Will Social Impact Bonds Revolutionize Public Services?

By Peter Lindfield, published in the Telegraph-Journal 13th July 2012

With the persistent issues of rising health care costs, homelessness and poverty, it is becoming increasingly apparent that the old paradigms of government aid and individual benevolence are inadequate to the future challenges that face us.

With budget pressures mounting at all levels of government, it will be critical to adapt to changing needs and expectations. Social impact bonds are being considered as a way to provide services in areas such as justice and corrections, mental health, homelessness and support for people with developmental disabilities. Bond issues have been directed to reducing crime and homelessness. These two challenges have interventions where there exists knowledge about what works and where costs can be reduced. They also have outcomes where measurements are possible in the medium term.

How social impact bonds work is deceptively simple. Private investors fund new services and are repaid their capital and an agreed-upon profit but only if social outcomes that are also agreed upon in advance are met. Social impact bonds are focused on outcomes rather than outputs, so governments – and the public – pay only if an initiative is successful. This pressure to achieve outcomes creates an incentive to innovate. Social impact bonds may fundamentally alter how some social service programs are structured, improving outcomes and reducing costs for government departments and social sector organizations.

The promises of improved outcomes and future cost savings are attractive propositions for governments. In the last federal government budget, Finance Minister Jim Flaherty said that the bond concept holds promise, stating that government was considering them. In his recent report, Don Drummond recommended that the Ontario government initiate pilot bond projects in a number of areas. Alberta’s Premier Alison Redford has committed to the introduction of social impact bonds in that province. In the U.S., Massachusetts is working to sign contracts to back $50 million in social impact bonds for two projects. The first is targeted to people exiting the juvenile justice system to make the transition to adult life, while the second will support housing for the chronically homeless.

This financial innovation is not without its detractors. The National Union of Public and General Employees (NUPGE) claims that the social impact bond funding scheme for public services introduces risks in the form of “higher costs, reduced accountability and privatization”.

“We will oppose these deals at every step,” said James Clancy, NUPGE national president. “Social impact bonds are just the latest quick fix funding scheme to catch the attention of governments. We urge governments to find the financial resources through a fairer tax system to invest in social programs and public services, instead of wasting time on more expensive and riskier ideas.”

The McKinsey Group points out that establishing rigorous outcomes-oriented management carries risk as well as reward. In a recent report on the potential of social impact bonds, McKinsey stated that it is easier to secure resources if a bond’s assessment provided evidence of significant impact, “but poor or misinterpreted results could lead to lower levels of financial support. Ongoing performance management, in which the nonprofit learns from what it is doing wrong and becomes more effective in achieving its mission, is crucial to long-term success”.

Social impact bonds are the latest example of two important movements in the delivery of social services. One is measuring outcomes rather than outputs while the other is financial reward for the achievement of that outcome. Both movements should be welcomed by beleaguered taxpayers.

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1 Comment

Filed under Finance, Government transformation, Innovation

One response to “Will Social Impact Bonds Revolutionize Public Services?

  1. Social impact bonds are not without their problems, but that does not stop them being worthwhile. There will be a survivor bias that makes social impact bonds look expensive for government: canny social impact bond investors will try to ensure that they only invest in projects likely to succeed, i.e. ones that will cost the government money (albeit money that may be offset by other savings). But think of the money saved from programmes that are unable to get investor money because investors are unconvinced they will succeed. The challenge for government will be to disentangle projects that cannot get investment money because they would make bad investments, and those that cannot get investment money because they are not suitable for investing in.

    If you believe that the capitalist approach enables good ideas to succeed to the detriment of poor ideas, then you should support SIBs.

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