This article was written by Federico Javier Díaz Sahr, social impact bonds project manager at the Ministry of Economy, Chile. For more like this, see our public private partnerships newsfeed.
Developing a social impact bond is neither a quick nor an easy process. Especially when countries have no previous experience doing it.
At the beginning, there are many constraints: First, public sector tends to pay based on service delivery rather than outcome. Second, it is not easy to get access to information from other public entities, and, finally, there is no clear framework on how countries can compromise future payments using the current fiscal year’s resources.
Starting from scratch
When the Chilean Ministry of Economy began to consider that social issues could be solved by a mechanism called Social Impact Bonds (SIB´s), we faced the same question that many countries had at the beginning: How can we start a SIB? What are the key points to consider?
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To move forward with that mission, in 2018, Chilean Government established contact with several undersecretaries to identify potential social issues that could be solved through a SIB. After a long way of pre-feasibility studies done by public institutions, such as the Ministry of Justice and Ministry of Social Development, we are now finishing the feasibility studies about two topics: The reduction of youth recidivism and the decrease in the number of homeless.
Based on the Chilean experience, we have learned two lessons. First, it is extremely important to look for potential organisations, inside the Government, to become partners during the whole process. Second, it is important to identify international experiences in order to define the best practices and the potential bricklayer of the SIB´s process. Although these steps seem to be logical and easy, it takes considerable time and effort.
According to the literature, one of the key points for the SIBs to be successful is the support from public organisations. For that reason, at the beginning, at the Ministry of Economy we started to realise that SIBs require a large set of skills and institutional faculties that could be better performed by other public entities in a considerably shorter time.
Building the team
For that reason, following several presentations to different public organisations about what SIBs are, we established a close cooperation agreement between CORFO (Chilean Economic Development Agency) and The Ministry of Social Development (MDS), and the support of IADB and San Carlos de Maipo Foundation. Each organisation provides a special set of skills related with their mission. For instance, CORFO is in charge of all the topics related with payments to the intermediaries and the procurement process with them. The Ministry of Economy selects the topics, with the support of the MDS, and coordinates the process from the beginning to the end. MDS provides the insights about how to evaluate pre-feasibility, monitor the intermediary and all the topics related to social issues.
The latter, coupled with strong governance, enabled us to define what each organisation should do, how coordination will be done, the different committees and meetings that will take place.
As a consequence of the previous step, organisations will provide different points of view and skills. Furthermore, it will be easier to get in touch with other public bodies. As participant organisations will be working in different roles, there is pressure from peers to achieve the goals.
Finally, as there is a diversification of the activities, because of the large number of partners, there are more chances to move forward on different tasks at the same time, something that does not happen when only one organisation is in charge of SIBs.
One important lesson is to not be afraid of getting in touch with other countries; everyone is willing to contribute to the development of the SIBs in the region
Last but not least, as SIBs have been developed in 26 countries around the world, it is important to learn from other experiences. In Latin America, several countries have tried to develop social impact bonds with different results. We established contact with Colombia, Mexico and Argentina. The main questions were related with how politics could affect SIB’s success, what the best practices for them are, and what practices we would be better to avoid.
The ideas and documents gathered from these conversations could be used to lay the foundation for the SIBs process. One important lesson is to not be afraid of getting in touch with other countries; everyone is willing to contribute to the development of the SIBs in the region. Moreover, never underestimate the support and feedback of countries that have already developed SIB’s, as you are starting from scratch.
Designing social impact bonds from scratch is not easy, mostly because public sector institutions are not well prepared for the challenges of designing and implementing a SIB. By using the two steps above-mentioned, certainly those barriers will be broken down due to the collaboration of public sector entities and the identification of best practices from countries with similar contexts.
The last lessons are extremely important, as the Chilean Government set the challenging objective of implementing, at least, three social impact bonds at the end of 2020. It is not easy, but we are confident that with the support of public entities and relevant stakeholders, this mission, will be achieved. — Federico Diaz Sahr.
(photo credit: JULIEN TSUJIMOTO)