wEBINAR Q&a SESSION
Social Impact Bonds (SIBs)
DATE: Wednesday, April 27, 2016
TIME: 9:00-10:00 AM (EST) / 3:00-4:00 PM (GMT+2)
Benedict Wauters - Director for Innovation and Impact Evaluation, European Social Fund Department, Flemish Ministry for Labor and Social Economy
Ian Dewae - Task Team Leader, Belgium Public Employment Agency in Flanders, Belgium (VDAB)
Vladimir Kvaca - Director of the Partnership Agreement Evaluation and Strategy Department, Ministry of Regional Development, Czech Republic
- Give us the prospective of the funder - why did you decide to fund this SIB project? What are the advantages to you (as compared to traditional funding)?
Answer from Benedict Wauters: At the European Social Fund (ESF) in Flanders, we are trying to support innovation, but not directly funding SIBs. However, we are allowing Ian Dewae to demonstrate what it looks like if we ever wanted to support SIBs. For us, this is a demonstration project, so we are not sure there are advantages yet. We hope to find out through this project and if we want to add this to our arsenal of ways to fund more innovative ways of societal challenges.
- One of the criticism of SIBs is the difficulty to measure the outcome of the scheme and to calculate objectively payments to investors. How are you calculating the payment per youth? How are you making sure it’s objective?
Answer from Ian Dewae: We have an Independent Evaluator who evaluates the results. To calculate the youth training price, we have our own training standards and compare them to what we are doing right now. For our investors, that is something we are negotiating, as we are currently working on the design and payment allocations.
- At the beginning you have pointed out the need to protect the service providers from pressure. Why you see this important and how you will arrange this (that the investors will not move the performance risk directly to service providers).
Answer from Ian Dewae: We see some differences between the UK and US. In the UK there are social involved investors who propose the same targets. In the US, the financial market is much more involved. Benedict can give a good example in the UK where the pressure is not put on the service providers and the results are much bigger. This is important.
Answer from Benedict Wauters: The evaluation that was conducted in the UK example (Petersborough SIB case http://www.rand.org/randeurope/research/projects/social-impact-bonds.html) demonstrates that not pressuring service providers means they can get more innovative and realistic service provision off the ground. What matters in this examples is the impact, so insulating the service provider from too much interference. We have to be careful with the role of the investor so there is minimal interference. There are risks and assumptions here that we are not always very clear on, though.
- Will this approach work with change in governments? What is the sovereign guarantee?
Answer from Ian Dewae: This is an issue that is under discussion. Politically, we are not sure how they will be involved as of yet. It’s something we are trying to start – starting a SIBs fund from scratch to find out if it works. Once successful, we can get political involvement or by-in. For our project, this will take about five years, so we need more time to figure this out.
Answer from Vladimir Kvaca: Government changes can change the large scope of things. Though in the end, the promise of the previous government has to be kept. However, the continuity of rolling out the pilot into the broader policy can be difficult.
Answer from Benedict Wauters: The SIBs is a multifaceted program, so once we start to imbed mechanism for running the program, we can have further discussions/agreements at the EU level. However, we are not there yet. We don’t have the mechanism right now, so for the future, we would have a seven to eight year program, which will provide a guarantee that it will not be disrupted due to a change in government. The only question is in what capacity would we be involved with the ESF – outcome funder or investor – as both could be possible, though it’s something we will think about and discuss.
- What is the interest rate on the bonds, and how was this established? How does the rate compare to the government's normal cost of finance, i.e. what is the risk premium?
Answer from Ian Dewae: Interest rates and refunds depend on the project and ultimate results. Many active SIBs have different refund mechanism. It’s not one standard based refund mechanism with a fixed percentage that can be refunded. The normal rate/costs are actually there, but the issue is whether they are successful or not. By applying the SIBs mechanisms, government costs will only be made if the project is successful and the social problem is partially or completely solved. The biggest risk we take is to show that the project is successful because then we have to refund the investors. Otherwise, there is no risk involved.
- Can SIBs be applied to sectors other than social, such as infrastructure?
Answer from Inga Afanasieva (moderator): This is something we will look at and follow-up on. There may not be a link between delivering infrastructure and social savings through the system.
- Private sector is usually attracted by investments with high return and it often makes sure the design of the operation/service is done in such a way to achieve the expected return. Is it possible that the objective of return on investment impact the quality and accessibility of the proposed services when using the SIB instrument? Given the high level of risk for the service providers who are only paid when improved social outcomes are achieved, do you think SIB mechanism is attractive as compared to other instruments with less risk? Have you notice any use of guarantee instruments by service providers to mitigate the risk of losing money?
Answer from Benedict Wauters: First, service providers do not have any risk with SIBs. The service providers have a guarantee up front that they can do the work as they see fit. The risk is for the investors. If the service providers are not performing well, investors may not get their money back. SIBs are typically positioned as a funding mechanism for innovative ways of working on something they have already demonstrated success on before – it is not suited for something that no one has ever tried.
- Can you give some examples of the 'premium' to the investors? I am trying to get a sense of how attractive this financing is to government’s given the uncertainties of outcomes for the interventions.
Answer from Ian Dewae: The first SIBs in Brussels show that higher employment rates among treatment vs control groups repaid investments to investors. In this example, if improvements in reemployment rates compared to control groups is between 0-10%, payment gradually increases from 0-100% of investment principal. If improvement is beyond 10%, investors earn incrementally higher interest up to 6%. So, the maximum return is up to 6% at the end of the project.