innovative financing

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

Research Friday: Social Impact Bonds: A New Tool for Scaling Impact

 

posted by
Patsy Kraeger, Ph.D.

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

“I cannot help fearing that men may reach a point where they look on every new theory as a danger, every innovation as a toilsome trouble, every social advance as a first step toward revolution, and that they may absolutely refuse to move at all for fear of being carried off their feet.”

—Alexis de Tocqueville


Alexis de Tocqueville, a French early nineteenth century political thinker and scholar known for his book Democracy in America, often pondered questions of societal well-being, or social policy. De Toqueville’s quote speaks to resisting complacency regarding society’s complexity and invites people to think of new and innovative solutions for bringing change. This kind of phenomenon can be seen in a 2011 joint report from Social Finance, Inc. and the Rockefeller Foundation, titled: "A New Tool for Scaling Impact: How Social Impact Bonds Can Mobilize Private Capital to Advance Social Good." The purpose of this blog post is to summarize the information from this report.

Social service and nonprofit programs have traditionally been supported through philanthropy and government contracts. The last five years has seen shrinking funds from both the government and philanthropic sectors due to a recession economy. Needs continue to grow beyond what philanthropy or government can provide. The emergence of microfinance and social entrepreneurship has given rise to new ideas about the role of venture capital in the social sector. There has been some discussion about for-profit alternatives to the traditional nonprofit model, such as “B” (for benefit) and “L3C” (Low-profit Limited Liability Company) corporations, which combine low profits with a social mission. However, there are questions surrounding the inherent stability of these new business models, given the complexity of financial and other federal and state regulatory requirements. One such model is the Social Impact Bond (SIB).

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