This post is based on last week’s report by the Social Market Foundation.
What is a Social Impact Bond?
Typically, under a SIB, an investor takes some financial risk for achieving outcomes and distributes the upfront investment for project-specific purposes (although often this is done through an intermediary). The provider of the capital is separate from the delivery organisation. Investors receive a return on their investment via a reward payment from the commissioner only if certain outcomes have been met.
The SMF report explores whether Social Impact Bonds are likely to become a core method of commissioning public services.
Why do governments love them?
The Government is struggling to provide decent quality public services in response to two key challenges:
- Productivity in public services has largely flatlined in recent years.
- Public expenditure cuts have drastically reduced the amount of resources available.
One key response has been the encouragement of innovation by enhancing the operational autonomy of front-line professionals. The government is seeking to do this by devolving the financial risk as close as possible to those in control of these interventions – so that they are financially accountable and have a clear incentive to succeed. In the words of the SMF report:
“Effective transfer of financial accountability is the holy grail of public service reform”
The main mechanism for this has been payment by results with which Social Impact Bonds are closely associated.
The SMF is clear about why SIBS and PbR are a good fit:
- They can facilitate greater pluralism and competition in the provider market (SIBs can facilitate the involvement of voluntary sector providers in PbR schemes by overcoming cash flow problems).
- They offer the possibility of involving specialist organisations in delivery – in the same way smaller organisations with particular expertise can get involved in big PbR schemes.
- They can be used as small scale pathfinders to develop new approaches to service delivery.
Will Social Impact Bonds become a mainstream funding model?
The SMF identifies 13 current SIBs:
and goes on to speculate whether the SIB will become a mainstream way of funding public services.
Despite their enthusiasm for SIBs, the report authors – Nigel Keohane, Ian Mulheirn and Ryan Shorthouse – identify some key barriers which they summarise neatly:
“The very high degree of uncertainty surrounding new interventions, combined with the measurement problems of small-scale projects, ratchets up the level of reward payments needed to attract investors in large numbers.”
They go on to note that early adopters face disproportionately large set-up costs and that the risk aversion of both commissioners and investors means that they will be nervous about meeting these costs – making it difficult to develop investable propositions.
The SMF sees a key role for government which, as I noted in the introduction, probably has most to gain from a growth in the number of Social Impact Bonds. They make a number of specific (and, to me, highly appropriate) recommendations calling on the Government to:
- Improve outcomes measurement,
- Strengthen the attribution of interventions to outcomes, and
- Facilitate more evaluation about what kinds of interventions work.
They conclude that standardising some aspects of SIB development would reduce costs.
At the moment, the Social Market Foundation and I share the view that SIBs will not become commonplace until their costs are reduced substantially.
Most of the current SIB-funded projects are highly subsidised either by philanthropic trusts (the ONE Project) or the government (most of the others).
The only other way to reduce costs is for commissioners to subsidise SIBs by offering large enough financial rewards to encourage investors.
Of course, once we go down this road, Social Impact Bonds do a quick about-turn from being a lever to reduce governmental spending to becoming a waste of public funds.
It will be interesting to see whether the government listens to these concerns or if Social Impact Bonds are destined to become a niche product favoured only by philanthropists in small scale new initiatives.