Social impact bonds (SIBs) and outcomes-based contracts represent a different approach to social investment — one that pays for results achieved rather than activities or services delivered. Understanding these instruments is increasingly relevant for grantmakers in New Zealand and Australia as governments and funders experiment with outcomes-based approaches.
A social impact bond (also called a pay-for-success contract or outcomes-based contract) is a financial arrangement where:
The "bond" terminology is somewhat misleading — SIBs are not bonds in the traditional financial sense. They're better understood as outcomes-based contracts with private risk capital.
Structure. A SIB typically involves four parties: the commissioner (usually government), the investor(s), the service provider(s), and an independent evaluator. A special purpose vehicle (SPV) often sits between the investor and service provider.
Outcome metrics. The agreement specifies measurable outcomes — reduced reoffending rates, reduced hospital admissions, improved school attendance — and the payment schedule attached to them.
Risk transfer. The defining feature of SIBs is risk transfer: the investor bears the financial risk if the programme doesn't work. Government only pays for success. This is the political appeal — paying for results rather than processes.
Return on investment. Investors receive a financial return if outcomes are achieved. Returns are typically modest (3-8%) and the investment is primarily social rather than purely financial.
New Zealand. New Zealand has a small number of SIBs and outcomes-based contracts, primarily in the social services sector. The Social Investment Agency (now Social Wellbeing Agency) has been involved in developing the framework for social investment approaches in government.
Australia. Australia has more developed SIB activity, with the federal and state governments having commissioned several SIBs in areas including homelessness, criminal justice, and child welfare.
Community Finance. New Zealand has explored Social Enterprise lending and community finance models that share some features with SIBs — outcomes-focused investment in community organisations.
SIBs are not grants. SIBs are investment instruments with financial return expectations. This matters for foundation governance — investment decision-making processes, risk assessment, and programme-related investment frameworks may apply.
Programme-related investments (PRIs). Foundations can participate in SIBs as investors through programme-related investments — capital deployed for social purposes that may generate a financial return but where social purpose is primary.
SIBs are complex and expensive to structure. The transaction costs of setting up a SIB are significant — legal, evaluation, and advisory costs mean SIBs are generally only viable for programmes at scale. They're not appropriate for small community grants.
Outcomes measurement requirements are demanding. SIBs require rigorous, independent outcome measurement. This raises the bar significantly compared to typical grant reporting.
Not appropriate for all contexts. SIBs work best for interventions with clearly measurable outcomes, established evidence bases, and populations large enough for statistical analysis. They're less suitable for innovative, experimental, or population-specific programmes where evidence is thin or outcomes are hard to quantify.
Many funders are experimenting with outcomes-based approaches that are less complex than SIBs but shift toward paying for results:
Milestone-based payments. Rather than paying the full grant upfront, releasing tranches of funding when defined milestones are reached — ensuring accountability for progress.
Outcome-linked grants. Grants where a portion of funding is tied to outcomes achieved, with base funding guaranteed and bonus funding conditional on results.
Challenge grants. Grants structured as challenges — organisations are funded for attempting a difficult outcome, with greater recognition and resources flowing to those that succeed.
These approaches borrow SIB principles without the full complexity of financial markets, investor structures, and legal arrangement.
Outcomes-based approaches require grants management infrastructure to support:
Tahua supports outcomes-focused grantmaking with configurable outcome frameworks, milestone payment workflows, and portfolio-level outcome tracking.