DI REPORTSIBSocial Impact Bond

Description ofSocial Impact Bond
July 13, 2021｜Dream Incubator Inc.
This document contains highly confidential information which may relate to a third party’s rights. Thus, this document and the information contained herein is restricted to our clientele’s internal disclosures andused only for the purposes agreed upon. No part of this document may be disclosed to any third party or used beyond the purposes for which it was originally provided without obtaining the prior written consent ofDream Incubator Inc.

Introduction

POINT 1

To keep up with the accelerating pace of change in the world and address impacts fromsocial challenges – lower fertility rate, aging population, population decline, climate change,
to name a few – organizations need to transform in many aspects of doing business.
Social sustainability goals strongly urge businesses to pursue social impact-driven businessactivities.

POINT 2Social impact initiatives require the participation of many different stakeholders,
including public sector entities. However, a proactive stakeholder engagement is hardto achieve with only traditional approaches.
Central and municipal governments may encounter financial constraints and hence havedifficulty engaging in alternative financing models.

POINT 3

It is the corporate mission of DI to “Create Businesses and Change Societies”. DI isactively promoting the adoption of Social Impact Bonds (“SIBs”) as a scheme toaddress the above challenges, seeking to “change” Japan’s society.
This report aims to provide a brief overview of SIBs and Dream Incubator’s (“DI”) related
efforts, in the hope that this will be helpful for concerned organization leaders, businesses,
and municipal governments who share the same vision.
1

CONTENTS

1．Historical background
2．SIB: A novel solution to social issues
3．Early examples of SIBs
4．The applicability of SIBs in Japan
5．DI’s SIB initiatives

2

The government’s dilemmaInnovation remains hard due to low financial risk appetite

Government
The need to provide social servicesof high quality
The need to leverage
private sector’s know-how
Because public money is spent, a riskaverse government will demand strict
compliance with the contractual
specifications, which may hinder thepractice of open innovation in public
service delivery

Consequence➢ The government seeks to resolve problems in areas

where public-sector services alone are often
insufficient to deliver the best possible outcomes➢ The government seeks to design social services usingstate-of-the-art technology and know-how in areas
they may have no expertise➢ More focus is put on explaining the use of public funds

rather than on service quality or efficiency➢ In some cases, project implementation itself is out of

the question when sufficient evidence of expected
outcomes is not proven available

These patterns make transformative and impactfulsocial innovation unlikely to take place3

History of SIB
SIB, used as a solution to the government’s dilemma, is the latest form of outcome‐based
public‐private partnership for the delivery of public services
Outsourcing

Initiatives

The government defines
detailed methodology andapproaches then awards
the contract in parts toseparate private sector
partners

Challenges

High costs without muchinnovative participationof the private sector● Difficulty maintaining

public services due topublic finance issues

Private Finance Initiative(PFI)

Pay For Success (PFS)A private-sector contractor is
responsible for all stages of a
PFI project

Performance-based
financing scheme aims to
improve service quality

SIBs can leverage private capitaland risks are distributed between
the private partners● Social outcomes evaluation is● Ability to provide upfront funding● A private partner funds, designs,

builds, and operates PFI project,
allowing cost cuts and moreroom for innovation

More intense price competition
between private-sector service
providers and deterioration ofservice quality● Incidence of moral hazard

Scheme illustration

Planning

Planning

Financing

Financing

Financing

Design/build

Design/build

Operation

Operation

Design/build

Design/build

Operation

Financialresources

Government

Private sector
providercontracted out to anindependent evaluator

The number of private
businesses that can take risks
associated with outcome-basedmodel remains limited

SIB● Risk sharing between service

providers and investors

To be detailed in subsequent
sections● Risk of failing to raise capital● Inability to provide upfront

working capital③ Outcomes measurement② Outcomes measurement

Financialresources

Government

Private sector
provider④ Measurement report

Evaluator③ Measurement report① PFS
contract① SIB contract⑤ Outcome-based
payment② Working capital④ Outcome-based
payment
Private capital

4

CONTENTS

1．Historical background
2．SIB: A novel solution to social issues
3．Early examples of SIBs
4．The applicability of SIBs in Japan
5．DI’s SIB initiatives

5

A typical structure of SIB
SIBs help mitigate risks for private stakeholders and provide the government with an outcomebased payment scheme, enabling innovative solutions to a range of social challenges⚠ Pressing social issues
Alleviate social issues by leveraging
private sector’s know-how and wisdom

Private-sector
service provider

２

１

３

CapitalOutcome-based
payment
Private capital

Government(e.g., banking institutions)6Benefits of stakeholders
SIBs benefit all stakeholders in various aspects● Generate better social outcomes while

reducing financial risks● Improve public service quality by

Government

properly measuring the achievementof social objectives● Improve returns to public

expenditures● Enjoy high-quality public services

Targetpopulation

Quadripartite
Prosperity● Generate returns on capital if social● Secure a stable source of financing

programs meet performancetargets● Invest in portfolios that bring

Investorsolutions to a number of pressing
social challenges

for public service delivery fromprivate investorsServiceprovider● Develop and pilot more innovativeand effective solutions todevelopment challenges

7

CONTENTS

1．Historical background
2．SIB: A novel solution to social issues
3．Early examples of SIBs
4．The applicability of SIBs in Japan
5．DI’s SIB initiatives

8

A global snapshot of SIBs
The use of SIBs has emerged across the globe, particularly in Western countries

Cumulative SIBs contracted worldwide

Percentage of SIBs by country

197

Others180(25 countries)

153

25%

119

Australia

55

1

2

’10

’11

15
’12

23

’13

Source:Netherlands

6%

32

’14

’15

44%

5%

79

UnitedKingdom’16

Social Finance SIB Database

’17

’18

’19

’20

Portugal

7%

UnitedStates14％9Real-world examples of SIB programs

Overview【Example 1】Re-offending prevention
in Peterborough Prison (U.K.)【Example 2】Water pollution improvementin Washington, D.C. (U.S.)

Timeline: 2010~2016 (halted in 2015)
Purpose: Reduce recidivism and save costs to the publicpurse for repeat offenders➡ Annual cost of £40,000 per prisoner
Target: Reduce reoffending by 7.5% overall compared toa national comparison group

Timeline: 2016~2046 (tentative)
Purpose: Save maintenance and damage costs forsewer systems through stormwater runoff control➡ Costs of heavy rainfall measures and sewer
system development
Target: Reduce stormwater runoff by 18.6％ or more

Independent
evaluator

Scheme illustration

Measurement results

SOVA
One Service

Ministryof Justice

Independent
evaluator

Measurement(operated bySocial Finance)

CapitalMeasurement results

Partner

Investors(charities)

Outcome⚫ Halted after 5 years due to a change in judicial
policies made by the Ministry of Justice⚫ The published outcomes achieved halfway through(9% reduction of reoffending) triggered a
repayment of principal plus a return of approx. 3％➡The independent evaluator confirms
the validity of DC Water’s assessment

DC Water(DC Water and Sewer Authority)

Ormiston

St Giles Trust

The government designs the service,
determines impact metrics, andmeasures program performance

CapitalCalvert Foundation

Partner
Water Environment
Federation*

Goldman Sachs⚫ Official finding has not been published yet(the interim report will be released in 2021)* The Water Environment Federation shares “wisdom” on water environment and disaster countermeasures such as constructing rainwater tanks, rain gardens, green roofs, etc.
Source: “Overcoming Regional Challenges with Social Impact Bonds” (Nomura Institute of Capital Markets Research), DC Water website, JSIF statistics, DI Analysis

10

CONTENTS

1．Historical background
2．SIB: A novel solution to social issues
3．Early examples of SIBs
4．The applicability of SIBs in Japan
5．DI’s SIB initiatives

11

A SIB program aimed at preventing severe diabetic kidney diseasein Kobe City (Japan)
Small-scale SIBs are emerging in various sectors, including health care
SI B pr ofile

St a kehold er s

Purpose◼ Prevent the progression ofdiabetic kidney disease andtransition to dialysis➢ Medical treatment for dialysis in Japan

Kobe City(Government)

MOU

SocialInnovation& Investment
Foundation(Intermediary)

totals ¥1 tril. & remains a serious issue

Service description

Performancebased contract◼ Recommend health check-ups andprovide health guidance for (100)high-risk patients

Payment by
results➢ Diet, exercise, etc.

◼ Investors’ returns are paid basedon the achievement of social
outcomes and service delivery➢ Service provision: Service delivery rate
➢ Outcomes: Life quality improvement,

Evaluation
reportreduction of kidney failure

Interimreport◼ The first payment was triggered by
the achievement of SIB objectives➢ Service delivery rate: 100% (80%)➢ Life quality improvement: 95% (75%)(Evaluator)

Operation &Management(Investor)

Upfront
capitalReturns

DPP Health Partners (Service provider)
Evaluation
service

Institute for
FutureEngineering

SMBC,
privateinvestors

Info/
Coordination

Health check-up
recommendation/
Health guidanceData collection for
impact assessment

Population in need

There were 18 SIB contracts initiated by 20 local authorities across Japan,
most of which are health-related (as of June 2019)
Source: “Reducing ¥1 trillion medical treatment costs a year by the prevention of transition into dialysis” (The Nikkei)
Kobe City’s Interim report on check-up recommendation and health guidance program for the prevention of severe diabetic nephropathy among patients with diabetes who have not undergone medical
tests, check-ups or have interrupted their medical treatment

12

Historical focus areas of SIBs
In general, the use of SIBs only involves a limited number of focus areas
Examples of SIBs contracted worldwide

A narrow range of focus areas
Agriculture
and environment
Recidivism

Youthdevelopment/
EducationYear

Poverty
1% 1%

8%

Employment

13%

28%

19%
16%

Children andfamily wellbeing

UnitedKingdom

Re-offending prevention in PeterboroughReoffending
NEET employment support in West Midlands
Employment
Youth care reduction in Essex
Youth careHomelessness reduction in Birmingham
Homelessness
Mental health and wellbeing improvement in Haringey
HealthHIV reduction in London(+42 other SIBs) Health

UnitedStates

2013
2013
2014
2016
2017
2018

Re-offending prevention in New York
ReoffendingChild education support for low-income families in Utah Education
Homelessness reduction in Massachusetts
Homelessness
Water pollution improvement in Washington
OthersImmigrant employment support in Massachusetts
Employment
Youth care reduction in Jefferson(+20 other SIBs) Youth care

Netherlands

2013 Employment support in Rotterdam
2016 Re-offending prevention in Amsterdam
2017 Cancer patients returning to work in the Netherlands

Homelessness

At first glance, SIBs seem to be targeting avariety of impact areas, but in fact, they only
prioritize easily accessible areas(+8 other SIBs)◼ Easy to define outcome metrics⚫ Areas with existing impact metrics◼ Small scale and low risk

Focus

2010
2012
2012
2015
2016
2017

15%
Health andwellbeing

Overview

Employment
Reoffending
HealthAustralia

2013 Reduction of housing care for youth in NSW
Youth care2015 Homelessness reduction in Adelaide
Homelessness
2016 Re-offending prevention in NSW(+6 other SIBs) Reoffending

Others

2014 Canada: Single mom support in Saskatoon
Youth care2015 Portugal: Computer edu. for young people in Lisbon
Education2017 Japan: Cancer screening rate in Hachioji(+36 other SIBs) Health⚫ Impact areas are more often addressed at anindividual or regional level rather than national level◼ Short timeline⚫ Areas where the impact is observable within a shortperiod of time (around a year)
Source:“Understand Japan’s SIB Today” by Social Finance SIB Database (Mitsubishi UFJ Research and Consulting Co., Ltd.)

13

Why SIBs usually focus on a narrow range of topics?
Because SIB focus areas have varying levels of difficulty in terms of impact measurement
Social issues (examples)● Women’s

Social impact ● Traditional
culturecreation
promotion

Measure new social impact
created through SIB
interventions

Image of impact measurement
Socialimpact

SIB interventions
Assess outcomesby new metrics

Require new metrics formeasuring future orientationand development

Non-intervention
Few years to
decades from now

Now

Ⅱ
Prevention offoreseeable
issues● Dementia

prevention● Earthquake

preparedness

Measure the extent to which
SIBs prevent foreseeable
issues from occurring

SocialimpactNone/minimal
outcomes
Non-intervention

Use alternative metrics
because long-term
observations are requiredⅠ

Now● Employment

support for
homeless
populations

Measure program outcomesusing existing metrics

SocialimpactFew months toyears from now

Assess outcomesby alternative
metrics
Observableoutcomes

Few decades Timefrom now

SIB interventions

Nonintervention

Now

SIB
outcomes

Few months toyears from now

Easy

Tangibleissuesprevention

Measure the extent to which
SIBs improve unresolved andapparent social problems

Time

SIB interventions－→０● Recidivism

Difficulty level

Hard

０→＋

Ⅲ

employment
supportMeasurement methodology

Time

14

The expansion of SIB focus areas by difficulty level
SIBs in areas of difficulty levels II and III are usually of larger scale,with most programs generating impacts at national level
Individual level*

Regional level*

CultureMinority group０→＋

People withdisabilities
LGBTcommunity
supportⅢ
Social impact
creation

Immigration
support

Employment

Marriage/Childbirth

Unmarried/ Husbands’
Latelack ofmarriages childcare
Lack of
Schoolwaiting afterschool
care
lists

Ⅱ
Prevention offoreseeable
issues－→０

TangibleissuesDecline inartistic
activities

Biology/Nature

Tech innovation

Landscapepreservation

VR/AR
development

Ecosystem
protection

Regional
revitalization
Shopping refugees

Local
infrastructure
deterioration

EarthquakesFireprevention

Volcanic
eruptions

ExtremeweatherLandsubsidence

Globalwarming

Soil/waterpollution

Environment

Disasters

Liquefaction

Caregiver Nursing
shortage fatigue

Working poor

Unemployment

Diabetes

Alcoholism

Allergy

Hay
fever

Depression

Dementia

Illness

Traffic
Blood
accidents shortage

Bullying

Child
abuse

DV
SexualPower
harass- harassment
ment

Violence

Artificial
intelligence

AnimalwelfareIoTpromotion

Global Deindustrial- Decline inacademiccompetition ization performance

Community
deterioration

Healthcare

PovertyⅠ

Decline intraditional
cultures

Single mom
support

Women's employment
Elderly
Women in employmanagement ment

National level*

Drug
abuse

Money
transferscams

Stalking

Prostitution

Juvenile
crime

Organized
crimegroupsHeatislandResources Alternative
energyFood
Food
shortage

Recycling

Security
Terrorism

Cyberterrorism

Acid rainAirpollution

Bubble size: population
Hundredmillions

Tens
of mil.

Mil.

Crime

Common focus areas of SIBs
* Levels are defined as follows.
Individual level: Size of target population is identifiable / Regional level: Target population covers a large area, but not nationwide; its size is, however, hard to identify /National level: Target population is distributed widely across the whole country / Source: Statistical data, research reports

15

Spaces in which SIBs are likely to create win -win situations in JapanSIB scheme andimplication

Healthy aging
Infrastructure
repair (e.g.,
bridges)
Recycling
Disasterprevention

Children’s
education
Town’sattraction

Upfront capital for “social participation services” to achievesignificant healthcare cost savings➢ The official verification (or estimation) of healthcare cost-savings triggers apayment of ●% returns to private investors

Upfront capital for “preventive infrastructure maintenance” toextend useful life of assets and services➢ The official verification (or estimation) of service life extension triggers a payment
of ●% returns to private investors

Upfront capital for large-scale plastics recycling and high-quality
waste sorting practices➢ The official verification (or estimation) of economic benefits triggers a payment of●% returns to private investors

Upfront capital for “preventive maintenance for disaster prevention
facilities” to significantly reduce disaster damages➢ The official verification (or estimation) of damages or losses triggers a payment of●% returns to private investors

Upfront capital for “children's education” for better employment
opportunities➢ The official verification (or estimation) of education (and employment) impact
triggers a payment of ●% returns to private investors

Upfront capital for “effective town development” for greater
economic benefits➢ The official verification (or estimation) of economic benefits triggers a payment of●% returns to private investors

Years needed toassess outcomes

3～10 years

5～20 years

3～5 years

N/A

5～10 years

3～5 years

16Keys and barriers to structuring SIB deals
Keys todeveloping SIB deals

Barriers bydifficulty level

Ⅰ

Ⅱ(Reference) Our ventures into the space ofnursing care prevention with difficulty level II

Ⅲ

STEP 1

To tackle the problem of “rising nursing care costs”,
DI has developed quantitative indexes of healthcare
cost savings achieved through relevant SIBs

Identify priority social
issues & quantify impact
from SIB interventions

To be specific, DI identifies “social participation”
indexes, measurement methodologies, and logic
models to measure social impact, i.e., health-carecost savings resulting from SIB interventions

STEP 2
Design a logic model
for social impact
measurement

Leverage private sector’s know-how to build
communities for social programs, draft a proposalof social impact measurement and assessment
methodologies, and network with stakeholders

STEP 3
Identify functions requiredfor deal structuring &build a network

STEP 4

Propel the adoption of SIBs for the government anddraft a framework driven by regional development
subsidies and hometown tax payments

Create engaging stories
to attract public
investment

STEP 5

Accumulate know-how& build a horizontal
development
model

Necessary to lower
hurdles ①～④－

17

CONTENTS

1．Historical background
2．SIB: A novel solution to social issues
3．Early examples of SIBs
4．The applicability of SIBs in Japan
5．DI’s SIB initiatives

18

Challenges facing wide-scale SIB adoption
Obstacles of SIB deal formation include the high concentration of stakeholders, KPI setting,and the difficulty of sourcing intermediaries to assist with overall SIB implementation
Obstacle ①

Obstacle ②

Obstacle ③

SIB deal structuring requires theinvolvement of many
stakeholders● Businesses, financial institutions,evaluators, central and local
governments, etc.
● Heavy burden of management
activities across SIB design～
implementation

Definition of desired outcomes(KPIs) shall be pre-determined● KPIs shall be designed on acase-by-case basis as they vary
greatly depending on focus area
● KPI setting is essential yet
incredibly difficult because they
are the basis of outcomes
payments

The role of an intermediary is vital;
however, it is hard to engage them
due to the lack of “juicy” returns● Tackling ① & ② necessitates theengagement of an intermediary
who provides support across allstages of a SIB – from planning,
design to implementation. Yet it
is difficult to reward themOutcomes

SIB

ServiceproviderService delivery
Targetpopulation

ServiceproviderInvestor

Evaluator

Municipality

Centralgov’t

Outcomes

ServiceproviderEvaluator

Targetpopulation

Investor

Intermediary

Municipality

Evaluator
19

DI’s role in SIB deals
In addition to the investor role, DI stands at the center of SIB model to connect all
stakeholders and provide support for a seamless project implementation and management

Working capitalService provider

Service delivery

Target population

Private capitalBusiness
producer(residents,
infrastructure, etc.)

Outcomes measurement

Outcome-based payment

Findings
Government

Evaluator
20

DI and several municipalities (cities) have started joining
hands for the rise of SIB
Collaboration with local governments
February 25, 2020 press release concerning
MOU conclusion

Summary of dialogues concerning key topics◼ Healthy aging⚫ Clarify the impact of nursing care prevention initiatives

To y o t a C i t y

implemented by the municipalities to identify the
resulting nursing care cost savings⚫ Enable greater social impact with new approaches towards

upgrading existing services provided under SIBs

◼ Infrastructure (public facilities, bridges, etc.)⚫ Explore ways to structure preventive maintenance SIBs

aimed at lowering maintenance costs needed for aging
public facilities and bridges

May 8, 2020 press release concerning MOU
conclusion◼ Recycling⚫ Provide upfront investment to scale up plastics

Maebashi City

recycling and high-quality waste sorting businesses togenerate significant economic benefits◼ Other areas⚫ Discussions revolve around health care, disaster prevention, etc.

Steady progress has been made in SIB design andstakeholder engagement
However, the underlying challenges and finetunes necessary to smooth out SIB adoption at aregional level are becoming increasingly tangible21

Launched the first SIB in Toyota City focusing on senior care
Press release (dated June 30, 2021)

Overview

PurposeOperator

Contribute to better health andwellbeing for seniors residing in Toyota
City, reduce their nursing care costs andtheir risk of entry into long-term care
Next Rise Social Impact Action LLC(“NRS”) is contracted by Toyota City
➢ To operate and promote social services

Service
description

ServiceperiodTargets* Target population means the total number of elderly persons receiving the services

Provide seniors in the town with avariety of social participation services,such as exercise and physical activities,
hobbies, entertainment, etc.
➢ Service providers are picked by NRS

July 1, 2021～June 30, 2026

Expected savings in health care costs:
Around ¥1 billion
Target population*: About 5,000
individuals per year

22

Launched a SIB fund
Press release (dated July 1, 2021)

Fund profile

Fund name

Next Rise Social Impact Fund
Investment Limited Partnership

GeneralDI Social Impact Capital Co., Ltd.

partnerFund size
Inceptiondate➢ A wholly-owned subsidiary ofDream Incubator Inc.

Initial funding of ¥3 billion (up to ¥5 billion)

July 1, 2021

Investors

Development Bank of Japan Inc.
Nippon Life Insurance Company
Dream Incubator Inc.

Fund term

10 years23

Conclusion: To build momentum for SIBs, there is a call for
uniform coordination between various stakeholders

Municipalities

A flexible approach that does not stick rigidly to existing processes is
crucial. A clear image of how to mobilize success rewards should be
the starting point of everything else. The structuring of SIBs which are
tailored to each focus area requires cooperation with the government(+private sector).

Service providers

Service providers should look at business segments that have been
neglected due to low profitability (e.g., seniors employment support,
high-priority infrastructure maintenance projects) to find opportunities
to turn social value into valuable business.

Investors/
Financial
institutions

ESG/SDGs investment opportunities abound. A new medium-risk
medium-return model should be in place. Financial resources are vitalto nurture high-value intermediaries.

Academia/
Evaluators

It is important to engage private partners in the accumulation andanalysis of meaningful data in various verticals (for example, the largest
nationwide research project on Japan’s older population named JAGES)
and drive the government to use valid KPIs.

Centralgovernment

It is urgent to consider launching impact funds. Immediate impact on
operational efficiency of regional development subsidies, hometown tax
system, and special zones could be seen. The central government isforced to take the lead in addressing the wrong pockets problem andnational/prefectural/municipal-level jurisdictional issues.

The bottleneck is the mindset of players who think, “If all the otherconditions were satisfied…”
24

C O N TA C T U S
Representatives ｜SIB Project Team (Yoshida, Ohara)

Email

｜

info@dreamincubator.co.jp

Phone

｜

03-5532-3200

Website｜https://www.dreamincubator.co.jp/25