The Power of Social Impact Bonds

Franz Karl Prueller

Social entrepreneurship, social impact, social innovation, social banking… it seems that these days there is a clear tendency for everything around us to become more and more socially-oriented. And this could only bring good news for everybody!

Lately we, at ERSTE Foundation, have grown an interest in another concept down this line, which could have great benefits for the societies where it’s implemented: the Social Impact Bonds. And because we would like to see it “alive” throughout Central and South-Eastern Europe, we started spreading the word about it. At the end of October we organised a conference in Prague, in order to present this concept to local players and inspire them. So we brought together local NGOs, government representatives, potential investors, as well as experts who have been already implementing this model in other countries.

After the conference, we had a talk with Franz Karl Prüller, Member of the Board of ERSTE Foundation, who told us more about the Social Impact Bonds and how they work:

Franz Karl Prüller: A Social Impact Bond (SIB) is a bond issued by a private social service provider (PSSP) to finance preventive projects that will result in certain savings for the public sector. A contract between the private social service provider and the public authorities provides for payment to the first one once the expected outcome and resulting savings have been verified. The public authorities make the payments out of these savings and the PSSP can pay back the bond with interest to the investor.

So how should that look in practice?

FKP: Let’s say that an NGO (=PSSP) is running a programme for former prisoners, which prevents them from becoming re-offenders and from going back to prison. One day in prison in Austria costs the taxpayer approx. 130 Euro, not to mention the cost for society related to whatever committed crime. The NGO makes a contract with the public authorities, pledging that their work will result in the reduction of the rate of recidivism from, say, 60% down to 45%. That means that, from 100 people released from prison, not 60 will eventually end up in prison again, but only 45. The difference – 15 people staying out of prison – will result in certain savings for the public sector.

Great, but where does the bond come in? What is here the role of an investor?

FKP: In order to finance this programme, the NGO issues a social impact bond and enters into an agreement with the public sector, stating that, if the project achieves the expected results (which need to be certified at the end by an independent evaluator), the public authorities will reimburse the costs of the programme, as well as pay an agreed interest rate. This should allow the NGO to pay back the bond with interest to the investor.

Does this mean that everybody wins?

FKP: Indeed, the NGO gets finances for running the project; the public sector registers a reduction of costs for imprisoned people; the investor gets his money back with an interest and with the satisfaction of having invested in a good cause; ex-prisoners get better rehabilitation programmes and, last but not least, the society at large benefits from a safer environment.

Sounds really great! Can SIBs be used for solving any social problem?

FKP: SIBs can be helpful in any situation where prevention can lead to savings further down the line, such as: working with homeless people to help them get a home and thus no longer have to live in shelters paid by public authorities; bringing Roma into regular employment and therefore change them from receivers of social welfare into tax payers; working with people in state institutions to help them move out of these institutions, get jobs and become independent; working with school drop-outs to help them back into a training or education programme  and to find jobs, thus preventing them from sliding into youth delinquency and eventually more serious crime, and so on.

So there is quite a diversity of areas where such bonds could work! How did the conference in Prague go? Is Czech Republic ready to adopt the model?

FKP: Particularly the NGO representatives were very interested in the concept, as well as in the practical application of the model. They identified a range of possible applications, however they were also skeptical that the system by which the government allocates budgets to central and municipal public authorities might actually not be conducive to establish SIBs in the Czech Republic. Participants pledged to continue the initiative and to take up consultations with high-level civil servants in the Ministries of Finance and Social Affairs so as to explore the possibilities to launch a pilot on a subject where results can be relatively quickly obtained.

Did you also attract the interest of potential investors?

FKP: Yes, those who were present would also like to see this initiative taken forward. The experts we invited from Great Britain, representatives of the Social Finance UK and the Essex County Council, committed themselves to be of assistance and to provide further advice, should the idea of SIBs be taken up in the Czech Republic.

So, fingers crossed and hopefully soon we’ll see things moving!