Social Impact Bonds: Analysis of a Mechanism for Financing Social Program Expansions

Developing an enabling environment and infrastructure for social impact bonds

    • March 25, 2013

Dates of Project: January 2012 to November 2012.

Field of Work: Vulnerable populations

Problem Synopsis: Little is known in the United States about social impact bonds (SIBs), which are relatively complicated and expensive instruments for bringing evidence-based social programs to scale. They require an effective partnering by government, service providers, coordinating intermediaries, and socially conscious investors.

Although a number of SIB projects are gearing up in the United States, the only tests of the concept in progress are in the United Kingdom. In an era when government, service providers, and socially conscious investors are all looking for creative ways to finance efficient and effective social programs, SIBs seem worth investigating.

Synopsis of the Work: A research team at McKinsey & Co. studied the potential of social impact bonds in the United States, in particular for financing the expansion of proven programs in homelessness and crime prevention. The team also created tools for stakeholders—investors, nonprofits, government agencies, and others—to help them determine whether SIBs are instruments they should consider, and apply due diligence in moving toward their application.

Because they involve a diverse set of participants, including coordinating intermediaries and assessors, SIBs are relatively complex and expensive instruments for bringing social programs to scale.

Key Findings

  • SIBs offer great potential as useful instruments of social program financing, especially to government entities constrained fiscally, or by “legacy” programs of remediation.
  • Specific conditions—characterizing the social program in question, service provider, coordinating intermediary, and evaluators—can dictate whether SIB funding is an appropriate option.
  • In the United States, homelessness and prisoner recidivism appear likely candidates for deploying SIB to finance the expansion of small-scale but proven prevention programs.

"SIBs can promote efficiency and accountability in social programs by requiring oversight and proven results."

SIBs can provide a financial structure to enable a "handoff" between private funders and government to bring evidence-based interventions to more people.

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#SocialImpactBonds: What are they, how do they work, what are the risks? McKinsey report tells all.