M-RCBG Associate Working Paper No. 65

Improving Social Impact Bonds: Assessing Alternative Financial Models to Scale Pay-for-Success

Nicholas Bergfeld, David Klausner, and Matus Samel



Social Impact Bonds (SIBs) represent a new and innovative tool for promoting social welfare. If implemented correctly, they could represent a new frontier for public-private partnerships and philanthropic-private contracts. The limitations on the private provisioning of social welfare programs are decreasing, and recent technology allows for more accurate cost-benefit analysis and the measurement of more meaningful performance indicators. Taken together, these factors increase the technical feasibility of SIBs.

By incorporating the private sector into the promotion of social welfare, social programs stand to benefit from the market-driven efficiencies gained by incorporating a profit motive. Society stands to benefit in return, through both the more effective provision of social services and the cost savings realized by government entities. This situation is made possible when we take an “outcomes-oriented” approach to social programs, where the goal of government is not to control the method by which services are provided, but rather the actual results of such interventions. A results-focused approach has created space for experimentation in the provision of social services and created opportunities for all stakeholders (private investors, governments, philanthropic organizations, non-profits, target populations, and intermediaries) to benefit from this new investment frontier.

This policy analysis describes in detail the risks and barriers that could prevent the growth of the SIB market and hinder its adoption as a useful means of providing social services. We identify eight key investor risks:



Government non-payment


Intervention model




and four barriers to scale:

Transaction costs

Availability of capital

Deal flow availability

Availability of service providers

All of the above risks and barriers must be addressed in order for the SIB market to grow. However, through this analysis we have determined that transaction costs are the greatest impediment to success. These costs are mainly attributed to the customization inherent in the current SIB market, whereby each SIB project must be individually structured, negotiated, and managed. The following analysis examines three alternative financial models with properties that decrease transaction costs, including bundled Clean Development Mechanisms (CDM), structured financial instruments, and social impact private equity funds, to see which elements of their construction could be useful in scaling the SIB market.

Through our analysis, we have determined that intermediaries and policymakers should attempt to scale the SIB market using a private equity intermediary model. This model requires the fewest number of regulatory and policy changes to be successful and results in the organic growth of the SIB market. Financial investors stand to gain through effective risk diversification, and intermediaries benefit as they increase their internal capacity to evaluate the risks in implementing social programs. This growth in assessment capabilities decreases the dependency on governments and other types of specialized intermediaries, thereby decreasing the overall transaction costs of SIB contract construction, origination, and implementation.

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