Social Impact Bonds as a Tool for Social Impact Investment

Introduction

According to World Bank data, the population of G-7 countries which is 65 and over is 150.1 million, while in G-20 countries this population is around 568 million (data.worldbank.org). In line with the projections made by the United Nations for future population growth every two years, it is estimated that the world population will increase to 9.7 billion in 2050 and the fertility rate per woman will decrease worldwide. As an inevitable side effect of declining fertility, the global population will continue to age. Accordingly, governments will have to prepare for economic and social difficulties (https://www.cbo.gov/publication/55331). Because this means increasing retirement costs and decreasing tax base. Therefore, the increasing financing need for social services provided by states will become a growing problem for economies in the upcoming period (Wood, 2010).

On the other hand, the temporary or permanent crises that occur in economies cause pressure on governments to reduce deficits by making serious budget cuts in many social spending areas. In this context, the need for governments to optimize the effectiveness and efficiency of their social policies and the way they finance them is increasing day by day (Carè & De Lisa, 2019). Especially in the aftermath of the Global Crisis, which emerged in the US mortgage market in mid-2007 but affected the entire world economy in a short time, the need for social support increased in societies, and the austerity policies implemented caused major cuts in social expenditures (Joy & Shields, 2019). In this respect, the idea of ​​developing new assets that can reduce the gap between speculative financial investments and the productive real economy has emerged in the process of solving social problems (Schinckus, 2017). One of these is social impact bonds, that is thought to be a financial tool that can help solving social problems that are difficult to solve due to conflicting and changing needs by turning them into a form of profit for private sector investors (Joy & Shields, 2019).

Social impact bonds (SIBs) are new financial assets that aim to encourage private investors to fund pre-defined social programs (Schinckus, 2017). Looking at the last two decades, it is observed that the concept of business model, which seeks innovative formulas including business models for sustainability, has come to the fore. Innovative forms of business and finance based on cooperation and shared value are emerging in the world economy and financial system, which is characterized by great difficulties during the global crisis we are still experiencing. In this context, business models based on intersectoral partnerships for sustainability can be considered as an important new paradigm that can address complex social issues. From the perspective of the finance industry, it can be said that SIBs are innovative and alternative financing approaches that aim to increase social impact based on various factors such as sustainability, solidarity, cooperation and social impact beyond the risk and return relationship (La Torre et al., 2019).

From this point of view, the purpose of this chapter is to provide information about social impact bonds, one of the new techniques used in financing social impact investments. After the introduction, the chapter continues with a brief explanation on collaborative business model and social impact investment concept. Following that, the structure, benefits and challanges of SIBs are explained. Finally, the study focused on the potential application of SIBs in Turkey.