By Mildred E. Warner
In the US, SIBs are the height of social policy fashion, but the risks are clear and numerous.
The dream of Social Impact Bonds (SIBs) sounds pretty exciting. It’s that you can invest in something good for society and at the same time get a market return so everybody wins. The investor wins, the client wins and, because it’s a better programme, society wins.
SIBs are growing around the world and mainly focus on prevention, which is good to see, because cure is often more costly than prevention. There is considerable enthusiasm in the US where 35 states are building programmes to encourage SIBs. Only ten SIB projects are active in the US, but there are probably hundreds in the pipeline.
In Congress, support is coming from both sides of the aisle. The US Government Accountability Office told me: “You know, Mildred, the Republicans like this because it lets the private sector get access to public social welfare dollars and the Democrats like it because it might increase public investment in social welfare”. So it’s a win-win politically.
Large organisations are lining up to act as intermediaries in establishing SIBs and evaluators are honing their skills to get the contracts to assess the outcomes. I’ve even talked to people on the street who have heard about SIBs. “I’d like to invest in that,” they’ll say. “I’d love to put my money in something that’s going to yield a good return for everyone.” But they’re not quite sure what this thing is.
And there’s lots of concern as well. Providers are responding to this new landscape – some are nervous about payment. Academics are probably the most critical. Government managers feel cautious, worried about how much work is involved in putting these things together. Sometimes, officials feel forced reluctantly down the SIB pathway.
Take, for example, the SIB at Riker’s Island prison, designed to reduce the rate at which juvenile offenders return to jail. The Vice Mayor of New York City told me she would not have done the Riker’s Island project as a SIB if she could have funded the program directly. That would have been quicker and easier. But budget limits prevented that and she didn’t want to wait as, each year, more teenagers get caught in the prison system.
So we should take a long hard look at what’s going on. We should make sure that we’re not swept along by a tide of wishful thinking that could leave disappointment in its wake.
SIBs transform social services
This aspect of SIBs is particularly important because they represent a major upheaval in the design and delivery of social services. Typically, SIBs require intermediary management, private investment and some kind of outside evaluation which allows you to link performance to financial returns.
SIBs take public management to a new place because government is no longer at the centre, as in the past, but an intermediary organisation is organising and running things. It’s true that the Government is at the top, calling the shots, defining the structure, defining the goals, but the intermediary is at the centre of the process making everything else happen, linking to the service provider, linking to the outside investors, commissioning the evaluator. The intermediary is becoming a very important actor.
Clients lack a voice
There are some real concerns about the way SIBs work. They tend to focus on areas where the client is pretty weak or voiceless or maybe despised by society. These are areas where we haven’t been able to motivate sufficient public investment in prevention because who cares, for example, about a prisoner and their re-entry into the community?
Yet, ironically, SIBs seem to leave the clients voiceless. These are homeless people, little kids, people who are vulnerable. There seems to be very little thought that we’re not giving the consumer or the client a voice in SIBs. That’s deeply troubling.
I would sum up other concerns as relating to: the suitability of SIBs for complex social problems and solutions; the difficulties of contracting; the transparency of SIBs; whether private investment in SIBs is, or can ever genuinely be, a reality; and the potential impact of private investment on the core values of public services.
Do SIBs suit complex problems?
You’ve got to be careful because social problems are by definition very complex. People are complicated and we live in a very complex world. There’s a lot going on. So focussing on a simple, short-term intervention to deliver a single outcome may not be the best approach.
The Riker’s Island SIB, for example, funded a behaviour modification for young people in prison. Those teenagers were then sent home with very limited skills often to distressed family and neighbourhood situations and to try to engage in an economy that had pretty much left them behind. But they had been taught how to be polite. That’s cheap and it certainly doesn’t hurt. But don’t we need a more comprehensive approach? Aren’t we simply treating the symptom and not the cause? Not surprisingly, some critics have said: “We really need some longer term structural change and this is just a Band Aid”.
Some SIBs are being developed in the US to fund pre-school provision. Indeed the roots for SIBs in the US lie in work done around developing private investment funding models for preschool provision. I can see the appeal. Preschool is inexpensive compared with the costs of early childcare. It’s relatively short term and you can get a good measure of the investment’s efficacy when you see how kids perform in kindergarten. It’s linked with some wonderful long-term improvements in health, education and employment.
When all these savings are calculated, one model found that preschool offers a 17 per cent internal rate of return, which is better than anything the stock market could give. And three quarters of that return is savings to government which offers the chance to get government to pay for SIBs out of savings in future programme costs. Nevertheless, it’s pretty heroic to assume that preschool provision can be credited with producing all the benefits you hope for when a child reaches adulthood.
At this point, it’s also worth remembering that SIBs – like many social policy innovations – are created around the assumption that you can take model programmes that have been proven to work in one place and then scale them up. But have you ever tried to make brownies for 40 people instead of ten? You actually have to change the recipe. You don’t just quadruple the recipe, because it won’t work.
I worry about the complexity of contracts that typically accompany SIBs. I’ve been studying contracting for 20 years in local government in areas like water and garbage collection. Those contracts can be quite complex, but they are simple compared with contracts for social services.
We also know that cost savings from contracting out water and garbage collection are at best ephemeral. In the longer term, markets require management, which can be expensive – especially when, at a local government level, there are not really markets for your public services. I measured how many alternative providers there are for any one of 72 different services that local governments provide in the US. On average, they have one alternative provider. This does not a market make. That’s why local governments do a lot of reverse privatisation or contracting back in – to ensure that there is some element of periodic competition.
High transaction costs
Transaction costs are also high to set up the contracts. Most local officials would say: “If I’m not going to get a ten per cent savings, I’m not going to go out because I’ll spend more than that just designing the contract.” Additionally, because public markets aren’t competitive, there needs to be monitoring, but monitoring is also expensive. That’s especially true for SIBs: they require high quality evaluation because the financial planning is based on delivery against metrics and, ideally, there should be a counter-factual, some sort of comparison group, not subject to the SIB.
SIBs lack transparency – there is a lot secrecy about discussions until the deal is done. People may not hear about a project until it has already been designed and, even then, documents are often unavailable to the public for scrutiny. It makes them hard to study and is a problem for open governance.
SIBs could actually promote inflexible innovation, because they typically involve a model programme for a process which has been proven and which is then locked into a contract. Fortunately, it’s usually only for three to five years, whereas public private partnerships for infrastructure might be 25 or 30 years. But that’s still a constraint on innovation.
Will the private sector invest?
The promise is that SIBs will engage the private sector as an investor in public services and so increase funding for effective programmes and build the political will for policy change. So the long-term outcome could actually be more public spending on these projects once the private investment has shown the value of investment.
That is problematic in the US context because, in seven of the ten projects that currently exist in the US, more than 50% of the finance is being guaranteed by private philanthropy. One of the key investors enjoying this underwritten status has been Goldman Sachs.
I had a student recently from the finance sector who did his Master’s thesis on SIBs. He concluded that the risk of SIBs is too high to attract private capital – a secondary financial market will be required to provide private sector funding. That’s something we should be watching for.
Public values at risk?
Some of the enthusiasm around SIBs is that we’re going to insert efficiency and investment logics to make the social sector better. That sounds interesting. But there is the risk that we will lose some of the values that have underpinned social service policies, such as social justice and citizen empowerment. If financial logics prevail over social values, that could undermine other social goals. And if there are savings from SIBs, why does government have to mortgage those savings to private investor profit, rather than spend it on future investment?
Then there are also those who worry that everything is priced in a SIB. I recently saw the play, “A Curious Incident”, about a child living with Asperger’s Syndrome. In the past, we would have justified spending on such a child as a matter of their right to an education and society’s obligation to accommodate all children in our world. But if we shift towards thinking about the “investible child”, justifying expenditure now by its returns in the future, will that child still get the investment s/he needs? I worry about social Darwinism creeping into social policy, especially as the clients’ voice is largely silent in SIBs.
Meanwhile, what role may intermediaries take in redefining the values of public services? The US already has a largely devolved social welfare state. SIBs may hand intermediaries even more power than they already have to determine what social policy looks like.
New political allies
So there are many challenges. But it’s also important to recognise that SIBs are making a difference, sometimes in unexpected ways. For a start, it’s clear to me that many city managers are trying to ride this wave of marketisation in social policy and get something positive out of it for their communities.
So for example, all the discussion about investment returns on preschool provision is bringing in new political partners to the cause of developing better services for children. Important CEOs in the local communities are saying: “This is important. We want to see investment here”. I remember the head of one of the public social welfare agencies saying: “This is the first time I’ve ever been able to go to city council and tell them that their expenditures are investments, positives rather than negatives.” This was because she was able to talk about the return on investment. SIBs often focus on quite short term returns. This style of language gains political attention, and motivates leaders more than long term returns because, they think: “In the long run, I’m not going to be in office”.
New policy tools
We are also seeing the development of new policy tools. People in the welfare arena are accustomed to rules and rigid regulations governing social services. In contrast, the language of economic development encourages entrepreneurship. In the social welfare world, people find it liberating to be in a culture in which they feel incentivised to deliver a policy rather than simply being governed by regulations and rules.
SIBs aren’t going away. They are growing. In the US they are likely to mushroom, but without the careful study and scrutiny that such a policy reform requires. We should not be blinded by the dream of greater investment and greater program effectiveness. Neither has been proven in the early SIBs. And there are clearly many issues about management and public values. We need to be honest about what really is happening. We should give special attention to how to maintain the important values that underpin our public services.
Dr Mildred E. Warner is a Professor in the Department of City and Regional Planning at Cornell University. Her published articles on SIBs and government services can be found on her website www.mildredwarner.org