Monthly Archives: February 2017

Dream of Social Impact Bonds should not blind us to their dangers

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.

Political support
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.

Considerable concern
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.

Contract complexity
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.

Poor transparency
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.

Inflexible innovation?
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

‘We should model complex public health interventions before piloting them’

By Zaid Chalabi

Mathematical models can test multiple variables cheaply and quickly, giving early indications of what really matters. That helps in designing pilots and understanding how context can affect a policy’s success, argues Dr Zaid Chalabi.

I was part of a team that evaluated the implementation and cost-effectiveness of the government’s Cold Weather Plan (CWP) for England. The CWP is a guidance document which aims to reduce the thousands of additional deaths that typically occur in England when temperatures plummet. The fall in temperature can increase risks for elderly people as well as those with heart or breathing problems and other chronic conditions.

The plan’s principle is that, when cold weather is expected, the authorities are alerted and they can enact various measures, suggested in the CWP. They might, for example, contact or visit vulnerable patients, check that they have medication, that they are warm and have enough food to last a cold snap. The CWP guidance is quite general and it is up to each local authority to implement the plan in its own way.

Assessing the Cold Weather Plan
There is a lot that we do not know in assessing the CWP’s cost-effectiveness. How fully will each health authority implement the plan? Which aspects will they focus on and what impacts are made by each particular action?

Somehow, we need to know how the CWP, implemented in its various ways, might impact on the health of the population and also avoid hospital admissions to save on costs to the NHS. The costs of elective admissions – postponed if there are weather-induced surges in emergency admissions – also must be assessed. We must evaluate the quality of life, and the years of life extended by the CWP, as part of the final cost-effectiveness calculation.

Clearly all of this is hard to evaluate because there are so many variables. Also the circumstances may not occur often: a decade of mild winters might pass before there is a harsh year. Because the CWP has been running for only a few years, we do not have much data, yet it is also a life and death scenario, so policy makers need advice on how best to implement the CWP in order to deploy limited resources well.

Options for evaluators
What should evaluators do? A meaningful analysis of the outcomes of the CWP would require the ability to compare vigilant health authorities with those less engaged, and to evaluate the CWP over several harsh winters. We cannot afford to wait that long, and it may be unwise to stop some authorities making preparations to protect their populations.

Modelling helps when data is missing
We adopted mathematical modelling as the best approach in such circumstances, where lots of important data are not yet available. It is possible to search the literature or seek expert opinion to make estimates for almost every scenario and action. We can estimate, for example, the benefit to patients’ health of being contacted during cold weather. Theoretical costs can also be factored in for the different options – be it a phone call or a more expensive actual visit. These figures can never be absolutely accurate. But, by building in as much data as possible, the model begins to reveal which variables are significant and which ones do not matter much.

Modelling also provides indications of where the extra costs of the CWP might occur (probably in social services) – and which areas are likely to enjoy savings (probably acute hospitals). In health and social care, implementation of cost-effective innovations is often held up because silo working means there are both losers and gainers. Because the losers may not be compensated, the policy may not be implemented, thus depriving the system of a net gain overall. Modelling can identify who wins and who loses, giving policy makers the chance to equalise the outcome between the silos.

This approach to evaluation, in identifying the many variables and assumptions, also helps us to see gaps in knowledge so we can focus research on gathering any important missing data.

Modelling and other public health interventions
The value of modelling goes beyond policies such as the Cold Weather Plan that can take years to bear fruit. Most public health interventions occur in complex environments and involve multiple variables. It is important to understand the role that context plays in their success.

Models provide an opportunity to vary contexts and see what matters and what does not. They are the obvious precursor to setting up a pilot that can then be designed around key factors that seem to be important, regardless of context. Inserting modelling into the process of early evaluation, before piloting, could be vital if we are to escape the scourge of successful pilots that are not rolled out, because they seem to work only in one place.

Dr Zaid Chalabi is Associate Professor in Mathematical Modelling at the London School of Hygiene and Tropical Medicine.

Ethical risks of marketising public services demand caution

By Julia Morley

Social Impact Bonds and similar financial vehicles may seem guaranteed to deliver key values, but they raise important moral dilemmas.

The impulse to use new private sector approaches to funding public services, via Social Impact Bonds (SIBs) and other social investment vehicles, is fraught with ethical dilemmas. We should be cautious before rushing into “marketising” some public services – packaging them up as commodities that can be provided for a price by any supplier judged appropriate.

It’s easy to miss these problems because many SIB advocates hold strong, high-minded and hopeful moral positions. They’re often tired of just trying to do the right thing: they want to achieve real, measurable improvement in people’s lives.

SIBs and Utilitarianism
The views of those supporting Social Impact Bonds are typically rooted in utilitarianism which attaches moral value to the consequences of actions, not merely to the intentions. This approach contrasts with deontological theories, which hold that no matter how morally good their outcomes, some choices are always wrong. The utilitarian tradition can also be contrasted with virtue ethics. This focusses on what kind of people we want to be so we can work out which actions are allowable.

In contrast to deontological theories and virtue ethics, utilitarianism, which underpins the SIBs’ approach, dwells on outcomes. One popular form of utilitarian theory is “prioritarianism”, which attaches higher moral value to improving things for particular groups of people, usually the neediest and worst off. The goodness of this outcome confers rightness on whatever was done to arrive at that outcome.

At first sight, adopting such a consequentialist approach may seem to be a no-brainer. Who could argue with a standpoint that’s focussed on using SIBs to provide concrete help for the most vulnerable? But this seemingly good sense can sometimes blind us to real dilemmas posed by SIBs, and similar examples of marketisation in social services.

SIBs dilemmas
For a start, what timeframe should be used to assess outcomes? SIBs are normally planned to deliver their benefits in between two and seven years. These are timeframes after which a private equity fund, or venture capital fund, would expect to exit a programme and realise a return on their investments. But there is concern that such timeframes may not capture all the main benefits – and the dis-benefits or negative externalities – that might manifest themselves subsequently.

Is it possible, in any case, to measure all the outcomes? And, if we can, is it always possible to establish a causal link between an intervention or service, provided via the SIB, and the outcomes measured subsequently? Such uncertainties make it difficult, sometimes, to assess the ethical value of the SIB approach.

Should some social problems be free of markets?
For reasons not to marketise social services, I draw on work by Debra Satz, a philosophy professor at Stanford University and author of “Why Some Things Should Not Be for Sale: The Moral Limits of Markets”. Satz is a critic of “noxious markets”, which, she says, tend to feature vulnerable people who have little say in what is happening to them and who may be damaged by being involved in such a market. These “noxious markets” are, she finds, often characterised by excessive profits. She worries about marketisation undermining our civic values and society in such cases.

I also draw on the work of Michael Sandel, a Harvard University politics professor, whose book, “What Money Can’t Buy”, studies the moral limits of markets. He invokes what I call an “icky feeling” about markets in certain goods on the grounds that the exchange, and the nature of the goods, may be devalued by using a market.

These commentators challenge us to consider whether we feel comfortable with a market for kidneys or for other human organs. Would we go along with a market for babies? Would we like to trade them? Would it devalue humankind if we were to do this? How about prisoners? Is it morally acceptable to profit from the misery of others? Is it OK if we “fancy a flutter” with someone else’s well-being, as the Economist asked in an article about the first Social Impact Bond, designed to reduce reoffending rates among former prisoners in Peterborough?

Even if one accepts that SIBs and other forms of marketised social investment are the best that can be done in a difficult world, there are other important issues to address.

The risks of marketization
First, could this kind of marketisation exclude some deserving recipients? Take, for example, help for potential paedophiles. It might not be easy for this group to gain access to resources, using these kinds of mechanism. Which social investor would be prepared risk their brand reputation through such an association?

Another important issue is whether marketising social interventions might affect staff motivation. Describing activities in terms of profit-making can undermine the reasons why people want to provide a service. For example, Richard Titmuss’ classic 1970 study compared voluntary blood donation in the UK with the system in the US that offered donors money in exchange for blood. It concluded that paying for blood reduced not only the quality but the supply of blood because some donors’ motivation was potentially damaged by marketisation.

And lastly, we should also consider possible ill-effects on recipients. How does it feel when a recipient’s problems are generating profits for someone else? How does it feel to be a profit-centre? In short, we should recognise that marketisation can create many potential issues affecting relationships for volunteers, staff and those who receive a social intervention or service.

There are also risks that market systems which replace public values can lead to behaviours that actually worsen social problems. Take, for example, private prisons in the US: providers have spent millions of dollars lobbying for increased rates of incarceration and extending custodial sentences.

Ways to tackle the risks
Where do all these risks leave the question of marketisation, particularly if it looks to be the only way to attract resources? We shouldn’t bury our heads in the sand and conclude that there is nothing that we can do. If some degree of marketisation is inevitable, we should address potential issues.

It may, for example, be better to view markets as complementing rather than supplanting non-profit social services. One can use them around the edges of traditional provision, maintaining an awareness of the social and political implications implicit in these market processes and controlling their worst excesses. This approach would militate against SIBs, and similar approaches, becoming more than an adjunct to more mainstream delivery systems.

One possibility is using experts to constrain profit-based decision making, thus placing moral limits on the market: in other words, regulation of approaches such as Social Impact Bonds. It’s also important to improve the accountability of providers as much as possible, particularly to those receiving services: regulation can reduce power differentials between providers and recipients. There should also be transparency about levels of profit and the structure of deals. Broader social impacts should be measured and monitored.

With these safeguards, the marketisation of social services may be justified even though problems remain, as demonstrated by the behaviour of the US providers of private prisons. Such experience ought to make us reflect about the kind of world in which we wish to live, before we rush into wholesale marketisation. We must not ignore the moral and political implications of actions that might previously have made us feel highly uncomfortable.

Dr Julia Morley is a lecturer in the Department of Accounting at the London School of Economics and Political Science.