human capital performance bonds

Research Friday: Human Capital Performance Bonds. What are they? How do they work?

 

posted by
Patsy Kraeger, Ph.D.

 

Welcome to Research Friday! As part of a continuing series, we invite a nonprofit scholar, student, or professional to highlight current research reports or studies and discuss how they can inform and improve day-to-day nonprofit practice.

The past decade has been rife with ideas on how to scale up successful nonprofit organizations. Calls for scaling have been amplified by the recent economic recession, which brought increased demand for social services coupled with shrinking government dollars. But a structural problem remains: philanthropy does not typically have available capital for scaling.

The Social Impact Bond (SIB), developed in the U.K., was recently adopted in Massachusetts. The SIB is not a traditional bond; rather, it is a capital equity investment pool.i As I discussed in my last blog post, with SIBs, money is paid up front to a nonprofit organization, which in return commits to predetermined benchmarks. The investors assume the risk that the nonprofit organization will meet the benchmarks and alleviate the social problem.

But what if the nonprofit organization was to assume the risk? What if the organization only received payment if the outcome was achieved? This type of bond is called a surety bond, specifically, a Human Capital Performance Bond (HuCap). Minnesota has enacted legislation to pilot the HuCap bond, in a program that will look at the “desirability of using state appropriation bonds to pay for certain services based on performance and outcomes for the people served” (Minn. HF 681, March 23, 2011).ii