from impromptu coffee breaks to newly instituted “Food Truck Fridays” were highlights of the internship.

I am incredibly grateful to the SF staff for taking a genuine interest in my development and making me feel like part of the team. I would also like to thank the IOP for coordinating what was truly a fantastic internship experience.

This summer marked a particularly exciting period of growth for this nascent sector with the introduction of bipartisan federal Pay for Success legislation in Congress (the Social Impact Bond Act in the House of Representatives and the Pay-For-Performance Act in the Senate), the publication of the United States National Advisory Board on Impact Investing’s recommendations for supercharging the industry, and the launch of the Social Innovation Fund’s $11.2 million Pay for Success grants competition.

Though I will no longer be held accountable for remaining informed of such advances in the field, I fully anticipate following the evolution of this exciting space to a mature and established industry trusted to tackle society’s most complex challenges.

Entry by Maddie Sewani, Harvard University ’16

This post was also published by Harvard University Institute of Politics here.


First Official Results Demonstrate Positive Outcomes at Peterborough

Today, Social Finance UK released the first official results on the Peterborough Social Impact Bond (SIB)—the groundbreaking transaction that inspired numerous projects around the world.  An independent evaluator found that the SIB-financed program, One Service, reduced reoffending among the first cohort of 1,000 ex-prisoners by 8.4 percent compared to the national experience.  If this trend continues, investors in the transaction will recoup their principal and earn a positive return when the project concludes in 2016, as this reduction exceeds the performance threshold of 7.5 percent.[1]

Beyond remaining on track to deliver social and financial returns to investors, the project at Peterborough is also demonstrating some of the core benefits of SIBs.  The project catalyzed a policy conversation throughout the United Kingdom about how to better rehabilitate short-term offenders, and the Ministry of Justice recently announced a nationwide program to deliver services to this population.  This underscores the potential for SIBs to spur government reform.

Additionally, the program illustrates substantial operational improvement over time, reflecting the power of data-informed project management and flexibility that are core to the SIB model.  Engagement and uptake of services in prison increased from 74 to 86 percent since services began, and from 37 to 71 percent post-release as One Service adjusted its operations.

As the world’s first SIB, Peterborough has become an iconic program, and in that context we are pleased and encouraged by these results – both as a sign of progress for the Peterborough project itself, and for the evolution of the entire sector.  They indicate that active performance management is critical, that investors are indeed taking on risks, and that the deal was well-structured to benefit all stakeholders in a fair and reasonable manner.  As clear-eyed practitioners in the field, we are well aware of the challenges inherent in launching a new financial instrument, and are mindful of the need for continual learning.  In that sense, early data points like these are valuable to all of us seeking to advance and build a strong field.

Perhaps most important, however, today’s announcement reminds us that the real value of SIBs lies in their ability to improve lives for vulnerable and underserved populations; the financial instrument is a means to an end.  As rigorous evaluation now reveals that the Peterborough project is delivering a meaningful improvement in life outcomes for formerly incarcerated individuals, which translates into fewer crimes, fewer families divided by the return of a father or son to prison, and increased numbers of ex-offenders who find gainful employment. This is the real bottom line, conveying the promise and power of the SIB model.

[1] There was a provision for early outcome payments in August 2014 had the program outperformed and delivered a 10 percent reduction in recidivism for the first cohort.  Investors will not be receiving these early payments, but are well on track to receive outcome payments for both cohorts as scheduled in 2016.

Entry by Jane Hughes, Director of Knowledge Management 

Guest Blog from SFUK Director of Peterborough Project: The One Service Delivers Results for Peterborough Prisoners

Finally we can answer the question about how things are going in Peterborough. All the indicators so far had been positive but it’s great to hear that reconvictions are down by over 8%. If we keep up our hard work, our investors look likely to make a return in 2016.

This project oozes innovation and it has been so exciting to be part of it. The team of staff and volunteers are incredible, as are our local partners, so it is no surprise to find that we have had a positive impact. You often hear people talk about multi agency working but I’ve never experienced it quite like this before. The fact that we had seven years, a flexible budget and one outcome, to reduce crime, resonates with agencies across the spectrum and their buy-in has been fantastic.

It’s been hard to get an accurate sense of performance up until now as the control group hadn’t been created. We do know that clients and stakeholders have been reporting that crime is down and people are changing habits of a lifetime but it is so good to see it in black and white. (It’s official!)

Our clients face multiple barriers and often have entrenched behaviour patterns so this journey hasn’t been an easy one. I am so proud of the way they have embraced the opportunities and made efforts to change their lives. It has been really exciting to see them open up and engage with the service. Some take time to build trust, and progress has been slow and steady over the last three years. This reinforces my view that projects like this need to be long term, so we can establish meaningful relationships and integrate fully into the local landscape. It’s been really hard work and at times immensely frustrating but it’s great to know that it is working.

The One Service was set up to be a seven year project and that is what we all signed up for, so it could evolve and improve further over time. It is a big personal disappointment that it was brought to a close two years early and it is a decision that clients and stakeholders are also struggling to accept. The team will however do our best for the remainder of Cohort 2 and use the learning to date to continue to improve. Thanks for everyone’s support!!

Entry by Janette Powell, Social Finance UK Director of the One Service and the Peterborough Social Impact Bond

Thoughts on the Future of the SIB Market: A Summary of SSIR Webinar, “Social Impact Bonds: From Concept to Reality”

The Social Impact Bond (SIB) market has recently gained tremendous momentum. Today, there are four SIBs operating in the United States—channeling $50 million in capital to the social sector—and at least two dozen additional states and counties actively pursuing SIBs in their respective jurisdictions. SIBs are also garnering significant attention in the international arena. However, despite the progress achieved to date and media buzz generated by this innovative financing mechanism—there is even a daily global online SIB newsletter—SIBs have yet to achieve proof of concept.

On June 4, the Stanford Social Innovation Review hosted a webinar titled “Social Impact Bonds: From Concept to Reality” to identify what steps will likely need to be taken in order for SIBs to become a well-established, widely-accepted option for funding social interventions at scale. The session featured Social Finance CEO Tracy Palandjian and Sam Schaeffer, the CEO and Executive Director of the Center for Employment Opportunities (CEO).

Tracy delivered an overview regarding the state of the domestic SIB marketplace, focusing particularly on the nation’s first state-payor SIB, a transaction focusing on reducing recidivism and increasing employment in New York. However, she warned that this is not the only appropriate SIB model because at this still-nascent market stage, each deal is unique. “If you’ve seen one SIB,” she said, “you’ve only seen one SIB.”

Sam then shared CEO’s firsthand experience partnering with Social Finance on the New York State SIB. He also presented a framework in order to assist providers in assessing risks and opportunities across six major components of SIB transactions: capital source, investment stake, payment type, performance threshold, geography, and evaluation measures. He explained that in CEO’s first SIB transaction, his team believed it was important to: unlock new private capital without diverting a high proportion of existing philanthropy to the SIB; have zero skin in the game so CEO’s staff could concentrate on executing well; receive unrestricted, upfront funding so they could pay for service delivery as it happened; commit to a performance threshold within the confines of results CEO had previously produced; scale the program in jurisdictions where CEO had proven impact; and focus on measures for reducing recidivism for which CEO had demonstrated effectiveness.

Below are a few key takeaways from Tracy’s and Sam’s presentations regarding the transformative potential of SIBs and the future of this young market:

  • SIBs have the potential to fill a critical gap in the broader continuum of capital available to providers: Tracy explained that foundations in their capacity as grant-makers are in the business of “incubating great social innovations.” In an ideal world, government—as the largest funder of social services—would eventually “take out” philanthropy and “use its strong policy lever to allocate funds” for proven programs run by high performing organizations. The current state of affairs doesn’t reflect this “nirvana,” however. SIBs can fill this critical gap in the continuum by increasing the flow of “1) upfront, 2) multi-year, 3) highly flexible” capital to evidence-based providers in order to “accelerate that link to government uptake.”
  • SIBs represent a model for provider-friendly, performance-based contracting: Sam commented that if all government contracts could be structured like SIBs, “where the marginal costs are paid for, where the full overhead rate is paid for, we would be a much different organization vis-à-vis scaling. This is a great model for how I think performance-based contracting can work for providers.”
  • More experimentation must be done: Tracy stated that more deals need to be launched in order for the industry to fully take flight. “There’s got to be a great degree of experimentation still, because we want to continue to learn…. Standardizing too early could threaten the market if we’re not standardizing the right thing.”
  • SIBs promote much-needed sustained engagement by all parties: Tracy emphasized that “True societal change at scale requires [a] sustained effort over long periods of time.” SIBs are meant to address “gnarly, multidimensional, complex problems that can’t be solved overnight.” The hope is that SIBs “can promote sustained engagement by all parties—the provider, the clients on the ground, [and the] government.”

Both Sam and Tracy remarked on the collaborative nature of the industry. Sam conceded that entering into the transaction was a risk, but explained that the risk was mitigated by the SIB partnership structure. “Based on the commitment we saw from Social Finance, the commitment we saw from New York State—[CEO] knew this was a very good road to pursue.”

All stakeholder groups have contributed to the development of the market so far—“government in catalyzing the space, foundations in providing technical support, and providers in executing the work that improves people’s lives,” according to Tracy. This collaboration must continue. Tracy asserted that whether we can realize “the promise of [SIBs] being a multibillion dollar market to finance significant social change at scale” will be up to all players in the market and whether they can collectively continue doing the on-the-ground work that generates results in the coming years.

Entry by Maddie Sewani, Harvard Director’s Intern

First of Its Kind: Federal SIB Legislation Introduced

The pace of exploration regarding Social Impact Bonds (SIBs) has picked up at the federal level. President Obama’s FY2015 Budget included nearly $500 million in Pay-for-Success-related (PFS) funding, including a $300 million Treasury “Incentive Fund” and millions in Social Innovation Fund (SIF) grants. There are clear indications that the SIB conversation is moving forward at the federal level in a fashion already embraced in red and blue states – from Utah and Oklahoma to New York and Massachusetts.

On June 18th, Rep. Todd Young (R-IN, 9th) and Rep. John Delaney (D-MD, 6th) released the first federal-level PFS legislation, the “Social Impact Bond Act.” The draft legislation advances an approach to SIBs that provides an accountable, bipartisan basis on which to bring this still nascent market to the national level. Young and Delaney were joined by four Republicans (Reps. Griffin, Reed, Ross, and Schock) and three Democrats (Reps. Larson, Polis, and Kennedy) in introducing the legislation.

The goal of Rep. Young’s April legislative draft, one shared by the current legislation, was to “Improve the lives of families and individuals in need by funding social programs producing real results; to ensure effective use of federal funds; to scale effective social interventions already being implemented at various government levels; [and] to scale pay-for-performance within the social sector.” This bill represents a good first step toward making that goal a reality.

The $300 million legislation empowers the Treasury Secretary, with the assistance of a Federal Interagency Council, to fund feasibility studies, pay independent evaluators, and provide SIB outcome payments for contracts inked with state and local governments. The SIB Act identifies social policy areas that applications may address as projects with “measurable, clearly-defined outcome[s].” Smartly, policy areas listed are not limited to those appealing primarily to Republicans or Democrats. The bill would support projects focusing on a variety of outcomes – from increasing employment for the long-term unemployed to reducing dependence on federal means-tested benefits to reducing the incidence of low-birth-weight babies.

As a first step towards a SIB contract, states and localities can submit feasibility study applications, which at Treasury’s discretion, the federal government may fund at up to 50% of expected costs (although Treasury may spend no more than $10 million on feasibility studies in total). These extensive feasibility studies will essentially allow for extensive pre-vetting of SIB contract applications, owing to the mandated inclusion of outcome goals, intervention descriptions, target populations served, evidence demonstrating success, projected costs/savings, and other salient factors.

The Act is well-aligned with SIB goals to date. Particularly, both the feasibility and final SIB applications place a high priority on outcomes. And PFS contracts, at their core, allow government jurisdictions to determine an acceptable price to pay for social outcomes. Additionally, by purposing federal money – equal to any federal savings resulting from the contract within a ten-year horizon – towards additional outcome payments, the legislation may open up the market to projects with benefits that accrue across various agencies and levels of government. This is particularly exciting in the healthcare arena, where the Medicaid cost burden is shared by federal and state governments and the federal government picks up the Medicare tab.

The group sponsoring the SIB Act further demonstrates the inherently bipartisan appeal of a concept that promotes the accountable use of taxpayer dollars and an intense focus on measurable social policy outcomes. The legislation provides a strong foundation on which future federal involvement in the SIB market may rest.

Entry by Daniel Rubin, Associate

Social Impact Bonds: Healthy Dialogue on a Young Sector (from The Nonprofit Quarterly)

This article was originally published in The Nonprofit Quarterly and may be found online here:


Those of us with Google Alerts tuned to Social Impact Bonds, or SIBs, have found our in-boxes busier than ever in recent weeks. Toward the end of April, the UK government announced that the world’s first SIB, at Peterborough prison, would wind down early because the government would be financing the program itself starting in 2015. Barely a week later, there were Senate hearings on SIBs, which we found to be both balanced and intelligent, so we were surprised to discover that Rick Cohen seemed to have a different impression.

Now seems like a good opportunity to reflect on questions and concerns regarding SIBs. We at Social Finance share some observers’ worry about the gap between the hype and the reality of SIBs. Senator Angus King’s question, voiced at the Senate hearings, “Why doesn’t the government try to get it right?”—instead of financing social programs with private capital—resonates with us as well. And we understand Senator Kelly Ayotte’s puzzlement when she wondered aloud why the Massachusetts SIB involved $12 million in private capital but $27 million of outcome payments.

We view this as part of a healthy dialogue on an innovative and new mechanism to re-imagine the role of capital markets in social services; we welcome and even share many of these questions and concerns. The Senate hearings were an important part of this dialogue, in which senators posed questions that deserve a more thorough response than the limited time frame and format of the hearings allowed.

Do SIBs save the government money?

Senator Ayotte’s question about the $12 million to $27 million gap is the most easily answered, but unfortunately the Senate hearings did not allow time for a full response. The Massachusetts project involves $12 million in private capital, plus $6 million in recoverable grants (philanthropic grants that will be recycled for other philanthropic purposes). The $27 million is the maximum outcomes payment possible under the contract; at this level, the state would realize around $18 million in net savings—after the outcome payments have been made.

Indeed, a hallmark of all SIBs, including the New York State Social Impact Partnership led by Social Finance US, is the understanding that performance-based outcomes payments from government never exceed the savings and benefits accruing to the public sector. In the New York State project, for example, should a 40 percent reduction in prison recidivism be achieved, the outcome payments would total $21.54 million while the public sector benefits total $37.34 million. These numbers should lay to rest the suggestion that SIBs do not deliver cost savings.

Two of the Senate witnesses, who worked on a SIB analysis for the state of Maryland that recommended against the use of SIBs, referenced their report in citing a lack of cost savings. However, we challenge some of this report’s key assumptions, including those around marginal costs, multiple streams of value, recidivism and victimization reduction, and target population. The report assumes, for example, that a SIB would be focused on offenders with the average recidivism rate. However, a SIB targeting higher risk individuals (like those in Massachusetts and New York) would yield a larger absolute reduction in recidivism and, thus, more savings.

Also, SIBs are about much more than short-term savings. As Senator Mark Warner observed at the hearings, SIBs are “designed to ensure that government only pays for what works.” This stands in stark contrast to the “base budgeting” norm, which is framed by the prior year’s funding level rather than outcomes. Referring to base budgeting, Senator Ayotte quoted Ronald Reagan’s remark that “There’s nothing closer to eternal life than a government program.” SIBs are designed to break this mold.

SIBs also support evidence-based spending patterns and incentivize public-private partnerships. The Peterborough SIB, for example, is ending early not because it hasn’t worked, but because it has. Partly thanks to the SIB-financed project, government has become convinced of the value of funding reentry services for all short-term ex-offenders like those being served at Peterborough, and is taking on the responsibility for funding nationwide programs in the future. As Professor Jeff Liebman noted at the Senate hearings, SIBs are “useful for breaking through…obstacles to reform.”

And perhaps most important, short- to medium-term cost savings are only one aspect of the social and economic value that SIBs can deliver. We can monetize the budgetary savings achieved when SIB-financed support services succeed in keeping an ex-prisoner out of prison and gainfully employed over a 3-5 year time frame. What is left out of that equation, though, is the broader social improvement that derives from lower crime and a more productive citizenry.

Do investors demand an exorbitant risk premium?

Senator King suggested that the only way SIBs would work was if the funders took on substantial risk—for which they would expect to be compensated by a substantial risk premium, i.e., high returns on their investment. In a similar vein, some articles about the Peterborough events have suggested that future investors will be deterred from participating in future SIBs because of the early winding-down of Peterborough.

In fact, these statements reflect a misunderstanding of the motives of SIB investors. SIBs do not and should not appeal to finance-first investors, who are primarily motivated by profit maximization. Rather, SIBs are designed for double bottom line or impact investors, who seek social value alongside financial value. As Bank of America Merrill Lynch Managing Director Liam O’Neil recently remarked of their participation in the NYS project, “We were increasingly being told by our clients that they wanted their investments to be reflective of their values.”

Thus, expected returns on the Massachusetts and New York State transactions are in the low-to-mid-single digit range, which does not reflect a substantial risk premium. And from the Peterborough investors’ point of view, if the SIB contributed to government policy reform that removed the need for SIB financing, that is definitely a win.

Do these complex programs make heavy demands on scarce government resources?

Senator Ayotte worried, quite rightly, about the complexity of SIBs and the resultant demand on scarce government resources to structure and manage the projects. One of the witnesses argued that smallish pilot programs like Peterborough do not generate “significant” cost savings.

They’re right.

But this is the very nature of pilot programs and new models; as Senator Warner pointed out, SIBs are “a tool to leverage innovation.” Senator Whitehouse underlined this by commenting that government doesn’t do the “prototyping function” very well. In fact, all of the witnesses agreed that SIBs facilitate the innovation process by bringing in private capital to shoulder the risks of innovation. If all goes well and the SIB proves the value of up-front investment in preventative social services, then these services will become policy and the SIB financing is no longer needed. As in the Peterborough case, this counts as a win.

Why doesn’t government do this itself?

We wish they would. If government fully funded effective, evidence-based social programs aimed at preventing the emergence of serious problems like homelessness and substance abuse, then SIBs wouldn’t exist – and the world would be a better place.

But the fact is that they don’t. The Nurse-Family Partnership, which provides home visiting services to low-income, first –time mothers, is one of the most effective service providers in the U.S. As columnist Nicholas Kristof wrote in the New York Times,

This organization sends nurses to visit poor, vulnerable women who are pregnant for the first time. The nurse warns against smoking and alcohol and drug abuse, and later encourages breast-feeding and good nutrition, while coaxing mothers to cuddle their children and read to them. This program continues until the child is 2.

At age 6, studies have found, these children are only one-third as likely to have behavioral or intellectual problems as others who weren’t enrolled. At age 15, the children are less than half as likely to have been arrested.

For all of its clear value, however, Nurse-Family Partnership only has the resources to serve four to five percent of its target population every year.

In the absence of adequate funding from government and philanthropy – in the imperfect world that we inhabit – there is a role for private capital to help fill this gap.

No more silver bullets

Finally, let’s agree to retire the “silver bullet” charge once and for all. Those of us with knowledge and experience in the SIB market have never and will never assert that SIBs are a silver bullet for all social problems; this is nothing more than a straw man that SIB opponents like to use. Let’s agree to free our future dialogue of empty claims, hype and hyperbole—for the benefit of all.

In this frame of mind, we welcome the probing questions that have arisen around the Senate hearings and Peterborough announcement, and we appreciate the opportunity to add our thoughts. SIBs embody a new approach to private-public partnerships, so the field is enriched each and every time a creative dialogue emerges.


Entry by Jane Hughes, Director of Knowledge Management at Social Finance US, and Alisa Helbitz, Director of Research and Communications at Social Finance UK.