Social impact bonds: Combine good with gain

Social impact bonds (SIBs) encourage collaboration between governments, private investors and service providers towards a common impact goal. We explore how one of South Africa’s first two SIBs has paved the way for a new, collective approach to addressing youth unemployment in a way that also delivers financial returns. 

SIBs marry private investment with public service delivery towards common goals. Leveraging results-based financing, they offer investors a financial return tied to the successful outcomes of development initiatives. Globally, these bonds are increasingly used to tackle complex issues such as homelessness, unemployment and healthcare, offering a fresh approach that brings together governments, investors, service providers and civil society. 

South Africa’s first two SIBs were launched in 2018 to address two of the country’s most pressing social challenges. The Inclusive Youth Employment Pay for Performance Platform, or Bonds4Jobs (B4J) fund, focused on reducing youth unemployment, while the Impact Bond Innovation Fund (IBIF) sought to improve early childhood learning and development (ECLD) outcomes in the Western Cape.  

The Standard Bank Tutuwa Community Foundation, which contributed funding to both bonds, commissioned assessments of the financial and social performance of the two SIBs in 2021, including a series of three reports by Intellidex (now Krutham), exploring the value of SIBs as tools to combat our many social challenges.  

Tutuwa CEO Zanele Twala says the collaborations were an opportunity for stakeholders to explore an alternative funding model to grantmaking and to test if it was possible to derive financial and social returns on social outcome-oriented programmes. “The two SIBs have triggered innovation in the social impact space, not just because the model has worked, but also through extensive knowledge-sharing about impact investing.”  

What are social impact bonds? 

SIBs are not conventional bonds. Instead of guaranteeing a fixed financial return, SIBs pay investors based on the achievement of predefined social outcomes. The model works by providing upfront capital to service providers, typically NPOs or social enterprises, that deliver interventions to a targeted group. Governments or other outcome funders only repay the investment if the agreed-upon outcomes are met, as verified by an independent auditor. 

At their core SIBs offer a mechanism to shift the focus of social programmes from inputs, or how much money is spent, to outcomes, or what is achieved. This structure incentivises efficiency and effectiveness in service delivery, as providers are rewarded for actual results rather than activities. SIBs also distribute risk between the government and the private and social sectors, allowing governments to explore social development solutions without needing to invest public money upfront. 

The first SIB was launched in the UK in 2010 to reduce the incidence of released prisoners to re-offend. Since then, SIBs have gained traction globally, including in countries such as the United States, Australia and South Africa. The model has been applied to various social issues.  

Twala notes that both B4J and the IBIF encouraged collaboration by aligning incentives across different sectors and integrating the expertise of the government, private investors and service providers. The structure of the SIBs requires all stakeholders – outcome funders, investors, service providers, intermediaries and auditors – to work together towards clearly defined outcomes. Within this partnership, the private sector drives innovation and financial discipline while the public sector and NPOs focus on social outcomes. 

Bonds4Jobs as a collaboration platform 

South Africa’s chronic and escalating youth unemployment problem is a cause for serious concern. The inability to secure and retain employment erodes the fabric of society as it limits access to nutrition, housing, education and healthcare. According to Statistics South Africa, youth unemployment was reported at 45.5% for the second quarter of 2024, compared to the national average of 33.5%.  

B4J, despite being cut short due to the Covid-19 pandemic, offers some hope for how private sector collaborative funding might contribute to meaningfully reduce youth unemployment. 

Developed by the investment group Yellowwoods and implemented by nonprofits Harambee Youth Employment Accelerator, WeThinkCode_ and Explore Data Science Academy, B4J aimed to address youth unemployment by providing skills training to disadvantaged young people and connecting them with formal job opportunities.  

Intended to run for four years, B4J’s focus was on placing economically excluded youth, aged 18–35, into long-term formal employment in three key sectors: business process outsourcing (BPO), IRM, and information and communication technology (ICT). 

The programme not only focused on the number of placements but also on the quality of the jobs. The targeted sectors – BPO, IRM and ICT – were chosen based on their potential to offer medium- to high-complexity jobs, providing better-than-average employment opportunities for youth from disadvantaged backgrounds. Providing short-term, targeted training in these sectors made it possible for B4J to bypass the lengthy and expensive formal education system, making a real difference in the lives of young people who otherwise would have faced significant barriers to entry into the job market. 

Set up as a special purpose vehicle, nonprofit company B4J brought together a mix of private commercial and foundation investors, government entities, intermediaries and service providers to deliver on this goal. 

Three types of investors – capital preservation (Brimstone Legacy Fund), senior investors (Clientele and Hollard) and first-loss investors (Standard Bank Tutuwa Community Foundation, Oppenheimer Generations Philanthropy and UBS Optimus Foundation) – provided the upfront capital for the intervention. The different investors carried different risk profiles and expected returns. While the senior investors earned up to 11% returns, first-loss investors were willing to accept lower returns due to their focus on social impact over financial gain. Foundations are generally able to invest more and take larger risks than commercial investors who need to be accountable to their shareholders for returns. 

The outcome funders – the Gauteng Provincial Government, National Treasury via the Jobs Fund, Yellowwoods, FirstRand Empowerment Foundation and Allan Gray Orbis Foundation – were responsible for repaying investors based on verified job placements. 

Twala explains that the intermediaries (B4J and Harambee Youth Employment Accelerator) were responsible for overseeing outcomes (measured by PwC) and financial auditing as well as for coordinating learning exchange platforms to guide stakeholders in this new way of working together.  

“In addition to taking responsibility for ensuring all the pieces of the puzzle fit together – from the legal contracting, the financing of the bonds, how the money flows through the whole transaction and design – the intermediary also managed the collaborative process between the different role players.” For example, investors had their own platform to discuss how to channel the funds, the design of the structure, dispersals, legal contracting, return on investment expectations and so on.  

Twala notes that while the focus, approach and investment terms may differ from one bond to another, SIBs would broadly follow this same structure. B4J and the IBIF had structural similarities, differing in terms of focus and outcomes. It was these outcomes that made the difference when the Covid-19 pandemic struck.

B4J performance amid external crisis 

Since the IBIF delivered home-based training, implementation was able to continue virtually despite Covid-19. B4J, however, required face-to-face interaction to connect young people with job opportunities. This was impossible during the pandemic. After a successful pilot and first cycle, B4J had to be abandoned in 2020, halfway through its planned duration.  

Despite its early termination, B4J achieved notable social and financial outcomes. The Harambee Academy placed over 1 800 young people into formal employment, with 600 placements in the first year and an additional 1 209 in the second year, representing 86% of the target. Furthermore, these placements were in relatively well-paying jobs, with a mean monthly wage of R5 500. 

The bond had been structured such that investors were not required to wait the full three-year duration to receive their return. Capital was paid back on a six-monthly basis with the relevant interest. Even though B4J had to be abandoned, investors received their investments back in full.  

Informing future SIBs for SA 

Twala says that the two SIBs have attracted interest from both the private sector and government as a potential mechanism to address social issues in different sectors. Among the SIBs currently in the design phase is the Education Outcomes Fund (EOF), in collaboration with South Africa’s Department of Basic Education (DBE).  

Other related funding mechanisms are also emerging. For example, Jobs Boost is a R300 million pay-for-performance model being piloted in South Africa. The outcome fund works in a similar fashion to a SIB, with investors collaboratively pooling their resources to address youth unemployment.  

SIBs drive collaboration, amplify impact 

Twala comments that the involvement of private investors in solving complex social problems is novel to the public sector. There is a concern that SIBs may raise the perception that private companies are financially benefiting from the misfortunes of others while the government is passing on its responsibility for social development to the private and social sectors.  

She notes, however, that it is important to communicate the benefits of SIBs more widely and to demonstrate their value as a new vehicle for social service delivery. “B4J offered a real-time solution to grow entry-level, non-tertiary jobs for growth sectors. Making available opportunities to poor communities where the salaries [from employment] are transformative for those young people changes their home circumstances entirely. Beyond the SIBs’ quantifiable, predetermined outcomes, the wider impact of its effects are immeasurable.”  

SIBs represent an innovative way of thinking about social service delivery. They shift the focus from inputs to outcomes while bringing together diverse stakeholders. This spirit of collaboration has the potential to drive and amplify more effective and sustainable social change. With the right framework and continued commitment from all sectors, SIBs could play an important role in driving collaboration for social change. 

Benefits 

• Funding innovations such as SIBs addresses a pressing need for social upliftment, drawing together private finance and social organisations to provide outsourced public services.  
• There is a zero cost to the taxpayer should the development initiative fail.  
• SIBS draw on private sector and nonprofit expertise that the government may lack to achieve outcomes. 
• The process demands evidence-based, quality social outcomes.  
• The process drives positive relationships between the public and private sectors. 
• Private investors carry the risk rather than the government or the taxpayer.  
• SIBs drive efficiency and experiential learning of all participating stakeholders. 

Challenges 

• SIBs and their outcomes measurements are time consuming and complex to set up. 
• Setting the price of a SIB requires a thorough and quantifiable understanding of the savings the outcomes would realise for the government.  
• Evidence-based outcomes can be difficult to define and measure. 
• The focus on outcomes requires a shift from traditional funding models for many nonprofit service delivery organisations.  
• Macro and microeconomic, social and cultural impacts can make it difficult to draw a direct relationship between the intervention and the outcomes, requiring an additional layer of evaluations to confirm.  
• Legal ambiguities, high legal costs and administrative issues can be a barrier for service delivery organisations facing limited resources and capacity.