PRIVATI / Finanza Sociale
Social Impact Bond: neglected causes and too much attention on consequences and foresights
A bit contrived debate that urges the epistemic community for a more interdisciplinary approach
05 aprile 2016

Some interesting considerations by Rangan and Chase, both professionally affiliated with the renown Harvard Business School have been published in the August issue of the Stanford Social Innovation Review. Already in the article's abstract it is possible to grasp the main idea that guide the two authors: “pay-for-success con-tracts also known as social impact bonds have been promoted as an intelligent way to fill the funding gap that troubles social programs by attracting a tranche of the trillions of dollars in private return-seeking capital. Although that scenario is not likely, the pay-for-success model will have a positive impact, just not in the way that many proponents think.” Opinions on impact investing and particularly on social impact bonds can significantly differentiate themselves, because the approach assumed to understand the impact investing phenomenon play a crucial role in identifying the nature and the functions of impact investing as well. For this reason, it is useful to attentively review the contents and the topics reported in the essay of the Stanford Social Innovation Review together with two answers that follow it, signed by Overholser (cofounder and CEO of Third Sector Capital Partners) and by Palandjian and Shumway (respectively CEO and vice-president of Social Finance US).

The debate’s content

A general overview on the advent of social impact bond

Rangan and Chase’s article starts with a general observation that aims at explaining the reasons why the financing model of pay-for-success (or social impact bond) has increasingly spreaded itself on a global scale. Indeed, considering that government’s funds for social assistance services have constantly diminished, it is possible to understand why more attention has been brought on new forms of financing, ultimately represented by social impact bond. These type of contracts seem to be able to attract private capitals for answering crucial social needs affecting part of the citizens. Instead of having a government responsible for financing non-profit organisations, a social impact bond scheme foresees that private investors provide the necessary funds with the obvious condition of a refund (and sometimes with a financial return, depending on the achieved results).

The authors - still recognising the high interest that social impact bond have received especially in the United States - sustain that the investigation based on the analysis of numerous cases makes them conclude that the new model is currently appropriate only for a restricted number of non-profit organizations. The list is based on two prerequisites: on one side, they have to be able to both create and measure social impact that arises from their initiatives; on the other side, they need to possess useful instruments for translating such an impact in financial benefits or identifiable savings, in line with balance sheets of one or more public administrations.

In the article, Rangan and Chase clearly specify that their intention is not to minimize the potential benefits that mechanisms such as social impact bonds could offer. On the contrary, they explicitly state that these will bring, doubtlessly, a series of important contribution to the ‘social world’. Thanks to the ongoing attempt to attract investments for the development of impact-driven models, governmental agencies will also develop the required knowledge for quantifying the costs related to several social problems. In the same way, non-profit organizations will acquire the useful competences for establishing, even in financial terms, the benefits acquired through their programs, giving birth, in this way, to efficient and effective partnerships at society’s service.
Nonetheless, considering the numerous cases analysed by the two researchers, the capacity that impact bonds have in attracting profit-seeking capital aiming at social outcomes is relatively low. Considering the important role of philanthropy in the recent cases of social impact bond, the potential contribution of the latter will be to unblock significative philanthropic resources, being responsible for eventual risks related to profit-seeking capitals or, in some cases, for the entire financing of some projects. Lastly, impact-seeking capitals rather than profit-seeking ones will stimulate the growth of social impact bond models.

The role of philanthropy and the future of social impact bond

Even if pay-for-success contracts are typically characterized as a system for solving social issues through the financing of private capitals, a closer analysis of the numerous ongoing projects in the United States reveals how the critical and enabling role is principally conducted by philanthropic capitals. In order to better understand the role of these capital in the overall picture of social impact bond financing, the authors distinguish financiers in three categories: senior, junior and philanthropic.

Recalling the first seven cases of social impact bond in the United States, Rangan and Chase sustain that among the three investors’ typologies, philanthropic ones are those that tend to be mainly responsible for risks that are inherent to the project. The reason is that philanthropic actors operate, comparing to the other two typologies of investors, according to diverse motivations. Indeed, in the best case scenario, senior and junior lenders would receive a refund of capital, with a return rate inferior to the average one found on the market. In the case of philanthropic investors, the refund of capital - depreciated by the loss of interests (surrender) - gives birth to a new type of philanthropic capital, available for another social investment. As it evidently appears, it is a very different case compared to one where capital is profit-driven and that has, as first objective, profit. Without reducing the risks that impact investors present (that in the article appears to be a synonymous of “philanthropic capital”), the authors sustain that the market of private capitals will not rush to finance programs that follow the logic of social impact bond.

They surely will have a role, but according to Rangan and Chase, investors who are looking for profit will start to take part of initiatives such as social impact bond once contracts will reduce the risks. These are the data that emerge from most recent pay-for-success contracts. Considering the fundamental role that philanthropy and mission-oriented investors are playing in the majority of global scale social impact bond, the future of pay-for-success programs - still according to Rangan and Chase - lies in the possibility of lining up impact-seeking interests with return-seeking ones. The authors recognize the capacity of social impact bonds in stimulating a growing number of philanthropic investors who could potentially marginalize profit-seeking ones.

The fact that philanthropic foundations become a fundamental actor for pay-for-success contracts is an encouraging data that authors underline. Indeed, it it is from the latter that the major part of funds for pay-for-success contracts should be expected. This type of development, together with the amelioration of public administrations and non-profit organisations in furnishing welfare services constitute the real measurable positive contribute offered by pay-for-success models.

On this regard, Overholser agrees that it is not profit seeking capitals’ responsibility to promote and sustain social impact bond for an indefinite time. The CEO of Third Sector Capital Partners’ opinion differs from the two researchers of Harvard since - according to Overholser - even philanthropic capitals do not completely control how impact financing can develop. Actually, governments should perform key roles: once pay-for-success mechanisms will be consolidated, thanks also to initial support by private capitals (philanthropic or not), the responsibility of systematising social impact bond will be government’s burden.

Palandjian and Shumway, in the same way, refuse Rangan and Chase’s prediction challenging the three initial assumptions. According to the two experts that work for Social Finance US, these three assumptions cannot be agreed with: 1) governments are interested in social impact bond mechanisms only in a logic of savings and of public spending cuts; 2) establishing a link between non profit organisations’ financing and the measurement of outcomes will negatively influence the sector; 3) pay-for-success investors are either looking for profit or for an impact, not for both. The conclusion drawn by Palandjian and Shumway is that the prediction regarding the future role of philanthropy is excessively premature.

The missing premise

Without getting into the numerous arguments mentioned by the article of Rangan and Chase and into the correspondent answers, it is possible to affirm that even if relevant, the debate lacks an important premise. In particular, it is the starting point of the reflection carried out by the two authors that, moving from the issue related to the reduced availability of public resources for welfare and social interventions, considers such a circumstance as given, something that does not need any further analysis or explanations. The choice to avoid any type of contextualisation regarding the condition of social protection expunges from the discussion a whole branch of study, that has, in time, importantly contributed to developing awareness regarding the evolution of the welfare state.

Taking into account eventual approximations, it is possible to say how the end of the golden age for the welfare state can be located starting in the eighties (Esping-Andersen 1996). While in the precedent period - the one following the second World War - welfare systems were structured in a context of economic expansion, from the eighties onwards welfare systems must confront themselves with a challenge posed by profoundly mutated politico-institutional and socio-economic contexts. Changes concern some premises upon which the welfare state was founded, which, as Agositini explains “faced with the crisis of the Social state and with the diffusion of cost containment policies, many researchers have questioned themselves regarding the future of welfare systems, giving birth to a debate that can be syntetized with the opposition of dismantlement/retrenchment and resistance” (2005). Dissatisfaction towards this dichotomous vision, which tends to neglect the qualitative dimension of welfare, has brought to advance the concept of ‘recalibration’ (Ferrera e Hemerijck 2003). With this expression, the authors refer to three elements in particular: 1) the presence of constraints, linked to challenges mentioned before (especially financial ones) that affect the choice concerning public policies and their evolution; 2) the interdependence between additions (or improvements) and subtractions (the so-called ‘cuts’) in the reform process, due to abovementioned constraints; 3) the shift of the weight recognized to different social policy tools and objectives, in the wake of complex dynamics of social and institutional learning (Ferrera 2004).

The missing premise is nonetheless indirectly mentioned in a part of the article when Rangan and Chase identify some of the challenges. The authors sustain that “after the initial round of savings have been effectively delivered in the first contract period, political pressure may force the lowering of the success payments for sub-sequent PFS contracts, in line with the new efficiency benchmarks” signifying there would be “little room for upside returns” and the risk that “private capital will be tempted to flee existing PFS markets”. This observation seem to be in favour of Rangan and Chase’s thesis, which sustains that the future of pay-for-success would depend on philanthropy. It would be more accurate to say that such a con-clusion is the result of a inadequate analysis of the already-cited strategies of ‘recalibration’ of the welfare state. In other words, it is possible to assert that once social impact bond will generate significant savings in social spendings by still maintaining the qualitative level requested by governmental authorities, we’ll reach a point in which further savings will mean the abolition of the offered service. Costless services do not exist and, in the same way, prevention services cannot eliminate the necessity of further ‘emergency’ actions.

In addition to philanthropy’s function, governments and markets’ role, social impact bond become particularly valuable for rising social risks and needs that emerged among welfare systems, following that approach that on a European level has been identified as the social investment perspective. Social impact bond, which are not a standard solution for welfare sustainability, are nonetheless a very particularly inno-vative tool, provided for targeted strategies of ‘recalibration’. By adopting a prevent-ing function regarding those services that are released for promoting major wellbeing and minor social costs, social impact bond consent the restructuring of those welfare areas that are recognized as potential waste areas. As as consequence, new savings are generated and can be reutilised for new “investments”.

As such, even a brief analysis of the ‘missing premise’ permits to appreciate how welfare systems can mutate “through a series of incremental adjustments in line with institutional structures of different welfare models” (Agostini, 2005) thus under the constraint of path dependency that characterizes any attempt of welfare ‘recalibration’ (Capano e Giuliani 2002). Such a slow and gradual evolution within welfare systems, occurring thanks to the introduction of new policy tools, the role of the epistemic community should not be undermined. According to the famous definition of Haas, the latter can be thought of as “a network of specialists with recognized capacities in a particular sector as well as an important political claim within a certain domain or a particular area” (1992). The role of the epistemic community, however, is not to promote a theme or to highlight its strengths or weaknesses but ac-tually to understand it in terms of dependent or independent variables, of issues at stake and of axiological assumptions (often implicit). In this way, the epistemic community respects the nature of its own composition - distinguishing itself from other actors that work in the field of advocacy - and offers a real contribution to the political debate in which it is located.

Such an observation entails the necessity to deepen, on a methodological level too, which approaches are the most adequate for understanding the theme of impact investing and particularly of social impact bond. These expressions neither can be considered as a rhetorical justification for placing new products on the financial market, nor can represent the attempt of entrusting to a certain type of entrepreneurship the solution of durable problems. When we talk about impact investing and social impact bond, we refer to new complex tools that emerged to adequately answer a problem or a series of well-defined problems. This definition should be the starting point for any rigorous reflections, otherwise the epistemic pretension cannot be respected and thus the claim's authority reduced. The domains that play a role behind the process of impact investing emersion are several. Certainly, the phenomenon can be analysed through the lenses of political economy as well as those of management. Nonetheless, the recent debate lacks the idea that impact investing can be considered a social policy tool and therefore the contribution of political and sociological areas remains marginal. What is even more harmful, is that such an absence is not even filed by sector’s experts. The analysis of the article by Rangan and Chase, together with numerous interesting inputs, raises the limitations of current reflections and underlines the need of an interdisciplinary approach capable to deploy all knowledge regarding all angles of the emerging phenomenon.


To conclude, facing the problem of scarce available resources together with other factors that put traditional systems of social protection under pressure, it is possible to assert that specific reasons which explain welfare state difficulties need to be understood in order to understand the debate concerning social impact bond. More precisely, welfare state failures need to be discerned. Additionally, it is important to discuss political strategies that have been offered for previously observed problems. Finally, it will be fundamental to understand which instruments are the most adequate for allowing the modernization of social protection systems.

Unfortunately, in the discussion regarding impact investing, only the part that concerns these instruments seems to interest the public as if the causes or the political dimension behind it were less important. In such a debate, apart from those involved in activities of advocacy, experts suggest that the epistemic community that treats the topic of impact investing is too focused on potential consequences and on experimentations, in this way neglecting the causes and the problems that impact investing is trying answer to. Depending on the capacity of impact investing in proposing solutions for determined problems, it will be possible to understand if it’s worth continuing the experimentation and eventually adopt such an approach for developing non-linear policies that sustain welfare services and social initiatives. If these prerequisites are not verified, the inevitably developed debate will be forcefully contrived and only partially useful.


Rangan & Chase (2015) The Payoff of Pay-for-SuccessStanford Social Innovation Review

Haas (1992), Introduction: epistemic communities and international policy coordination, International Organization / Volume 46 / Issue 01 / Winter 1992, pp 1-35

Agostini (2005), Fra politiche e istituzioni. Quale eredità per i nuovi modelli di welfare?, Quaderni di Ricerca del Dipartimento Innovazione e Società, Università di Roma “La Sapienza”, n. 3

Capano e Giuliani (2002), Dizionario di politiche pubbliche, Carocci, Roma

Ferrera (2004), Ricalibrare il modello sociale europeo. Accelerare le riforme, migliorare il coordinamento, URGE Working Paper 7/2004

Ferrera & Hemerijck (2003), Recalibrating Europe’s Welfare Regimes, in Zeitlin J. e Trubek D.M., (a cura di), Governing Work and Welfare in the New Economy. European and American Experiments, Oxford University Press, Oxford.  

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