By John Honeck, GOPC Senior Policy Fellow Social impact bonds (SIBs) or “pay for success” models are debt arrangements established by a public agency or nonprofit organization in order to finance an innovative service or program with an uncertain rate of return. Investors are paid back in full only if the project succeeds in meeting its goals. In this way, public agencies are incentivized to take a more flexible approach to problem-solving. Until recently, social impact bonds were mainly tried in social service and criminal justice fields to test approaches with significant risk. For example, Cuyahoga County is using a SIB to test a new approach to reduce foster care placements of children with homeless parents.
Two recent deals show that the social impact bond approach can be used in infrastructure and urban redevelopment. In Hamilton County, the Port Authority of Greater Cincinnati has been looking for ways to redevelop sites for manufacturing firms seeking to locate or expand within the county. Although the county has many abandoned industrial sites, they are often contaminated and have outdated buildings and infrastructure. The lack of suitable locations for manufacturing expansion puts the county at a significant disadvantage with respect to greenfield development.
To help remedy the situation, in June, 2016, the Port Authority issued bonds with a principal amount of $7 million for the acquisition and remediation of contaminated sites in the county.[1] The bonds were purchased by local businesses and high net worth individuals that have an interest in economic development but are willing to provide a source of long-term patient capital. Investors hope to make a profit when the land is sold, but if the deal does not work out as planned they are only guaranteed a miniscule annual rate of return of 0.15 percent. If the approach is successful, the Port Authority may seek an additional $13 million from other investors. This financing strategy may provide an example for other older post-industrial cities in Ohio and the rest of the nation.
In Washington, D.C., a ground-breaking deal showed the potential for social impact bonds for infrastructure.[2] The DC Water and Sewer Authority announced in early September that it will seek between $20 - $30 million in financing from investors to support the installation of “green” infrastructure such as porous pavement or rain gardens to manage stormwater flowing into the Potomac River and Rock Creek watersheds. DC Water hopes to avoid using expensive deep tunnels or other major infrastructure work that would otherwise be necessary to address a federal mandate to stop combined sewer overflows. Like many other cities in the Eastern U.S., the older parts of Washington’s sewer system combine wastewater and storm water runoff into the same pipes, which overflow when it rains, discharging raw sewage into rivers and streams. Investors will be repaid according the degree of stormwater control that the project achieves.
Greater Ohio Policy Center is currently in the midst of a year-long study of innovative financing techniques for water and sewer infrastructure and brownfield redevelopment. These two issues are critical needs for cities in Ohio and across the nation, as discussed in our earlier report. Although social impact bonds cannot be expected to provide most of the financing needed to tackle these issues, it can promote innovative approaches to test the application of new programs. In the long run, these arrangements can also help to build a network of stakeholder organizations that see themselves as partners in addressing a significant environmental or economic problem. SIBs are not just about financing, they also help to focus public attention on an issue.
[1] Press release, Port of Greater Cincinnati Development Authority, “Port Authority Issues Impact Investment Debt To Fund Industrial Site Revitalization; Closes $7.0 Million In First Round,” June 16, 2016. http://www.cincinnatiport.org/wp-content/uploads/Port-Authority-builds-patient-capital-portfolio-6.9.16.pdf
[2] Kyle Glazier, “D.C.’s Social Impact Bond Deal Will Fund Infrastructure,” The Bond Buyer, 9-2-16, http://www.bondbuyer.com/news/regionalnews/dcs-social-impact-bond-deal-will-fund-infrastructure-1112664-1.html.