social impact bond

Social Impact Bond (SIB) is one of the Public-Private Partnership (PPP) schemes, which is a results-oriented approach to solving social problems through collaboration among governments, private businesses, and funders.

-Possibilities for Diversification of Financial Resources for Local Governments

Akane Enatsu, Nomura Institute of Capital Markets Research

Summary

Social impact bonds (SIBs) are a mechanism to solve social issues by entrusting the operation of highly public projects traditionally handled by the government to private organizations and raising funds for their operation from private investors.

SIBs were created as a new means of raising financial resources in the 21st century, and have been fully introduced in Japan since FY2017, with some success. Looking ahead to the future of local government finances, SIBs may increasingly be used by local governments as a means of financing social security-related projects.

For SIBs to be an effective tool for Japanese local governments, it is necessary to address the following issues: (1) linking SIBs to individual social issues, (2) appropriate selection and standardization of evaluation indicators, (3) risk management, (4) consideration of local fiscal measures, and (5) securing the project scale.

Although the history of SIBs in Japan has only just begun, they have potential as a means for local governments to properly provide administrative services while maintaining and improving quality within limited financial resources, and future trends will be closely watched.

SIB is a contracting method whereby public projects are implemented with funds from private investors, and the government reimburses the investors for the principal and interest based on the results of the project agreed upon in advance. In South Korea, Seoul City introduced Asia's first SIB project in 2016, and a second SIB project was launched in Gyeonggi Province in 2017.

South Korea's SIB projects are led by local governments, while building cooperative partnerships with the private sector. Although there have been some trials and errors in the promotion of the project, a Korean-style SIB model is being created, with improvement measures being taken and the next SIB project being prepared. It is expected that the SIB business in Korea will further expand in the future through support measures by the central government, the establishment of a legal infrastructure, and the strengthening of public relations for SIBs.

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