Cities and all levels of government need to be much smarter as they approach a global financial crunch – more evidence emerging they are trying to get the plot from Medellin to Mumbai and many other parts too. Today’s SIB News:

The Gallery: Social Impact Bonds: Harvard Public Sector Innovation Award Winner Helps Forge A New Financing Mechanism For Nonprofits And Government

Their work has taken them from Medellin to Mumbai, from educating politicians, investors and service providers, to helping girls from remote villages stay in school. And over the past year Instiglio, a company founded by Harvard Kennedy School students in 2012, has become a major player in developing a marketplace for social impact bonds in developing nations.

“We see ourselves as an organization that plays within this space of results-based financing,” says Instiglio Founding Partner Michael Belinsky, adding that the past year has honed the organization’s ability to understand the pace and process of developing such bonds, the instruments used to monitor and evaluate programs and the politics behind launching a social impact bond (SIB).

Social impact bonds are still emerging as an innovative option for cash-strapped governments, and only a handful is under consideration in developing nations. Intermediary organizations like Instiglio connect investors, governments and service providers to set expectations on outcomes for social services programs ranging from reducing recidivism to keeping girls in school and HIV treatment/prevention. Governments only pay investors back if outcomes are reached.

Only a year ago, Instiglio launched with support from a $10,000 Harvard Public Sector Innovation Award sponsored by Accenture and the Technology and Entrepreneurship Center at Harvard (TECH). Since then, the group has established a home office in Medellin, Colombia, and has worked with governments, NGOs, and international development organizations on SIB education and implementation.

Instiglio is currently working on two major projects. In India, the pay-for results financing plan will support a Mumbai-based NGO in helping girls from villages in Rajasthan stay in school and increase their test scores. Instiglio is the intermediary, working with a UK-based development agency to fund the program. But Instiglio is more than a connector; the team is also helping the NGO improve their program monitoring.

Financing Urban Innovation And The Rise Of Social Impact Bonds

As local governments struggle to meet their budgets, they have been forced to cut social programs often because of reduced federal support. This bears several questions:

Where will cities get the money to get smarter?
How can a smart city also be good for its people?

A tool in the toolbox that is gaining a lot of attention is the social impact bond (SIB), also known as pay for success or social innovation financing.

The idea is based on a commitment from government to use a proportion of the savings that result from improved social outcomes to reward non-government investors that fund the early intervention activities. Initially developed in the UK to finance a prisoner rehabilitation program, which yielded savings to the government, it has also gained traction in Australia and increasingly in the U.S., with both support from the Obama administration and leading public officials and philanthropists. This animated 2-minute video above, by McKinsey & Co, does an excellent job in introducing SIBs.

The particular characteristics of projects funded by social impact bonds are particularly aligned with the goals of a smart city: successful performance can be measured through available data, efforts should be scaleable and replicable, and total benefits to society should be greater than the programs they replace.

Furthermore, only those programs that deliver the promised results are paid, otherwise the risk is borne by the third party investor. Therefore, government only funds programs “that work”. And we should all agree that smart city initiatives must work.