What are the benefits and challenges of using social impact bonds for urban development projects?

1 How SIBs work

SIBs are based on the principle of pay for success. A public authority, such as a local government, defines a social problem and a desired outcome, such as reducing homelessness or improving air quality. A private investor, such as a foundation or a bank, provides upfront capital to a service provider, such as a non-governmental organization or a social enterprise, to deliver an intervention that aims to achieve the outcome. An independent evaluator measures the impact of the intervention and determines whether the outcome has been met. If the outcome is achieved, the public authority pays back the investor with interest, based on the savings or benefits generated by the intervention. If the outcome is not achieved, the investor bears the loss and the public authority pays nothing.

2 Benefits of SIBs

Social Impact Bonds (SIBs) can offer numerous advantages for urban development projects, including the mobilization of private capital and expertise for social good, as well as the encouragement of innovation and experimentation. SIBs can also align the interests and expectations of different stakeholders, while shifting the focus from inputs and outputs to outcomes and impact. This type of bond can thus foster collaboration and accountability, while promoting a culture of learning and evaluation.

3 Challenges of SIBs

SIBs can present numerous challenges for urban development projects. These include finding investors and service providers who are willing and able to take on the risk and complexity of SIBs, as well as defining and measuring the outcomes and impact of the intervention. Additionally, balancing the trade-offs between financial returns and social value, while ensuring the payment mechanism is fair, transparent, and sustainable, can be difficult. Furthermore, managing the legal, operational, and governance aspects of SIBs, as well as dealing with potential conflicts and uncertainties that may arise during the contract period, can prove challenging.

4 Examples of SIBs

Social Impact Bonds (SIBs) have been used for various urban development projects around the world, such as the 2012 London, UK project to reduce rough sleeping among a group of 830 homeless people with complex needs. This intervention provided personalized support and housing options to the participants and achieved a 77% reduction in rough sleeping days, generating savings of £3 million for the public authority. Denver, USA launched a SIB in 2016 to improve the health and housing outcomes of 250 chronically homeless individuals with mental health and substance abuse issues. This intervention provided permanent supportive housing and intensive case management and resulted in a 35% reduction in jail days, generating savings of $2.6 million for the public authority. Quito, Ecuador launched a SIB in 2019 to reduce air pollution and greenhouse gas emissions from urban transport. This intervention incentivized and supported 1,500 taxi drivers to switch from conventional to hybrid or electric vehicles, aiming to achieve a 20% reduction in emissions and generate benefits of $1.5 million for the public authority.

5 Here’s what else to consider

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