Traditional ways of funding not-for-profit organisations (NPOs) to deliver programs that address complex social problems are struggling to keep up with demand. Despite record high levels of government funding for NPOs, there is still a significant level of unmet need and new approaches to funding NPOs are being explored.

There is increasing international interest in the potential of one particular type of social finance – social impact bonds (SIBs). A SIB restructures the relationships between government agencies, not-for-profit service delivery organisations and social investors such as charitable foundations and high net worth individuals. Under a SIB, a bond-issuing organisation raises capital from investors based on a contract with government to deliver improved social outcomes that generate future government costs savings. These savings are used to pay investors a reward in addition to the repayment of the principal, if the agreed outcomes are achieved.

SIBs support social innovation by providing a mechanism for investors to fund programs based on early intervention, prevention or breaking the cycle of dependence. They offer the potential to achieve significantly better social outcomes and deliver future costs savings for government. SIBs provide a new model for the sharing of risk between government, NPOs and social investors. They utilise commercial investment expertise and market discipline for the delivery of public services by NPOs.

SIBs, it should be emphasised, are not a panacea. Their use should complement existing modes used to fund community benefit goals.

In this report, the Centre for Social Impact   has addressed two key questions:

1. Whether the SIB concept is feasible in a New South Wales (NSW) context; and
2. Whether NSW has the necessary ingredients: market conditions, NGO capacity, social investment interest and government preparedness, for this new approach to funding.

To answer these questions, CSI held detailed discussions with and considered the perspectives of NPOs, social investors/philanthropists and government agencies. The overarching conclusions are that CSI believes that the SIB concept is feasible and NSW does have the necessary ingredients, although there is much work to be done to deliver a SIB pilot.