Michael Belinsky

World Bank Development Marketplace creates funding platform for its previous competition winners

The World Bank Development Marketplace announced last week that it will create a funding platform designed to facilitate follow-on funding to social enterprises that it had previously chosen for seed funding. This platform, called the Development Marketplace Investment Platform, will help a “pilot group of 30 selected social enterprises that have received prize money from DM” to attain additional rounds of financing.

This initiative responds to a persistent gap in the funding cycle for social enterprise organizations. Social enterprises that have secured an initial round of funding from interested donors or by winning competitions consistently struggle to raise additional capital. Many die; in fact, most nonprofits close because they run out of money.

Echoing Green, a New York-based early-stage funder of social enterprises, has observed the same problem among the social enterprises that it funds. It has responded to this problem by urging some to pursue for-profit status and develop credible and sustainable revenue streams, and by creating an impact investment fund to generate additional funds for Echoing Green fellows and applicants.

The rise of social impact bonds in emerging economies

Social impact bonds have caught the attention of at least a dozen governments in high-income countries such as the UK, the US, Australia, and Canada. Yet discussions around the use of this innovative performance contract for international development in emerging economies have started relatively recently. My own social enterprise, Instiglio, which I founded with my partners Avnish and Michael, has been making some progress in this space. There have recently been three major developments in this space that are worth reviewing:

1. The creation of the Development Impact Bond Working Group. Social Finance UK, which structured the world’s first social impact bond over in England, and the Center for Global Development, which had been the intellectual champion behind the Cash on Delivery model, created a working group that is comprised of top officials from leading development agencies and is tasked with exploring the application of social impact bonds in emerging economies. This group has released information about two meetings (here and here) and created web pages to track its progress (here and here).

2. International development agencies have formally and informally expressed interest in social impact bonds. First, the Canadian International Development Agency has released a proposal to study the application of SIBs to access to finance. Second, DFID and Social Finance UK conducted a scoping study of a SIB for family planning. Third, the Inter-American Development Bank, the Asian Development Bank, several other development finance agencies have started internal discussions around the social impact bond model.

3. DFID, UK’s development agency, has included a request for social impact bond approaches in its requests for proposals through the Girls’ Education Challenge Innovation Window. This is the first public request for social impact bond programs in international development of which I am aware. Here is language from the The Girls’ Education Challenge: Guidance to applicants submitting a Full Application for the Innovation Window:

DFID is therefore committed to funding a small number of projects that use PbR (which implies grant payments in arrears following independent verification of pre-agreed results, or may also involve the ‘development impact bond’ approach) and will be looking out for suitable projects during the assessment of Full Applications. These projects will undertake additional evaluation and research on the efficacy of the PbR mechanism, as well as that of the intervention.

And here is language from the Frequently Asked Questions for the Girls’ Education Challenge Innovation Window:

We are interested in funding some projects through the Girls Education Challenge Innovation Window which will be wholly delivered through Payment by Results (PbR). This is a relatively new approach to delivering overseas aid, whereby payment is only made when pre-agreed results have been achieved. The Innovation Window of the GEC is an opportunity to demonstrate and evaluate the use of PbR, within a sample of pilot projects, to increase Value for Money (VfM) and achieve better learning outcomes for girls. Proposals looking to use or trial a PbR mechanism are encouraged, though we appreciate that PbR will not be appropriate for all projects.

Analysis of the proposed social impact bond pilot to reduce asthma in Fresno, California

Reuters recently published an article that describes the ongoing creation of a social impact bond pilot for a preventative healthcare service in Fresno, California. In this pilot, the nonprofit organization Collective Health is testing whether services to reduce environmental triggers for individuals with chronic asthma will generate savings to the insurance companies that pay for those individuals’ resulting hospitals visits. This blog post reviews the program and offers some analysis.

The problem: Fresno County has 200,000 individuals living with asthma. These individuals account for over 6,000 emergency room visits and over 1,100 hospitalizations annually. The total annual cost, including foregone worker productivity, is $87 million. (Source)

The solution: Several services can reduce home-based asthma triggers by improving indoor air quality. These services can reduce asthma triggers and prevent costly ER visits and hospitalization.

The barrier: Individuals switch health insurers too often for any single insurer to realize financial gains from asthma preventative services. Therefore, insurers under-invest in this preventative programs for asthma.

The innovation: If insurers are convinced that these preventative services reduce their costs, they will have the incentive to create a collective pool of funds that will invest in these services and generate cashable savings to all the insurers. (This solution has the accompanying collective action problem that each insurer will want to reduce their financial contribution into the pool and increase their financial benefit from it.)

The caveat is that neither the current Fresno pilot nor the envisioned future program resembles the social impact bond model that is being designed in Massachusetts and New York. In the Fresno pilot, the California Endowment is paying service providers up-front to reduce chronic asthma triggers, while actuaries work to determine the financial outcome of the program months later. This is not a social impact bond; it’s just good investment into a pilot to test whether savings materialize.

In the program envisioned after the pilot, insurers will collectively purchase services to reduce asthma-related hospital visits and benefit from the resulting financial gains. The social impact bond component of this model is that private investors will give service providers money, and insurers (or a fund they jointly create) will repay these investors. However, if the service is proven to be effect, the insurers can simply pay for the service and include a basic performance bonus to incentivize good outcomes, rather than creating a social impact bond with private investors. In order to determine if the social impact bond is the most appropriate financial mechanism for preventative asthma services, I think the designers of this program should consider two questions:

1) If insurers are convinced that the preventative service saves them money, will they be able to come together and purchase this service?

2) If insurers are able to purchase this service, can they disburse money in expectation of the savings, or are they constrained (in some legal, technical or budgetary way) in paying only out of the resulting savings?

3) If insurers can make an up-front purchase of this preventative service, is a regular performance bonus to service providers sufficient to generate the same level of savings that would exist in a social impact bond? In other words, are the benefits of the SIB worth the costs of creating it?

Data for this blog post were taken from secondary sources, including the Collective Health website and the Reuters article on the Fresno program.

Three recent social impact bond developments

A lot of interesting things have been happening in the social impact bond space over the past several weeks. Here is a recap of three major events.

Early Education in New York City: Manhattan Borough President Scott Stringer proposed a social impact bond to expand Early Head Start, an early education program. According to the New York Times report of his proposal, the idea appears to have political motivation to counter the tax-the-rich proposal of Bill de Blasio, a New York public advocate. Early Head Start offers educational services to children ages 3-5 through 250 centers throughout New York City. The program has been evaluated through rigorous trials at the national level and found to positive results: “Compared with controls, Early Head Start parents were more emotionally supportive, provided more language and learning stimulation, read to their children more, and spanked less.”

One of the biggest concerns about the applicability of the social impact bond model to Early Head Start is whether the program pays for itself through cashable savings at the city or state level. Existing designs of social impact bond programs (designs, since only one program is in operation) center on programs that generate government savings. This value proposition has made social impact bonds especially attractive as state struggle to fund social programs in a time of fiscal austerity. I will write more on early childhood social impact bond programs later.

Healthcare in New Jersey: Assemblyman Angel Fuentes (D-Camden/Gloucester) has introduced legislation to create program and studies and issues social impact bonds to improve healthcare to low-income residents. The bill does not propose a specific program, but rather appoints the NJ Economic Development Authority to study whether such a program is possible. The proposal has its own Twitter account at @NJ_SIB_Act.

Social investment in England: Across the pond, the first UK social investment bank Big Society Capital has announced its first round of funding. Big Society Capital is a hybrid for-profit/nonprofit organization that carries a government mandate to capitalize the social investment market in the UK on a sustainable basis. BSC invested $60 million into 12 providers of social finance. This set of investments includes $720,000 to Triodos Bank for its social impact bond program and the same amount to Think Forward for its social impact bond program. I analyze these investments in detail in subsequent blog posts.

Reflections on the SOCAP Conference in San Francisco

Two weeks ago I had the opportunity to attend SOCAP, the Social Capital Markets conference in San Francisco. I attended as a Social Entrepreneur Scholarship, which SOCAP graciously offers to a select number of social entrepreneurs for a full discount on the $1,300 ticket that other conference attendees have to purchase.

The conference highlighted the release of a report by Omidyar Network on impact investing titled Priming the Pump: The Case for a Sector Based Approach to Impact Investing. Attendees mentioned that each SOCAP conference centers on a particular issue or topic, with this year’s focus on impact investing.

Here are some insights I had from my amazing time at the SOCAP conference.

1. Figure out your goal. SOCAP will overwhelm you if you do not prepare in advance by defining a goal and using that goal to choose what to do as well as what not to do. This is true for many large events. With over 1,600 participants, three days of panels, and side-bar presentations, meetings and receptions, doing everything at SOCAP is impossible. The three step solution should be a) define your goal, b) select meetings and panels that advance your goal the most, c) keep away from events and meetings that do not meet you goal.

2. Prepare for meetings. The easy thing is to create a pitch, perfect it, and deliver it ad nauseum. The hard thing is to learn about your audience and tailor your pitch to their interests. One investor might like the geographical focus of your work. Another might be interested in an innovative way you structure your financing to achieve your objectives. A third may be fascinated by your use of mobile technology in a development setting. The same pitch might excite one investor and bore another. You might get a second chance to approach that investor or her company, but you shouldn’t bet on it.

3. Pace yourself. I spoke with several social entrepreneurs who had audacious goals for day one of the three-day conference and were devastated when they failed to meet those goals. Not everything must happen on day one. One of my most unexpectedly productive meetings happened when I decided to share a cab ride to the airport with two people leaving the SOCAP conference who I had not met before. After the initial meet and greet in the cab, I quickly realized that they are impact investors whose focus aligns with that of a close friend’s social enterprise. Just like that – a connection, a call, and the start of a due diligence process. The lesson is not to lose energy and enthusiasm if the first day does not go as planned.

These lessons sound simple and mundane, but they bear repeating because it is so easy to forget them. I thought I knew them going into the conference, but still I made mistakes on each front and can do better next time.

Overall the conference was a useful window into social enterprise. I met former Echoing Green applicants whom I had judged as part of Echoing Green’s Social Investment Council. I met former professors who taught me business in developing countries at Harvard Business School. And I made new connections with entrepreneurs in South Africa, Japan and Singapore, who I may not have met otherwise.

Harvard’s CID launches Building State Capability, features Instiglio

Harvard Kennedy School’s Center for International Development has launched a new research program, Building State Capability. The goal, as stated on their website, is to research “new strategies and tactics that can be used to escape capability traps and build the capability of public organizations to execute and implement.”

The website features practitioners that build state capabilities, including Instiglio, the nonprofit I co-founded that advances social impact bonds in developing countries, and IDinsight. Research papers can be found here.

Published in Colombia’s Portafolio

My Instiglio colleagues Michael Eddy, Avnish Gungadurdoss and I were recently published in the op-ed section of Portafolio, Colombia’s Wall Street Journal. The article is available in Spanish here and in English here.

An excerpt from the article:

Social impact bonds hold promise for addressing some of Colombia’s most complex problems. With a youth unemployment rate over 19 percent governments increasingly focus on creating stable upward trajectories for young Colombian. These trajectories must resolve multifaceted and interconnected challenges that range from lack of money, to unstable families, to inadequate educational opportunities. […] Colombia has an opportunity to become the first Latin American country to pilot social impact bonds, and spark policy innovation for the region and the world. At Instiglio, we hope to help Colombia realize that opportunity.

US Department of Labor Social Impact Bond Update (cross-posted from Instiglio.org)

Cross-posted from Instiglio.

In this blog post, we comment on the recent information regarding savings and intermediation released by the U.S. Department of Labor (DOL) regarding its $20 million social impact bond (SIB) solicitation.

DOL has released selected answers to questions that were asked by the public regarding its solicitation for a SIB program in workforce development. As we understand, DOL must have a comment period, and must respond to questions, but may choose whether it answers the question in whole or in part, and may address several questions with one answer.

Background on the DOL SIB Solicitation: DOL has made approximately $20 million available for pay for success programs out of its Workforce Innovation Fund. It expects to fund one to three grants, up to $12 million per grant. Responses are due by December 11, 2012 and funding will be disbursed by September 2013. The goal of any proposed program should be to create “positive workforce outcomes.” DOL is “particularly interested in projects that focus on expanding the availability of social services to address difficult workforce system problems, such as strategies intended to eliminate significant barriers to employment faced by at-risk, disadvantaged, and hard-to-employ populations (e.g., high school dropouts, homeless individuals, long-term unemployed, former prisoners).” (Source: DOL SIB Solicitation)

In this solicitation, government entities must apply jointly with an intermediary. New York City has indicated that it may reply to the DOL solicitation by requesting proposals for collaboration from intermediaries.

The savings question:

“Q1. In the Peterborough pilot, savings are described as recoverable, cashable savings. Can you please confirm if savings must be cashable savings or is it sufficient to identify/show evidence of savings but not have them isolated and converted to cash at the end of the Period of Performance? Can savings be expressed in terms of return on investment?

[Government’s Response] A1. While we do not use the phrase “cashable savings” Section V. Criterion 5, Factor 1, Bullet 4 states: You must calculate the savings that will accrue to the public sector based on successful achievement of each outcome target through the intervention. Savings must be shown in dollars. If public sector savings accrue at multiple levels of government, you must break out the savings by each level of government. However, you must be able to demonstrate some savings at your level of government. Savings may accrue through preventative programs that reduce the customer burden on existing services. […] These savings for the local government could be based on reduced need for workforce system services by the target population, increased efficiency due to a decreased intensity of service delivery needs, or a better allocation of resources. […] Pay for Success models are best viewed from this cross-sector assessment; accordingly, you should describe any cross-sector savings or additional non-monetized benefits. As a result we expect applicants to calculate in dollars the anticipated savings as a result of the project. Savings must still accrue to the government, including at the applicants level of government, even after the return on investment has been paid out. The savings do not need to be cashable.”

Commentary: We read this answer to mean two things. First, savings will accrue to different budgets across different governments, both during the lifetime of the SIB program and afterwards. This is in line with the savings analysis that was published by McKinsey several months earlier. Second, the government is interested in programs in which direct “cashable” savings do not fully cover the cost of implementation. This means that, at least in the short run, the government expects to spend more on the SIB program that it will save.

The intermediation question:

“Q6. Can a government entity separate of the applicant act as the intermediary?

[Government’s Response] A6. While the SGA does not define the type of organization that may be an intermediary, applicants should be mindful of the complications that could arise if another government entity acts as the intermediary. As stated above, the intermediary must be in a position to actively and quickly manage service providers and delivery strategy based on real time information. A key benefit of the PFS model is that it allows governments to pay for outcomes that are achieved through service delivery methods that they may be unable to undertake themselves. Furthermore, while it is not inconceivable that one state agency, “the applicant,” could subcontract another agency to act as the “intermediary,” such an arrangement between government applicant and government intermediary must be governed by the Federal contract guidelines of the funding stream, which do not allow for sub-grant authority.”

Commentary: We believe this answer conflates programmatic and financial intermediation in the SIB model. By programmatic intermediation, we mean activity related to selecting, managing and scaling-up service providers over the lifetime of the SIB project. By financial intermediation, we mean activity related to raising capital from private investors on behalf of service providers. An intermediary can engage in one or both activities. In some cases, no financial intermediation is necessary because the service provider is better positioned to raise funds. In other cases, no financial intermediation is needed because, for example, only one provider may be delivering services.

The answer suggests that the government would make a poor programmatic intermediary because it would have trouble nimbly managing the operations of several nonprofit organizations.

But the answer does not rule out financial intermediation by a government entity. In this case, a government entity would offer financial sponsorship to social service organizations while they implement the program, after which the line agency that commissioned the SIB would pay for any program outcomes. In fact, several government entities worldwide have already started exploring the potential to inject capital into organizations that would act as financial intermediaries for the SIB. Although Big Society Capital in the UK is not a quasi-governmental organization, it was created by a group of political and financial actors for the purpose of catalyzing the impact investment space. A portion of BSC’s work may include capitalizing financial intermediaries and potentially acting as a financial intermediary.

Private Investment in Social Impact Bonds

I just published some thoughts about the Goldman Sachs social impact bond deal in the Stanford Social Innovation Review.

Private Investment in Social Impact Bonds

Stanford Social Innovation Review

August 8, 2012

Michael Belinsky

This past week marked the introduction of social impact bonds to the United States. Government officials, businessmen, and academics who have been working diligently to develop this policy innovation have announced progress on two social impact bonds (SIBs), one in Massachusetts and another in New York…

Minnesota’s pay-for-performance pilot

As part of its effort to create a pay-for-performance pilot, Minnesota recently released a request for information that asks the public to submit information in response to multiple questions about the potential design of a pilot program. The state has expressed willingness to issue bonds up to $10 million to finance the pay-for-performance pilot. The RFI asks for feedback on programs in workforce development and supportive housing. There are several similarities to, and differences from, the pay-for-success model that is currently being designed by Massachusetts.

– Minnesota has issued two RFIs, one for service providers and another for third parties. – Massachusetts issued one RFI, but two RFPs, asking service providers and intermediaries to apply separately for the invitation to negotiate with the state. One purpose of this separation was to avoid a situation where the intermediary entered into an exclusive relationship with a suboptimal service provider, or vice-versa. A downside of this separation was that it was much harder for the intermediary to create, plan, and describe a potential program delivery model without knowing for sure which service provider’s model it would ultimately use. Minnesota seems further removed from this decision. It currently seeks responses that would inform its program design, rather than RFP responses from which it would select its preferred service providers and third parties.

– Minnesota’s RFI mentions that the state might play the role of an evaluator. The Massachusetts RFP did not discuss that option. If the state commissions the social outcome, agrees to pay for it, and evaluates the service providers’ success in achieving that outcome, then it will have to manage a perceived – and perhaps a real – conflict of interest.

– The bond. Minnesota is interested in issuing a bond to pay service providers for successful achievement of social outcomes. Here is the logic of issuing a bond, as I understand it. The service providers’ program would reduce costs or increase revenues to the state. These financial benefits would appear in the state’s budget during the service providers’ program and after the program; service provision will create other benefits, as well, but they may not appear on the budget at all. Massachusetts and Minnesota have chose two different options for paying for all these benefits. Massachusetts has requested budgetary authorization (for $50 million) to pay service providers if they achieve predetermined outcomes. Minnesota has chosen to issue a bond (for $10 million) to pay service providers if they achieve their outcomes. Minnesota will presumably repay the bond at least in part from the financial benefits that the service providers’ programs created.

– Service providers’ funding gap. In the proposed designs of both states, service providers will need to self-finance or raise external capital to fund the implementation of the program. The state pays only when – and if – predetermined outcomes have been achieved. In both cases, there is an opportunity for private capital to fund social outcomes.

Sources
– Minnesota Third Party RFI
– Minnesota Service Provider RFI