Inside a Social Impact Bond Agreement

Exploring the Contract Challenges of a New Social Finance Mechanism

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    The Social Impact Bond, a promising new model for funding some social programs, is best understood as an agreement between a government agency and an outside organization in which payment from the government is entirely contingent on the organization achieving measurable, positive social outcomes. There is particular excitement in state and local governments and among philanthropic foundations and social service providers about using these agreements to finance preventive social programs that often save government money down the road but are still vulnerable to budget cuts in fiscally tight times.

    Social Impact Bonds also pose significant challenges because they require government agencies to act in unfamiliar ways. Most obviously, agencies accustomed to paying service providers for performing a proscribed set of activities may find it challenging to make the switch to only paying for results in a SIB agreement. The government will also need to clearly define the beneficiary population receiving social services and must provide safeguards to make sure the external organization doesn’t just “cream skim” or work with only the easiest cases to achieve the outcome. And, of course, the government must continue to cooperate with the external organization throughout the full term of the agreement.

    These challenges mean that the agreement itself—the contract signed by the government agency and the external organization—is critically important to the success or failure of a Social Impact Bond. Among other things, the contract will define the relationships and responsibilities of all the parties in this unusual arrangement, will set out the circumstances under which the external organization can expect to earn their payment, and will determine when either the government or the external organization can terminate the agreement. Writing the agreement well will help guarantee transparency and cooperation between the government and the external organization, help protect the vulnerable populations that the agreement serves, and make better outcomes possible.

    In this issue brief, we present some draft language that could be included in a Social Impact Bond agreement. It is meant to help readers understand some of the complexities of SIB arrangements and the ways to address them. As an example, this SIB contract focuses on improving employment outcomes for the long-term unemployed, but SIBs can also be used in many other policy contexts.

    Click on the arrows to read through the sample agreement below. You can also click on the highlighted text to see commentary on the different parts of the agreement.


    The above language for inclusion in a Social Impact Bond agreement is meant to help address common questions about how these unusual arrangements can be structured between government and an external organization. But it is by no means the final word on how these arrangements should function. Social Impact Bonds are still developing in the United States, and as more states and cities explore the concept, new models with their own agreement terms and language will emerge. Because Social Impact Bonds require openness, trust, and ongoing communication between government agencies and an external organization, most agreements will likely contain clauses formalizing the roles, responsibilities, and expectations of both parties—including rules for the orderly termination of an agreement.

    Upcoming issue briefs in this series will focus on possible applications of the Social Impact Bond concept, further explore how to measure successful outcomes, and discuss the long-term potential of these innovative new financing tools.

    Jitinder Kohli is a Senior Fellow with the Doing What Works project at the Center for American Progress. Douglas J. Besharov is a professor at the University of Maryland School of Public Policy and a Senior Fellow at the Atlantic Council of the United States. Kristina Costa is a Research Assistant at the Center for American Progress.

    The Center for American Progress’s work on Social Impact Bonds is supported by the Rockefeller Foundation. The authors are extremely grateful to those who provided insightful input to this piece. In particular, they would like to thank Alex DeMots, Gary Glickman, Steve Goldberg, Justina Lai, Ben Jupp, Trupti Patel, Jim Robinson, Dan Rosenbaum, Kathy Stack, Marta Urquilla, and Mary Ellen Wiggins for their help.

    Download this brief (pdf)

    Read the brief in your web browser (Scribd)