Innovative Financing: What is a Social Impact Bond (SIB)?

April 16, 2014Leigh Hunt
 

Leigh Hunt qualified as a pediatric physiotherapist and has over 10 years of experience in the healthcare industry and the non-profit sector in both South Africa and Ireland. During her MBA at UCT, she conducted research on SE's transformation from non-profit to for-profit business models and while at Bertha has authored a comprehensive study of ECD initiatives and carried out research on innovative financing models for ECD in South Africa.

South Africa spends a significant proportion of its GDP on education, last reported at R5.99 billion in 2010 according to a 2012 report by the World Bank. In fact, SA spends perhaps one of the highest proportions of its GDP on education, compared to other African countries. In the private sector, at least R7.8 billion goes towards CSR efforts, with the majority of that funding going into various education initiatives. There is therefore a clear desire and commitment by both government and the private sector to address the issue of education in SA, and yet, SA still has some of the worst results in education.

So, a larger issue remains…how do we use the available funding in the most effective and innovative way to address the ongoing issue of education in SA? The question that social innovation is desperately needed is a foregone conclusion in education, but is there an argument for better outcomes based financial instruments? Additionally, how do we find appropriate funding mechanisms to implement the desired and very necessary changes, especially when there is significant donor fatigue and cash strapped governments? And, how can we use a financial instrument as a means to develop and build better public and private relationships in order to address the identified needs effectively? 

The Bertha Centre believes that in order to address social issues and foster the desired change, that we should be encouraging innovative, “out-the-box” solutions. These solutions should reward multi-stakeholder involvement and collaboration. Following these principles, the Bertha Centre has started working on how various innovative financing mechanisms may be able to assist in addressing and catalyzing social change in South Africa. 

One of these innovative financing mechanisms is the Social Impact Bond (SIB). Social Finance, the organization that pioneered SIBs in the UK and is currently working with the Bertha Centre on SIBs in Africa, has defined a SIB as an outcomes-based contract which has the potential to provide “an innovative way to bring in non-governmental money to preventative services”.

Impact bonds make use of risk capital from private investors to pilot a social intervention, which has a successful track record, but has not yet been scaled. Outcome funders, like the government, commit to repaying the capital, plus returns, to the private investor only if the intervention successfully meets pre-determined outcome and output metrics – in other words, only if success is achieved.  A South African SIB presents a unique opportunity to change the dynamic of how public and private capital is used to solve society’s challenges

Prototype of an Education Impact Bond 

 

The Bertha Centre believes that faced with the challenge of addressing inadequate early childhood investment, especially for at-risk children, that a SIB has the potential to address a number of issues: the identified early childhood development needs of governments; the ongoing funding dilemma; public and private sector distrust; facilitate positive change in government policy; encourage private and public sector accountability.

There is however still much work to be done to ensure that a healthy ecosystem can be developed in order to ensure the success and creation of dozens of impact bonds in various sectors of identified need. A more detailed discussion on how SIBs may be suitable for Early Childhood Development needs in South Africa will be discussed in an upcoming blog.

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