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Archive for July 2013

Capitalism With A Conscience: How Social Impact Bonds Can Fund Public Services

Mohammed Huque, Urban Times, 9th July 2013

Social impact bonds provide an innovative new approach with the potential to change the way governments tackle social problems.

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.


British people are wrong about everything: here’s why

British people are wrong about everything: here’s why

Wrong about migrants, wrong about benefits, wrong about choice of headgear. Torsten Reimer

People are wildly wrong when we ask them about many aspects of life in Britain, as shown in a new survey by Ipsos MORI for the Royal Statistical Society and King’s College London.

We think one in four of the entire population is Muslim (5% in reality). We believe 31% are immigrants (the official figure is 13%). We have an extraordinary view of teenage girls, believing that on average 15% under the age of 16 get pregnant each year (0.6% in reality). We think £24 out every £100 of benefit spend is claimed fraudulently (it’s actually 70p). We think crime is rising (it’s been falling for years). And we’re more likely to pick out foreign aid as a top item of expenditure than state pensions (we spend 9-10 times more on pensions).

The scale of our errors is startling – but this isn’t particularly new, similar patterns have been seen in other surveys. So the more interesting questions are why these massive misperceptions arise and what, if anything, can we do about them.

Four reasons to be wrong

On why, I’d group the explanations into four. First, there are simple measurement and definitional problems. It’s difficult to get across what can be quite complex and precise issues in simple survey questions.

But probably more importantly, the public are not always thinking about the things we think they are. For example, when we ask people what they were thinking of as benefit fraud when they guessed at its scale, they select items that can’t be counted as actual fraud. In people’s minds, it includes claimants not having paid tax in the past and people having children so they can claim more benefits.

Second, there are a whole range of cognitive errors, simple mistakes we make when answering these types of questions. This includes problems of statistical literacy – for example, we just struggle with very big or very small numbers, and find it hard to distinguish between rates and levels.

But there are also explanations from social psychology on the biases and shortcuts in how we think: for example, we know we’re more likely to focus on and remember negative information.

Third, there is certainly an impact from the media and political discourse. The links are complex and difficult to prove categorically, but the association between attitudes and media coverage is often strong. Of course, the media also reflects our concerns and tastes for types of information: to a large extent we get the media we want. The focus on vivid stories rather than straight facts is because we pay more attention to those vivid stories ourselves (we admit we rely on personal experience and information from those around us more than representative data).

Which leads onto the fourth key explanation – that these misperceptions may be an effect of our concerns rather than a cause. That is, we overestimate partly because we are worried about these things, rather than being worried because we believe we know their full extent. Academics call this “emotional innumeracy”: we’re making a point about what’s worrying us, whether we know it or not.

Getting it right

What we decide to do depends on which of these effects we think are mostly to blame. The boring, but probably accurate, answer is that it’s likely to be a bit of each, so we need a range of responses. In particular, we need to avoid a convenient conclusion that because over-estimates are partially a reflection of our concerns, we shouldn’t even try to correct them. That just leads to a vicious circular argument that perceptions are reality even when they are plainly wrong.

So we do need to improve statistical literacy – which is as much about improving our confidence to question both statistical assertion and anecdotes as improving simple maths skills. This needs to start in schools, with more use of real-life data rather than abstract problems. Given the disproportionate effect of the media and politicians, steps to improve their understanding of statistical stories should be a focus too. The Royal Statistical Society’s getstats campaign targets each of these.

Alongside this, we need to continue to challenge the misuse of data by politicians and the media, through bodies like the UK Statistical Authority and FullFact. Of course, this will have a limited direct impact on public perceptions, given it is working against the weight and habits of the media and political rhetoric. But the aims of these bodies are at least as much preventative as corrective: the more those using statistics badly are pulled up, the less likely they will think the risk is worthwhile.

Even so, these steps will always struggle to get to a key part of the problem. There are many instances where the information provided by politicians or the media may be perfectly factually accurate, but vanishingly rare. The vivid anecdote is the only thing people remember. This is part of the reason why “myth-busting” exercises alone are likely to have very limited impact on perceptions.

So just as important as providing a correct picture of scale is providing a narrative that appeals to people, with its own role models and vivid stories.

The power of facts

We also shouldn’t entirely give up on changing people’s minds with facts. We regularly run deliberative workshops on tricky policy issues where information is provided, experts give evidence and people have time to reflect on things they don’t normally get the chance to. And views do often shift. This serves a useful purpose in its own right, if it means policies are based on what a more informed public thinks.

But it’s obviously not very practical to get the whole population in a workshop for a day or so. However, new communication technology does provide easier ways to do this. It won’t be as cathartic and will only reach a subset, but online mass deliberations by independent organisations (say, the BBC) could play its part in improving our currently badly informed debates.

Just don’t expect a public epiphany any time soon – those many thousands of phantom pregnant teenagers will be with us for some time yet.