Case study on Social Bond
A social Impact bond Is a way to provide high-quality social services while saving the government money by monitoring the financial gains of Improved social outcomes (Cole et al, 2013). Non-profits organizations receive money that Is funded by private Investor, foundations or even some profit-oriented financial Institutions to carry out their programs. At the same time, the monitoring and evaluation of these programs Is performing to judge if the perspectives target has been satisfied.
The performance of SIBS depend strictly on the determined social impact, which means if the project ailed to meet the goal, investor would lose not only interest part of their money, but also the principal they invest initially. SIBS can deal with social problems by permitting government to shift the financial risk associated with those programs away, and transfer it to other sorts of investors, who are more capable to price and bear the risk, based on the expectation of future savings.
They also provide the incentive for multiple government agencies to corporate, capturing savings across agencies to fund Investor repayment (Social Finance, 2012).
Moreover, SIBS can reward those high efficient organizations with stable and predictable revenues and long-term growth capital for operation. The mechanism of SIBS: 1 . Intermediary, such as: Social Finance, issues SIBS and raise fund from all types of investors. 2. Intermediary fund the less costly prevention projects that are operated by non-profits service providers.
Through out the life span of SIBS, intermediary are responsible for coordinating all the involved parties. 3. By providing effective social prevention service, non-profits deduce the need of costly downstream remediation, hush create the “social profit”. 4. An independent third party step in and evaluate If the specified targets have been achieved.
If they have, government pay a percentage of Its savings to Investors, returns depend on the performance of the project. If they have not, Investors get nothing. 2.
How snouts Social Hence structure ten Atlanta Instrument: as a Dona? As Equity? As some hybrid? During the issuing process, the contracts of SIBS promise the return of the bond explicitly (according to the social benefits of relevant projects) and arrange a specified time horizon of the financial instrument. So, it seems to more like a bond.
However, as I mentioned above, there is a tremendous risk embed in SIBS. Investor can only collect the interest and principal if the pre-determined social impact or cost saving is achieved.
Compared with government issued bond, SIBS will not provide a fixed rate of interest and even cannot repay the face value of the bond when the project failed to complete the targets. By thinking in terms of bonds, the issuers and intermediaries who are structuring these financial instruments naturally begin to discuss how to ensure that investors are repaid (Newly, 2013). However, in our case of Social Finance, financial returns are generated only when the government budget invested in this area can be cut off and transferred into initial investors.
So, investing in this kind of bond more like investing in equity, which does not provide a stable return unless the targets are attained and the so called “social profits” is created.
By using the terminology “bond”, this kind of investment become more attractive under a volatile economic circumstance, especially during the global financial crisis, most investors were worried about losing money in the market and preferred to hose investment instrument which is safer. Even the most conservative and prudential investors can misunderstand the meaning of Social Impact Bond.
The implications of a bond suggest security, fixed return and almost zero risk while an equity investment implies uncertain risk, unsure return and unidentified time horizon. It is possible for an investor to lose 100% of principal when he/she engaged in equity investment; the similar situation takes place in SIB investment. For equity investment, the rate of return depends on the performance of the issuer; this is also true of SIBS. Overall, It is too difficult to define Social Impact Bond as bond-like or equity-like.
I think it is most suitable to say it is a kind of hybrid investment instrument. 3. Consider Social Finance’s proposed structure from the standpoint of the government, the social sector, and private capital. What are the strengths? What are ten weaknesses? In the past, it is the obligation of the government to tackle with most of social problems; they had to spend billions of taxpayer dollars. However, compared with well-developed organizations, government has been proved to be inefficient due to he lack of experience and bureaucracy.
It is not the best entity to deal with some special problems.
They cannot provide better outcomes than those non-profits can, even fail to address the root problems of some social issues. However, SIBS have provided an alternative way for government to address these troubles. In this sense, authority holds the accountability for taxpayer money, reduces the need for further investment in remediation, increases supply of effective social service (Social Finance, 2012) and transfers the relevant financial risk to those investors who have better understanding about it. In this sense, government only needs to pay for the real value creation.
SIBS can generate large number of stable and predictable funds for social sectors without costly fundraising procedure and give them access to greater source of capital, so that they can provide community with uninterrupted social service at scale.
But, there are certain problems that non-profits have to face. Firstly, using SIB as funding resources generates plenty of expense on supervision and evaluation of the project outcomes. That is a significant burden for non-profits. Secondly, the arterial that are utilized to measure the outcome of the project is not always explicit and may lead to moral hazard issues.
Last but not least, it is hard to balance the interest of a variety of investor types, which means, in order to generate sufficient financial returns, some projects may be too risky for one certain kind of investors.
Private capital achieves both positive social impact and financial return if the project successfully attains pre-determined targets. At the same time, investing in a new asset class that diversifies away unsystematic risk can be regarded as a significant advantage of SIBS. Nevertheless, a huge financial risk has been transferred to private investors.