A guide to outcomes contracting and social impact bonds
After 10 years of social impact bonds in Australia, we share insights and answer questions here in one place – including how outcomes contracting and SIBs work, how to assess if your program is suitable for a SIB, and what are some of the myths, challenges and hopes for their application.
It’s been almost a decade since the launch of the first social impact bond (SIB) in Australia, the Newpin Social Benefit Bond. Since then, around two dozen social impact bonds and outcomes-based contracts have been deployed across the country to address a broad range of social issues.
The development of social impact bonds and outcomes-based contracts remains a largely government led process. While the ‘end goals’ for the projects implemented can sometimes be unclear, and the road to those goals can be convoluted, market participants – including governments, service providers, intermediaries and investors – have been consolidating learnings across transactions, simplifying approaches and working out ‘where to next’ for the funding model in the context of the broader service commissioning landscape.
What are outcomes-based contracts?
Outcomes-based contracting is an approach that governments use to commission a program for a clearly defined target cohort, with clearly defined outcomes. Not all programs are suitable for outcomes contracts – more on this below. Outcomes contracts have different names depending on the government jurisdiction, including payment by outcomes (PBO), social impact investments (SII), payment by results (PBR), and Partnerships Addressing Disadvantage (PAD).
Typically, the performance of the program is measured relative to a baseline or counterfactual and payments are linked to the program’s performance as measured by the agreed outcome metrics.
This type of arrangement generates a financial risk for a service provider relative to traditional government grant funding – if performance targets are not achieved, then the service provider won’t be paid to cover its cost of delivering the program.
There are two key variations of outcomes contracts (see Figure 1). The key differentiating factor is who bears the risk that performance is not in line with expectations – investors, the service provider, or somewhere in between – as both variations have at-risk funding linked to outcomes.
Another feature of outcomes contracts is that they give service providers greater flexibility in how they deploy resources in the pursuit of the target outcomes during the term of the contract. Under traditional grant funding, there are usually detailed acquittals processes to report on the service provider’s expenditure of funding during the term of the contract. These either don’t exist or are more relaxed for outcomes contracts, hence there is lower accountability for program costs (but a high accountability for outcomes).
What are social impact bonds?
Where the risk profile of a ‘pure’ payment by results contract is greater than the risk tolerance of a service provider (i.e. the service provider could potentially incur a financial loss greater than it can accept), a SIB can be used to share the performance risk with (or shift the risk entirely to) investors. A SIB effectively provides the funding mechanism to enable the service provider to enter into an outcomes contracts with government. A SIB also provides the upfront working capital to fund the delivery of a program.
Figure 2 provides an overview of how SIBs can work (noting that different countries, legal systems and social programs necessitate variations on this structure).
Is your program suitable for a SIB or outcomes contract?
The article Is your program suitable for a Social Impact Bond was published in 2015 as a practical guide to help organisations self-assess their program’s appropriateness for a SIB. There are many stars that need to align for a SIB to be viable, and article provides some ‘rules of thumb’ to consider that still hold true.
The key takeaways are:
The current landscape in Australia and abroad
Outcomes contracting has largely been led by state governments in Australia over the past decade, with the Commonwealth Government commencing its social impact investing initiatives in 2017.
Figures 3, 4 and 5 summarise the number of outcomes contracts by jurisdiction, issue (target) area and status1. Around 24 outcomes contracts have been deployed or under development, of which 17 are social impact bonds or have an external risk financing arrangement.
Since the launch of the first social impact bond pilot in the UK in 2010, 235 impact bonds (comprising 218 social impact bonds and 17 development impact bonds2 ) have been contracted in 38 countries across a range of sectors, with numbers more than doubling over the last five years. Figure 6 provides an overview of international impact bonds by sector.3
So, what have we learned over the past decade?
There are still many misconceptions about SIBs
After seven years of close involvement in Australia’s social impact bond market development, in 2019 Elyse Sainty shared her insights around SIB ‘myths and legends’ in Social impact bonds: a letter from the frontline – part 1.
These insights are still applicable today. Elyse explains:
SIB development processes could be streamlined and learnings applied more broadly
In part 2 of Elyse Sainty’s Letter from the frontline she sets out some views on the role that SIBs could play in the evolution of a system that focuses on what is important, uses evidence to shape responses, and delivers for the community – and how to make the path to that vision a little easier.
She discusses how:
There are key takeaways and conditions that are generally applicable to outcomes contracts
The Newpin4 family reunification program has been deployed under the SIB mechanism in three states. The Newpin Social Benefit Bond in NSW was Australia’s first SIB, and it matured in 2020. Over seven years, 61% of children were restored, almost three times the counterfactual. Replication of the model in Queensland was less successful, and the bond terminated early. The Newpin SA SIB launched in 2021, and has achieved promising early results. The article Social impact bonds: a tale of three Newpins draws out some of the learnings from comparing the experiences across the three projects.
This article highlights that:
SIBs are an important testing ground for development of broader policy
The latest results and recent evaluation of the Aspire SIB contributes to a growing body of evidence backing the highly supportive Housing First approach.5 In the article Housing First: the challenges of moving from pilot to policy, Pat Bollen explores the barriers to this approach being funded and adopted more extensively across Australia. Many of these challenges are applicable to other SIBs and programs which demonstrate positive results for individuals and governments, but have not yet been embedded within the policy and service delivery landscape.
This article outlines:
For more information contact Patrick Bollen on firstname.lastname@example.org
1 Data is based on information available to SVA, may not reflect recent developments and only includes contracts with key ‘outcomes-based contract’ features outlined in this article.
2 Development impact bonds are typically issued in developing nations and the funder is a philanthropic organisation instead of government.
3 International social impact bonds by sector. (Source: Brookings Institution global impact bond database snapshot, October 1, 2022) Social welfare includes impact bonds addressing homelessness, poverty reduction, and child and family welfare.
4 The Newpin program works to restore children in out-of-home care to the care of their parents. It works with parents through a trauma-informed lens to enable them to create a supportive and safe family environment.
5 Housing First is an approach to housing and supporting people experiencing chronic homelessness, incorporating intensive case management and specialised supports alongside permanent housing. The Aspire SIB evaluation found that the Aspire program was highly effective, especially for people with complex needs for whom more conventional service delivery approaches tend not to deliver sustainable benefits. The evaluation found that the key innovative features of Aspire – the intensity of supports, the flexibility to tailor supports, and the long duration of supports – were unlikely to have been possible without the resourcing levels provided by the SIB.