Naturally there are those maintaining the curious credo that money grows on trees who will seek to dismiss the SIB initiative at all costs, missing out the simple truth that money is not readily available from the broadly bankrupt government sector world-wide. That, allied with clear public cynicism about the ability of government to act with financial responsibility is driving the SIB revolution…

Critics Question Impact Of ‘Pay for Success’ Bonds

Standing in contrast to government social protection programmes implemented over the past decade by progressive governments in Latin America and the Caribbean, a new initiative appeals to private investment and uses non-profit service providers.

But the outcomes-based “social impact bonds” (SIB), also known as “pay for success” or “social innovation financing”, have drawn criticism.

Social Finance, a UK-based organisation that works to inject market principles into social sector funding, describes SIBs as “a form of outcomes-based contract in which public sector commissioners commit to pay for significant improvement in social outcomes (such as a reduction in offending rates, or in the number of people being admitted to hospital) for a defined population.”

“There is a great deal of interest in developing these models, not only on the part of governments but also among development foundations and agencies,” Michael Eddy, one of the founders of Instiglio, told IPS. “We have seen this applied to many issues, but they have to be different in Latin America,” where social conditions are different, the U.S. economist said.

Instiglio, a non-profit social enterprise based in Boston, Massachusetts and the Colombian city of Medellín, designed an SIB in 2012 for Medellín aimed at reducing teen pregnancy.

New Zealand economist Ronnie Horesh was the first to advocate SIBs in a 1988 article on “Social Policy Bonds”,which he argued could be made tradeable.

The mechanism behind SIBs is that the government of the selected location identifies a social problem to be addressed and signs an agreement with an intermediary, which raises capital from banks, foundations or individuals and hires a non-profit service provider.

A neutral evaluator is hired to measure outcomes and settle disputes. If the project meets the agreed-on targets, the government repays investors with returns that generally range between six and 13 percent.

In other words, a third party bears the costs and performance risk of providing social services, and the government only pays based on measurable outcomes, from a portion of the projected cost savings.

But there are questions regarding the use of SIBs in Latin America, where social problems have already been tackled by means of hiring third parties.