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Social impact bonds are multi-party contracts between agencies seeking financial support and funders with money to lend them. State and local governments are signing contracts with investment houses, banks and foundations, leveraging capital from investors and expertise from service providers to do everything from helping the homeless find shelter to rehabilitating drug addicts.

Image: Penn State Harrisburg

Pandey examines innovative contracts for funding social issue initiatives

HARRISBURG, Pa. — Penn State Harrisburg researcher Sheela Pandey, assistant professor of management in the School of Business Administration, is examining a new approach for funding initiatives aimed at solving challenging social issues. 

First launched in the United Kingdom in 2010 and in the U.S. in 2013, social impact bonds — or SIBs — are multi-party contracts between agencies seeking financial support and funders with money to lend them. Instead of relying on tax revenue or donations, state and local governments are signing contracts with investment houses, banks and foundations, leveraging capital from investors and expertise from service providers to do everything from helping the homeless find shelter, to rehabilitating drug addicts. 

This approach is timely, emerging when the federal government and states are cutting back on “safety-net” spending, Pandey says.

Pandey, with colleagues Joseph Cordes, Sanjay K. Pandey and William Winfrey, is taking a closer look at the contractual hazards and transaction costs in social impact bonds and has co-authored several recent articles on social innovation and entrepreneurship.

According to Pandey, social impact bonds are still so new, that it is too early to claim that they are effective. Some programs have been successful, while others have failed. Based on her preliminary analysis, she has found that there are two ways in which social impact bonds can benefit recipients. One is in launching innovative social interventions and programs, while the other is scaling up previously launched approaches and programs.

“We believe that social impact bonds have the potential to bring needed financing to support innovative ways of delivering social services,” Pandey and her colleagues explained in The Conversation. “At the same time, funding projects this way will probably cost more due to the additional coordination and evaluation required.”

Among the social issues that SIBs have addressed are criminal justice for juveniles, early childhood education, homelessness, child welfare, healthcare to prevent preterm births, female incarceration, green infrastructure, immigration and refugee employment, and family stability.    

“Worldwide, there is great interest in SIBs,” says Pandey, who, with her colleagues presented their research in September 2018 at a University of Oxford conference focused on SIBs. In the eight years since the first social impact bonds were launched, a total of 108 have raised about $392 million, impacting more than 700,000 people in 25 countries, she said.

The U.S. debut social impact bond sought to help Rikers Island inmates stay out of trouble after prison through education and counseling. According to Pandey, the project failed to meet its benchmarks.

“The second U.S. social impact bond program targeted early childhood education in Salt Lake County, Utah. This program was declared a success because it achieved a 99 percent success rate in reducing the need for special education in elementary school,” Pandey said.

Next up, Pandey and her group will examine the extent of innovation in the 20 SIBs launched in the U.S. so far. About half of them have backed efforts to solve criminal justice issues, such as reducing juvenile offender recidivism or the incarceration of mothers of young children.

SIBs have attracted supporters and skeptics. Pandey noted that some people are excited to see “a new avenue opening up for impact investing, while some disagree with the notion that profit-seeking investors should have a say regarding the delivery of services for people facing economic hardship. The researchers also point out that arrangements such as SIBs are most suited to innovations in the delivery of social services that save money, something that not all improvements in social services can do.

Based on the mixed track record so far, Pandey said she and her colleagues believe it’s too early to tell if social impact bonds can help resolve intractable problems like mass incarceration.

“But as long as investors, nonprofits and government agencies can heed the lessons from successes and failures alike, we are cautiously optimistic regarding their potential to supplement taxation and charitable donations as a source of revenue to do good,” she said.