Social Impact Bonds? Don't believe the hype!


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If you believe the hype, Social Impact Bonds are the next big thing in social policy. Social Impact Bonds have been described as the latest 'ethical investment', a way to harness private finance for social good, but what exactly are they?

According to Social Finance:

A Social Impact Bond is a contract between a public sector body and Social Impact Bond investors, in which the former commits to pay for an improved social outcome. Investor funds are used to pay for a range of interventions to improve the social outcome.

Supporters argue Social Impact Bonds will shift the focus from the cost of services to improving social outcomes and ultimately lead to savings on future social costs. It addresses public sector disincentives to invest by involving the private sector and private investors will only paid if agreed targets are met. It's a win, win situation for the public and society. 

It sounded good enough to the previous NSW Labor Government that in 2010 they announced a trial program in collaboration with the Centre for Social Impact. The newly elected NSW Liberal Government has also embraced Social Impact Bonds and in March announced three trials.

A closer look at Social Impact Bonds, however, reveals limited information on how effective they actually are. The first trial of a social impact bond in Britain only commenced in March 2010 and the touted benefits will not be known for years.

Most concerning is that Social Impact Bonds sound suspiciously like a public-private partnership (PPP). The fact that the Centre for Social Impact is a business school partnershipwith corporate “investors” does little to dissuade this perception and it is reinforced by a comparison in a media release by the then NSW Labor Government on the pilot:  

Social Impact Bonds are similar to a public-private partnership. They provide a mechanism for the private sector to invest in non-government community programs.

The rationale for a PPP for social services is questionable. PPPs have generally relied on the state socialising risk and guaranteeing a rate of profit for investors to secure funding, removing many of the assumed benefits of the private sector. As the government can borrow at a lower cost, PPPs are often more expensive than if it was directly funded by the state. It is likely that increased government spending on preventative projects is cheaper over the long-term than a SIB. This argument has been even been noted by supporters of Social Impact Bonds:

A common response from Treasuries are that Social Impact Bonds are an unnecessarily complex way of financing better social programmes. Since government's costs of capital are significantly cheaper than markets, they should be providing finance. If there really are better approaches to cutting recidivism or unemployment, these should be directly funded by governments, rather than indirectly via Social Impact Bonds.

If an increased cost is likely, why are Social Impact Bonds being strongly promoted? 

The prioritisation of balanced budgets and obsession with credit ratings cannot be overlooked. John Quiggin noted that PPPs were used to shift costs off the balance sheet to create balanced budgets and surpluses. With governments running deficits and seeking to returning to surplus as quickly as possible, Social Impact Bonds  may become the latest way to privatise and replace rather than complement funding. This seems likely given NSW Liberal Treasurer Mike Baird’s comments to 7:30 that:

What you're seeing in the UK is what you're seeing across every government here in Australia. I mean, it is a tough environment. Budgets are tough, revenues are falling.

The likelihood of gaming is another problem that cannot be ignored. From the past experience of PPPs and payments by results, there is a strong likelihood that investors will only fund easy projects rather than complex, riskier projects that need funding, leaving them to the state. Projects with easier targets are likely to be adopted to encourage investors and secure funding. It is not reassuring that target outcomes and corresponding Government payments were not determined and that work done on indicators had not been done prior to the choice of the trials. These are only some issues with Social Impact Bonds . There are many others that even proponents such as the Centre for Social Impact have admitted such as that:

...the biggest barrier is likely to be the lack of robust evidence of the efficacy and cost saving potential of programs and policy interventions.

This is all not to say that advocates are completely wrong. They are right about perverse incentives that deter public sector investment. Improved outcomes may lead to a reduction in spending and job cuts. It needs to be addressed. What is missing is the discussion about a better public sector funding model that does not penalise improved outcomes with funding reductions.

It is difficult to determine the effectiveness of Social Impact Bonds at this early stage. However, the lack of discussion about problems from past PPPs and the silence on improving the public sector funding model is concerning. As governments across the world reduce debt and deficits at any cost, Social Impact Bonds may become the latest way to privatise public services. We need be wary of claims made by advocates and will need to heavily scrutinise the costs and benefits for many years to come.

Author: Osmond Chiu

Osmond Chiu is the Young Members Director of the Australian Fabians


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