Instiglio – Bringing social impact bonds to developing countries

Instiglio

Over the last few years we have seen the emergence of a new model for public-private partnership which innovatively allows private financiers to help public sector or non-government actors to achieve needed social goals.  That model is the social impact bond (SIB) – or as the Economist magazine calls it a new way to link commerce and conscience.  It is a model which allows the private sector to finance social programs and get paid back with interest by the government if and when a pre-determined social target is met.  Started in the UK in 2010 it has since caught on around the world being used in places like New South Wales, Australia, the state of Massachusetts in the US and notably by the New York City government in conjunction with Goldman Sachs in an effort to help troubled teens avoid going back to jail.  More recently a new company, Instiglio, started by a bunch of bright young Harvard Kennedy School grads has decided to take the model to developing countries starting with Colombia and now also India.  Read on to find out more.

WHAT IS THE BUSINESS ABOUT? 

Instiglio is a social enterprise that uses social impact bonds* to discover and scale social service programs that work. By linking financing to the outcomes of evidence-based social interventions, it aims to transform the impact of how philanthropic, investor and taxpayer money is used. The enterprise does not provide the financing or the design, development and implementation of the social programs.  Instead it works as the intermediary between the financiers and public sector or non-government entities in developing countries to match sources of funds with high potential social programs, to design and structure the social impact bond contract and monitor the performance once implemented.  

*Social impact bonds are outcome based contracts between a private financial lenders and typically government to finance a social program.  Unlike traditional contracts, the government will pay back investors with interest only if they achieve the desired outcome which is agreed upon ahead of time. The private sector financer assumes upfront costs and performance risk to expand promising programs, while assuring that taxpayers will not pay for the programs unless they demonstrate success in achieving the desired outcomes. The government benefits because it forces it to focus on finding programs that work and it allows them to mobilize additional sources of funding and scale programs quickly when they are successful.  While the private sector wins because it allows investors to invest in programs with financial and social returns – something which is increasingly being demanded by sophisticated investors.  Watch this video for a more detailed explanation.

HOW DID IT START?  

Instiglio was founded by two classmates at the Harvard Kennedy School in 2012 who were inspired by the movement being led by Harvard Economics Professor, Jeffrey Liebman who was implementing a social impact bond program with the government of Massachusetts and whom later created with funding from the Rockefeller Foundation the Social Impact Bond Technical Assistance Lab. Through the lab and the Harvard community the pair met government officials from the Colombian state of Antioquia who were eager to implement such a program in Colombia.  Thus the idea was born.  The pair got started in earnest in 2012 working in a summer residency program at the Harvard Innovation Lab and through that winning the Accenture Public Service Innovation Award .  This award boosted the companies profile, when the pair graduated they were notified of intent of funding from USAID to conduct proof of concept in Colombia on a program in the city of Medellin to reduce school dropouts and prevent unwanted pregnancies.  This they hope will be the first of many such programs to be replicated around the world.

WHAT IS THE SOCIAL NEED IT ADDRESSES?

Social impact bonds can be used to address a wide range of social programs typically funded primarily through government support and tax-payer money.  This could vary from programs to help the homeless get off the streets permanently, help unemployed find work, reduce juvenile delinquency, reduce teen pregnancy, educate girls in India or even to reduce the incidence of Malaria in places like Mozambique.

WHAT IS THE BUSINESS MODEL?

  • Value proposition – Instiglio value proposition is to be intermediary service provider between interested financial investors and government or non-profits looking to find innovative ways to finance social programs.  They will be the knowledge provider, structurer, implementor and monitorer of social impact bonds to make sure they are successful.  
  • Customers/Channels – There is a wide range of potential customers in developing countries, it could either be to provide services directly to governments, or to NGOs and development finance institutions actively seeking ways to address large social challenges. It is not clear how Instiglio goes about finding its customers but most likely this will be based on proof of concept and success stories which can later be replicated.
  • Revenue Streams – As any service provider, Instiglio presumably would make money through a fee for service model  taking a share or fixed fee as part of matching making, structuring and monitoring of the SIBs. It is not clear how else they could make money, perhaps through the sale of the intellectual property they create in this innovative space.
  • Cost Structure  – Costs are primarily labor, overhead + all of the travel and contracting of other service providers to implement the monitoring required to make programs successful.
  • Key Partners/Resources – The business is reliant on its partners and there are many.  It requires a partnership from governments and/or DFIs and NGOs to provide the need. It requires partnerships with financial institutions who presumably would prefer to build a portfolio of investments to reduce costs rather than go on an ad-hoc basis.  It requires partnerships with academia to monitor and provide proof of concept.  It also requires partnerships with foundations and other sources of seed capital to get the business off the ground.

WHAT ARE SOME CONCERNS I SEE WITH THE MODEL?

  • Partnership risk – as a business why couldn’t the financial lenders such as Goldman Sachs or DFI’s like the IFC or others once the concept is proven simply eliminate the intermediary players like Instiglio and go direct to contract SIBs with governments?  Also the business is very heavily reliant on its relationship with Harvard and donors such as USAID.  Would the business work without their support?
  • Scale – The business is still on the proof of concept stage so maybe it is a bit early to talk about scale, but how will this business scale? It seems that there is a lot of learning that needs to be done in each individual country or context and that replicating SIBs will be difficult to do without such local insights.
  • Risk sharing/incentives – As a service provider would they share some of the risk with the private investors if the programs are unsuccessful or would the fee for service be based just upon finding and structuring SIBs.  How can we guarantee that Instiglio’s incentives are aligned with finding projects that work and not just pushing for more SIB’s because it is a cool idea.
  • Measurement – looking at the bonds themselves the selection and measurement of performance indicators are crucial to their success.  How can we be sure that the right metrics are chosen and that those metrics are actually associated with the type of impacts which will really benefit society.  Rigorous studies will be required, they likes of which are expensive and difficult to replicate.
  • Unfair competition and accountability – Will the competition that is created by this funding platform between NGOs always be good?  I’d like to think yes but maybe programs without clear performance measures or no ideas to address problems will go underfunded.  Also who will be accountable when targets are not met?  Government, the private financier or the service providers?  It seems like government could potentially reduce its accountability to the public through SIBs

Despite these concerns I love the concept of social impact bonds and what Instiglio is pioneering in developing countries.  I hope it will be successful and be role model for a new form of more effective development and social program financing.   

WHAT DO YOU THINK?

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