The question of how to fund social programs for vulnerable populations is currently undergoing a significant and in many ways quite profound transformation. In countries such as Canada, the US, and the UK, there is a growing sense of frustration with the way that nonprofit and charitable programs have been funded with limited evidence that investments by government and philanthropy have “moved the needle” on intractable social problems. Nonprofits themselves continue to raise concerns around the decline of government support, the greater reliance on contracts rather than grant funding, and the fragmented nature of the funding marketplace with providers having to draw from multiple funding streams subject to different expectations and reporting requirements.
The search for solutions to these challenges has assumed several different forms. There is the transition from “outputs” to “outcomes” and the notion that public and private capital should be directed towards programs and providers that are able to demonstrate meaningful “outcomes,” part-and-parcel of a more “rational nonprofit capital market.” There are related shifts in philanthropy including the growth of “venture” or “strategic” philanthropy where the emphasis is on developing capacity and helping nonprofits to grow and scale rather than simply paying for programming. And there is what is variously referred to as ‘social finance,’ ‘social investment,’ and ‘impact investing,’ an emerging investment market seeking to deliver both financial and social returns while providing new sources of capital for the purpose of social good. Collectively, these developments reflect an emerging vision for a new nonprofit funding marketplace where government, philanthropy, and private investors can all invest in long-term social change.
Funded by a grant from the Social Science and Humanities Research Council of Canada (SSHRC), the objective of this three-year study (2016-2019) was to examine this shifting funding landscape and the challenges faced by social service nonprofits in Canada, the US, and the UK in securing stable, long-term funding. With a focus on providers operating in five core areas – education, employment, criminal justice, homelessness, and child welfare – particular attention was devoted to new outcomes-based funding approaches and a model that has attracted a great deal of discussion and debate: the social impact bond.
First introduced in the UK in 2010 as part of a program to reduce recidivism rates for short-term prisoners released from HM Peterborough prison, SIBs (or, as they are more commonly known in the US, Pay-for-Success projects) are investment contracts in which a group of investors provides up-front capital to fund a social program or service. If this program is successful in meeting agreed upon outcomes targets (in the case of Peterborough, reductions in recidivism rates), the government agrees to repay the principal and provide a return to investors. If the program is not successful, investors may lose all or a portion of their investment. This model offers the promise and prospect of a win-win-win scenario for all parties concerned. For investors, it provides an opportunity to realize both social and financial returns. For charities and nonprofits, it offers much needed working capital supplied under more flexible terms and for a longer duration than standard government contracts. And for government, it is a way to fund longer-term, preventative social programs while transferring the risk of program failure to investors. Based on these imagined benefits, the SIB model quickly gained international attention with projects soon following in the US, Australia, Canada, and Europe. As of January, 2018, over 100 SIBs have been contracted in 25 countries in policy areas ranging from homelessness, to child welfare, to criminal justice, to health. And yet, SIBs have also attracted considerable controversy and are the subject of an increasingly polarized debate with critics pointing to the limitations of the SIB model and its failure to deliver on key promises such as cost savings and innovation.
Informed by over 195 interviews with individuals involved in, or with direct knowledge of, the SIB market (e.g. government; providers; intermediaries and advisors; and investors), as well as those working in neighboring fields such as social investment, impact investing, and venture philanthropy, this study has sought to provide a more nuanced account of both the possibilities and the limitations of this new funding model and the extent to which it is able to address the funding challenges faced by social service nonprofits. These interviews were conducted over a span of three years (2016-2019) in Canada, the US, and the UK (including three month research trips to both Boston and London) thus allowing for comparisons to be made across national contexts and yielding insights and lessons from three very different SIB markets. While primarily focused on SIBs and PFS, the study also sought to explore alternative funding models including more traditional forms of grant-based funding which continue to be an essential funding source for large numbers of social sector nonprofits and charities. The ultimate hope is that this research will help to provide a clearer picture of both the present and potential future of nonprofit funding and thus how best to support the work of organizations seeking to assist those in need and combat prevailing forms of inequality, injustice, and marginalization.