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Social impact bonds fund welfare projects: how South Africa's first two have done

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Social impact bonds fund welfare projects: how South Africa's first two have done

Social impact bonds fund welfare projects: how South Africa's first two have done

18th May 2021

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The ConversationSocial impact bonds are a financing model for social welfare services based on “payment by results”. They are relatively new: the first was launched in the UK in 2010, and the first in a developing country in Colombia in 2017. Nearly 140 have been launched in the last 10 years. About 70 are being developed.

In social impact bonds, investors provide working capital upfront to nongovernmental organisations (NGOs) to deliver services. If the NGO successfully meets predefined targets – like placing a certain number of work-seekers in jobs – outcome funders repay investors with interest. If NGOs miss the outcome targets, outcome funders reduce their payments to investors in proportion to the performance gap, thus diminishing their returns.

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If targets are missed by a wide margin, the investors could also lose their capital.

In most cases, it is philanthropists (typically charitable or corporate foundations) that provide all the investment capital. Rather than providing grants, the investments give these philanthropists the chance to earn returns and recycle social expenditure, ensuring that the money goes a little further.

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The performance against the outcome targets is confirmed by an independent outcome auditor, with the financial management audited by a financial auditor. An intermediary typically solicits investments and outcome funding, manages the relationships between the different participants, and assists the service providers in developing results-based systems.

This capacity building – along with the promise of larger pools of funding – is a drawcard for NGOs. Another is that it opens an alternative funding door in an environment that has seen a decline in funding from traditional donors.

The first two social impact bonds were initiated in South Africa in 2018. They concluded last year. Both pioneered new solutions to stubbornly persistent social problems. They also increased the money available to social expenditure by soliciting private investment capital.

I was involved in compiling a series of reports for the research firm Intellidex about their financial and social performance.

The reports concluded that social impact bonds showed innovation in areas that desperately needed it. And with minor adjustments, they should be applied more widely.

The projects

The first social impact bond in South Africa – Bonds4Jobs – had a single performance target: the placement of economically excluded young people into well-paying, higher-complexity jobs. Meeting the target was the responsibility of NGOs that provide training and job-matching services to young people and employers. The project was led by the non-profit Harambee Youth Employment Accelerator. Two additional providers were brought in after the successful first year.

Matching is an approach to youth training that designs training in consultation with employers. It combines additional services with training for work-seekers. This involves the profiling of job-seekers so that they are trained for specific jobs that fit their competences and abilities.

Research has demonstrated that many employability programmes for young people aren’t developed on a matching basis. This reduces their effectiveness and means that substantial spending – by the state, private sector and civil society – is inefficient. In turn, this contributes to the unending catastrophe that is youth unemployment in South Africa. At the end of 2020, 63% of 15-24 year olds, and 41% of 25-34 year olds, were unemployed.

The service providers were successful, meeting the social impact bond’s job target of 600 medium complexity jobs in the first year and missing it by only a small margin in the second year (1,209 placements against a 1,400 jobs target). This was due to the COVID-19 related national lockdown.

The social impact bond was terminated by the intermediaries two years earlier than anticipated and with full repayment of capital and returns (ranging from 7% to 11% per year) to investors. The decision to terminate was taken due to the extraordinarily negative economic environment.

The second social impact bond – the Impact Bond Innovation Fund (IBIF) – ended on schedule in November 2020 after an investment term of three years. Here, the Western Cape Foundation for Community Work provided home-based early learning services to preschool-aged children in two impoverished communities in the Cape metro area: Delft and Atlantis. For most South Africans, early learning services delivered in preschool-like environments are very expensive. Where services are accessible, they are typically bad.

The performance targets were:

  • the recruitment and retention of 2,000 children in the programme over the three assessment years,

  • attendance of a set number of sessions, and

  • improvements relative to a group of similar children in the Early Learning Outcomes Measure – a test that assesses programme impacts on early learning.

The project significantly over-achieved on the first target. However, though improvements were achieved, the early learning outcome measure targets were missed. This was largely due to the fact that the IBIF was the first time the test had been applied to a home visiting (rather than centre-based) model. This made setting targets difficult.

Rich learnings

In both social impact bonds, the priority of the NGOs was meeting the performance targets. This results orientation – along with the provision of working capital by investors to cover service delivery costs upfront – allowed service providers to try new things to ensure that targets were met.

The service providers’ efforts were supported by the intermediaries. They built the capacity of NGOs to improve service delivery, especially in the area of monitoring and evaluation. These systems allowed for a better understanding of performance, the needs of staff and beneficiaries, and what needed to be changed to ensure targets were met.

A major consequence of the monitoring and evaluation was that the evidence base about effective programming in youth employability and early learning has grown. Bonds4Jobs showed that it is possible to use a matching approach to deliver decent jobs to young people from disadvantaged backgrounds. This has already led to a change in the way the state designs some employment programming. Similarly, the IBIF showed the usefulness of home-based services in improving access to quality early learning and improving child-carer interaction.

The hope is that future social impact bonds will build in rigorous impact evaluation – rather than simple outcome verification. This would allow for a more nuanced understanding of the various effects of social programming, and how they might differ for different groups of beneficiaries.

Secondly, to really begin to make a dent in youth unemployment and inadequate early learning, performance targets will need to be more ambitious.

This could be achieved by intermediaries building capacities of smaller, less well-resourced NGOs to deliver services differently and in more areas.

Scale could also be achieved by the state adopting models that have been proven with the social impact bonds.

Next frontier

The next frontier in social impact bonds is attracting larger volumes of commercial investment. For this to happen, bigger transactions serving more beneficiaries are needed. In addition, a blended capital stack, as employed in Bonds4Jobs – where philanthropists take losses first, and commercial investors are the first to be paid out – is a promising feature that lowers the risk profile for investors.

Finally, more market development is required. As social impact bonds and similar instruments proliferate, and as benchmarks are developed, investing in them will seem less niche. But the need to make investment profiles attractive for commercial investors must be balanced against the needs of outcome funders who also require a good deal. It makes little sense for governments to pay investors returns unless they are shouldering significant risk in financing innovative programmes to vulnerable populations.

Written by Zoheb Khan, Researcher, University of Johannesburg

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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