Governments have always been the primary funder of services that seek to combat the chronic problems in society. Whether it is affordable housing for the homeless or healthcare for the sick, it has traditionally been public money that pays for it, either through local agencies or funneled through non-profit organizations. However, these complex problems are only treated, and rarely prevented. To borrow the oft-quoted analogy, money is being spent on the ambulance at the bottom of the cliff, leaving no fence at the top. The issuing of social impact bonds (SIB) is an innovative new approach which aims to rethink this equation, and could potentially change the way we tackle tough problems.
It is considered a win-win-win, with investors, governments, and society all benefiting.
The bonds are an experiment within the emerging sphere of social finance: investments that yield both a positive social impact and a financial return. It is a tool that hopes to attract private capital for public benefit in a time when many cash-strapped governments are reducing their spending on costly programs that affect the poorest and weakest in society. The concept of SIB begins with an investor who enters into a contract with the government to deliver an improved social outcome within a set timeframe: reducing the youth unemployment rate by five per cent in 10 years, for example. The investor partners with a service provider, injecting fresh capital in order to meet the objective. If the goal is reached, the government will reimburse the investor with an added rate of return, however if it falls short nothing is paid out. The risk is assumed entirely by the investor, while the government only spends taxpayers’ money when a program is successful. It is considered a win-win-win, with investors, governments, and society all benefiting.
The first application of SIB took place in the small English city of Peterborough in 2010. Social Finance, a non-profit group that pioneered the concept, arranged a pilot project with the Ministry of Justice aimed at curbing prisoner recidivism. At the time, reoffending rates in some UK prisons stood at an alarming 70 per cent and since previous measures were ineffective, this was an opportunity to break away from status quo thinking. The group raised £5 million—around $8 million—from 17 social investors, mostly charitable groups, to fund a consortium of local service providers that help released inmates transition to a better life. The target was to reduce the reoffending rate by 7.5 per cent over a six year period, and if achieved, the investors would earn a maximum annual return of 13 per cent. The Peterborough project is still underway, butpreliminary results have indicated signs of success. The recidivism rate has gone down in that city, while in the same period it has risen nationally.
And that is also what distinguishes SIB from the traditional model: success is measured by outcome and not output.
A prisoner released back into society and having to restart their life will encounter a world with great challenge and little support. Too often, they are placed in the same conditions that initially led them to commit a crime, and sadly the cycle continues. Society’s failure to rehabilitate these men and women places a great financial strain on the system as well, as they are shuttled between homeless shelters and hospital beds, courtrooms and prison cells. The problem is hardly a law enforcement matter alone, but a holistic approach is costly and not always guaranteed, so governments have little incentive to experiment.
The great benefit of SIBs is that they focus is on a preventive intervention. The Peterborough project is operated by an umbrella group that brings together various stakeholders, from psychologists and social workers to even ex-offenders who assist the newly released prisoner. They arrange housing, counseling, and skills training so that the individual has a comprehensive support system to avoid reoffending. Since investors are only paid by the government if the recidivism rate drops by the agreed upon terms, everyone is highly motivated to ensure the target is met. And that is also what distinguishes SIB from the traditional model: success is measured by outcome and not output. Funding for social services is typically determined by how many clients have been assisted, placing the emphasis on volume but not effectiveness. However, when resources are allocated to achieve a specific social outcome, it encourages creative strategies and even collaboration with other service providers.
Despite its initial promise and increasing popularity, the use of SIB is not without criticism. Those skeptical of any privatization of public services view it as an attempt by government to offload its responsibility. There is also worry that an obsession with measurability will affect which causes are deemed worth pursuing. Also, when profits are contingent on particular outcomes it may invite “creaming”—selecting the clients who are most treatable instead of those most in need of treatment. These are all valid concerns, but it should be noted that SIB is not a solution for all problems. It is not meant to replace existing funding for social services but rather complement it. The concept only makes sense to apply in certain niche areas where there is a high cost of treatment and the current intervention programs have a proven track record. The idea is still evolving in its early stages and over time will certainly respond to its critics and refine its design.
Although it first emerged as a tool to finance public services only three years ago, there is a great wave of optimism over the potential of SIB. The same model is already being used in other areas, particularly international development. While still in its infancy, development investment bonds (DIB) are now incorporated in fightingmalaria infection in Mozambique, reducing adolescent pregnancy in Colombia, and elsewhere. It is unclear how broadly applicable this idea can be, or even if it works. The original project in Peterborough is still incomplete and will be another few years before we truly know whether it was successful. This untested experiment of blending finance and philanthropy could radically transform the way governments spend their resources. Mayors of broken cities and governors of failing states could look to it as a possible option for funding. In a time of austerity in many parts of the world, it is this kind of innovative thinking that will help solve the complex social problems we face.