Social Impact Bonds (SIBs) are an alternative performance-based public financial instrument, that shifts the policy focus from inputs and outputs to outcomes and value-for-money. SIBs are typically issued by the public sector, whereas the working capital is provided up-front by private investors and paid to the service provider. The public partner commits to paying the outcome payments to the investor if and only if the predefined and measurable social goals are met.
This paper addresses the question whether and when SIBs are suited for financing public services and preferred to traditional funding, like public procurement or public-private partnerships. To this end, it identifies seven preconditions for the feasibility and successful issuance of SIBs, structured into a decision framework: (1) governmental willingness to use innovative funding techniques, (2) clear definitions of the social issue, social impact and target group, (3) sufficient supply of experienced service providers, (4) measurable outcomes and robust datasets, (5) unambiguous baseline, (6) sufficient potential cost savings and (7) removal of administrative and tax barriers. At date, most SIBs are used for the provision of ‘soft’ public social services.
This paper assesses the feasibility of SIBs for financing ‘hard’ infrastructural investments, more particularly in road safety. The decision tree shows that there exist no fundamental obstacles for the use of Road Safety Bonds. Their current limited use is mainly due to the managerial complexity, the lack of experience, administrative support and venture capital, and the desire of policy makers to keep control of the policy output.International Journal of Transport Economics (accepted)