Report 2015

Making money from fighting crime, youth services and development aid

Every young person to get a new job can start contributing to society. Finding a job offers them a future, and improves the public budget. Not only does the government save on benefits, health care and policing, the additional incomes are taxed as well. Municipalities do not always have enough money to invest in solutions, making employment a missed opportunity for many.

This is where ABN AMRO and Star Foundation entered the stage, on behalf of the city of Rotterdam. Together they invested in the Buzinezzclub, which guides unemployed young people towards finding and keeping a steady job or entering self-employment. Participants enrol in an intensive programme that includes an apprenticeship, personal coaching, and group training sessions. Support continues for a full year after a participant enters employment. This is a win-win situation for young people, governments, and investors. The investors receive a percentage of the returns if pre-established social and financial goals are achieved. The project is still in the start-up phase, but initial results are positive

A better world

Social Impact Bonds can also make a difference in combating problems involving crime, youth services, health care, and development aid. The driving idea is to create a better world in a profitable way. Financial risks are shifted from governments to private parties, who are more agile and innovative. As a reward, they receive a percentage of the returns.

Around the world, governments and financial institutions alike are pleased with this solution. Ruben Koekoek, ABN AMRO's Manager for Social Impact Bonds says, “It used to be the government that solved every problem. Nowadays, citizens and businesses accept part of that responsibility.”

Growth market

The UK and US governments have launched extensive programmes, and a growing selection of countries is following suit. Banks such as Goldman Sachs and Bank of America are joining in as well. J P Morgan has estimated 2014's total investments in the rapidly growing impact investment sector, which includes Social Impact Bonds, to be 10.6 billion dollars (approximately 9.4 billion euros).

Obstacles

Despite the promising results so far, impact investing has a long way to go before it reaches maturity. Projects often do not make it to the launch, and when they do, they do not always live up to expectations.

To a large degree, the projects' failures have to do with the social goals that are linked to the projects as return requirements. This summer, Goldman Sachs and Bloomberg Philanthropies discontinued a re-integration programme in the New York prison Rikers Island, because the programme had not managed to lower young prisoners' odds of recidivism. Achieving social goals with a focused strategy turned out to be more difficult than reaching financial targets.

Measurement problems

Measurability is a challenge in itself, as researchers from accountants Ernst & Young have stated in a recent report. If positive results of impact investments are not measured, they do not translate into returns. Setting and measuring the right goals is, therefore, a prerequisite for success. This means large investments in the organisation, which challenges the small-scale feasibility of Social Impact Bonds.

Closing a deal

There's the rub: the investors who are needed for large projects, are not keen on taking on too much risk. In many cases, to attract sizeable amounts of money, there needs to be a successful pilot, or a non-profit organisation has to pledge to partially absorb any losses. Governments are not always cooperative either. It is not uncommon for Dutch social investors to become entangled in bureaucracy as they cooperate with multiple levels of government. Koekoek observes that closing a deal is often complicated by the large number of parties involved.

Future

“I recommend having fewer parties involved in Social Impact Bonds,” says Koekoek. The government can accomplish that by instituting an overarching fund that pays out the returns. Companies and governments, Koekoek believes, should share more knowledge in their quest for effective business plans. Despite the challenges, the list of successful applications of Social Impact Bonds is growing. That offers hope for the future. Because of the considerable international interest, many organisations have started their own research. Another ingredient in the recipe for success is finding investors with the courage to experiment, such as ABN AMRO. Koekoek: “We think of ourselves as thought leaders. We became involved in an early stage, and hope to give the market a push in the right direction by sharing our knowledge.”

Report: Social Impact Bonds (Dutch)​ (PDF 4 MB)