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A quick look at Social Impact Bonds

A new source of funding for the public sector or a new way to privatise public services?

Social impact or social investment bonds (as they are also known) are the next Great Leap Forward in privatising the state for the benefit of private investors. A relatively recent innovation, they have now arrived in New Zealand almost by stealth via the Ministry of Health (see http://www.health.govt.nz/our-work/preventative-health-wellness/social-bonds-new-zealand-pilot for more details). In December 2013 the Ministry of Health released a registration of interest (ROI) to identify suitable outcome areas and capable service providers with the potential to deliver a social bond pilot.

Social impact bonds (SIBs) are essentially a performance-based contract. Their supposed innovation is derived from the inclusion of third-party investors who provide money to fund the operations of a social service programme. The idea is that private investors and the government enter into a contractual arrangement whereby the investors fund services and get paid for achieving specific outcomes (for example reducing prison recidivism rates). If the outcomes that have been agreed are achieved then the investors receive their capital back plus a profit margin. If the offered service does not meet the outcomes that have been agreed the investors lose their money. For governments this is attractive – it gets the operation of expensive social services off their books and creates the illusion that they are saving money.

Sounds like a win-win doesn’t it? The government pays up if the programme works; the investors lose if it does not.

However it is not so simple and social investment bonds have a number of drawbacks.

Firstly - social outcomes are notoriously difficult to measure. Assessing how, and to what extent, an intervention has an impact on, for example, a participant’s well-being is not a simple task.

Secondly - the complexity involved in formulating a SIB contract based on its impact demonstrates how difficult it is to specify the mechanism which generates any impacts. Imagine drawing up watertight contract to deal with a “problem family”; evaluate their addictions, mental health, education, crime, truancy or unemployment, then put a price on their heads, returning to measure the cash value of any improvements a few years later. For this reason SIBs are often reduced to simple box-ticking exercises that deal with only one aspect of our ‘problem family’ (for example employment outcomes).

Thirdly – as a consequence, SIBs risk encouraging an emphasis on a simplistic ‘mechanical’ model of cause and effect, resting on the notion that an intervention is a singular ‘thing’ or event which results in a clearly discernible outcome. This fails to grasp the complexity of the conditions and contexts of the social problems that SIBs are aimed at addressing.

Finally – the belief in the usefulness of SIBS arises from a view that the private sector is always more efficient, whatever its mind-boggling extra costs (remember that the government can always borrow money more cheaply than the private sector). As we have seen time after time already with the contracting out of, say, education payrolls, this is not true. And of course if the social targets are not met, the state is still bound to pick up the tab!

Further reading

Ainsworth, David. (2011, November 1). Analysis: Can Social Impact Bonds help to create a better society? Third Sector. URL: http://www.thirdsector.co.uk/news/Article/1101352/Analysis-social-impact-bonds-helpcreateabetter-society/ [June 18, 2013].

Fox, C. and K. Albertson (2011). "Payment by results and social impact bonds in the criminal justice sector: New challenges for the concept of evidence-based policy?" Criminology and Criminal Justice

Hayes, Sarah. (2012, February 15). Social Impact Bonds and small organizations—solution or nemesis? The Guardian. URL: http://www.guardian.co.uk/voluntary-sector-network/2012 /feb/15/social-impact-bonds-smallorganisations? newsfeed=true [May 16, 2013].11(5): 395-413.

Loxley, John. (2013, January). Social Impact Bonds. Canadian Centre for Policy Alternatives Review

(Economic and Social Trends). URL: http://www.policyalternatives.ca/sites/default/files/uploads /publications/ Manitoba%20Office/2013/01/CCPA%20Review%20Social%20Impact%20Bonds.pdf [June 18, 2013].

Young, Niki May. (2011, May). Outcomes are ‘easily manipulated’ in payment-by-results contracts.

civilsociety.co.uk. URL: http://www.civilsociety.co.uk/finance/news/content/9162/ outcomes_ are_easily manipulated_in_payment-by-results_contracts [May 16, 2013].