Social impact bonds: made in Switzerland – finally!

 

Heiko Specking

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In 2010 the first social impact bond was launched in the UK. In its very nature this innovative structured fixed-income instrument proved the concept of realising a reasonable financial return along with a measurable social dividend. This summer such a bond has been launched as a pilot project in the Cantone of Bern, Switzerland.

Many potential investors are still struggling to fully understand the concept of social impact bonds. Are they an investment opportunity for large endowments, trusts or foundations with a strong social bias, reflecting the responsible attitudes of the investors? A possibility to diversify a portfolio for pension funds who have a long-term perspective and rely on stable returns? Certainly this is a sound opportunity to invest differently and with a strong social leverage.

Social impact bonds have been highly praised at major sustainable investor gatherings throughout Europe during the last year, such as the Sustainable and Social Impact Investing Conference in London with the theme, ‘Can Green Bonds deliver.’

The logic is to outsource a public social service to a private provider, who, it is assumed, will do a better job than would the government. The bond itself is independently set up with the state on one side, a coordinating intermediary in the middle, and the investors/service provider on the other. It binds the investor’s capital for this privately run social prevention programme for a set number of years. The state, as the remitter of such an initiative, only pays back the capital to the private initiative and therefore the investors, if the set goals have been fulfilled. This way social impact bonds monetarise the advantages of social interventions and relate the return payment to the performance of a programme to all parties. If the privately run service succeeds, overall costs are reduced and tax money is saved in the process. However, if the program fails, the investor loses the investment.

In general, private initiatives have more room to realize new and innovative ways to solve an existing problem, which the state is not capable of addressing or does not prioritize. Youth unemployment, early childhood education, re-socialising programmes for prisoners or the care and integration of homeless people have been popular causes so far. However, the exact measurement of the defined success remains, in most cases, challenging and only is quantifiable over a long term.

The first Swiss social impact bond was set up in June 2015, which finances a project that aims for the successful integration of refuges and persons who are applying for asylum into the Swiss job market. The current employment rate is 20- 40 per cent and the scheme aims to increase this to 50- 60 per cent over the next five years, primarily through training and work placements.

The initiative, Fokus Bern, is backed by 70 companies, including the Cantone of Bern Department of Health and Welfare of and the NGO Caritas Bern. The outcome of the initiative is measured according to the carefully defined goals, such as having completed a professional qualification. The project has a budget of CHF 2.7 million, and is mainly financed by charitable foundations. If the goals are reached by 95 per cent to 105 per cent, the Cantone Bern will pay for the generated services, with a bonus paid out if expectations are succeeded. But there is also a malus mechanism implemented, if the task is not completed.

It will be interesting to follow the development of this initiative in Switzerland, especially as the situation of refugees in general has become more complex and challenging.

Interested to read more about it? The CEPS, Center for Philanthropy Studies at the University of Basel has recently released a report on Social Impact Bonds.

Heiko Specking, founder and partner of specking+partners ltd.


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