More Governments Are Turning To Impact Bonds–But Do They Deliver?
Connecticut has a social impact bond (SIB) to help the kids of opioid-addicted parents. Massachusetts uses the same financial mechanism to help immigrants assimilate to the U.S. workforce. In Rajasthan, India, a coalition of banks and foundations is funding the world’s first “healthcare development impact bond,” hoping to reduce infant mortality.
Social impact bonds are not bonds in the traditional sense, like, say, bonds of government debt traded on an exchange. They are really pay-for-performance (or pay-for-success) contracts. Normally they are led by governments that see an opportunity to raise fresh capital and cut costs by working with outside service providers to deliver a certain outcome. For example, a state may look to cut the cost of delivering training to refugees or the cost of foster care. It contracts with outside funders, like a bank, to raise capital to pay for the service. If the service provider meets its targets over time, the investor gets paid a return–perhaps 5% on their original investment over five years from the state. In theory, SIBs are win-win: improved social outcomes save governments money while paying investors for their capital. Moreover, they encourage all sides to pursue interventions that are proven and likely to work, as opposed to interventions that someone hopes will work.
The model of the social impact bond, now eight years old, is spreading. Figures recently released by Social Finance, a nonprofit that arranges SIBs, says there are now 108 around the world. Thirty-three launched in 2017 alone, covering areas like homelessness, child and family welfare, education, workforce development, and recidivism, including the three above.
Some results are now available. Social Finance says 27 SIBs have come to the end of their term, with 10 delivering on targets for outcome improvements. Of the other 17, 16 have not reported results. Only one, the SIB to reduce recidivism among prisoners at Rikers Island Prison, in New York, didn’t meet its objectives. Its funders Bloomberg Philanthropies and Goldman Sachs lost money on the deal.
The first SIB was enacted at Peterborough Prison, in the U.K., in 2010, and it proved to have positive outcomes. Seven service providers helped ex-prisoners with substance abuse and mental health issues, helping to cut reoffending rates by 9%–above a target of 7.5%. The SIB therefore delivered a financial return of 3% on capital to foundations that funded the initiative, Social Finance’s U.K. arm announced last summer.
Does this prove that SIBs work on the whole? Not really. The truth is we don’t really know, because many SIBs are ongoing. And, as important, we don’t know what the wider social consequences of SIBs might be. SIBs have widespread support among philanthropists and impact investors, among service providers and originators like Social Finance. But the jury is still out on effectiveness and unintended consequences (in fact, the jury may have gone home for a few years because most SIBs are still mid-term and results are not yet available). Several academics who’ve studied SIBs point to the potential for skewed incentives and expensive and complicated contracting procedures. They worry about misplaced enthusiasm for a model that remains largely unproven.
The positive case for SIBs is that they help raise capital for vital social services. The 108 projects have raised about $400 million in all, according to Social Finance, with about half of that flowing to U.S. projects. That is money that might not have been spent on helping kids and ex-prisoners were SIBs not started. Advocates point to the potential for risk-free government innovation (states and cities can try interventions with outside money). And SIBs have the potential to deliver greater accountability: projects are funded on the basis of proven results (rather than hope and ideology) and governed by observable metrics.
For example, Connecticut’s SIB looks to help kids living with parents suffering from opioid addiction. Up to 50% of children falling into the state’s child welfare system come from opioid-affected homes at a cost of between $40,000-$60,000 a time. The SIB, worth $11.5 million over five years, funds health care visitors to go into homes and help addicts recover. It builds on proven “family-based recovery” research from the Yale Child Study Center.
One metric of success is whether the intervention reduces the number of parents using drugs. As well as delivering counseling, health visitors carry out urine tests. “A clean toxicology screen is a good metric. A bad toxicology screen is not a good metric,” says Tracy Palandjian, CEO of Social Finance, in an interview. “Investors are paid based on those results and whether children stay with their families and there is a reduction in children going back into the foster care system.”
This sort of intervention seems logical: private money (the funding was led by BNP Paribas bank) used to fund an evidence-based intervention. The potential to save public money is considerable. The trouble is that contracts between service providers, funders, and government are notoriously complex and take a long time to set up. Palandjian says the typical timeframe is one to two years. That raises costs for all sides.
Palandjian says governments aren’t used to starting SIBs and often don’t have the data needed to draw baselines against which results can be judged. “We spend months just getting the lay of the land, just understanding the current status of a problem,” she says. “Do you call that complexity because of the SIB itself? Or, is it that our government partners are still getting their systems in place to think about the outcomes they are getting for the current amount of money they are spending?”
SIBs are seen as a way to drive more metric-based government. Palandjian is not necessarily in favor of bringing in outside capital for its own sake. “I often say social impact bonds are the second best solution. Government should be measuring their programs and holding themselves accountable and staying focused on how they are moving policy areas,” she says. “They don’t need private capital to create a set of incentives to do that. But we know that the government accountability movement has been going for some time and if private capital can invigorate that conversation across administrations, that’s a good thing.”
Palandjian sees potential for future SIBs in areas like teen pregnancy prevention, where interventions like long-acting reversible contraceptives have reduced the number of unwanted kids, helping teens to build lives and be economically active. Other areas include K-12 education, where Social Finance is currently scoping ideas using a grant from the (Obama era) U.S. Department of Education.
But academics who have studied SIBs point to risks like undue interference from private investors with their own agendas. “They have been promoted to governments as a way of reducing the risks to government in their funding choices,” says Cameron Graham, a professor of accounting at York University’s Schulich School of Business, who researched a U.K. SIB aimed at reducing homelessness. “Rich investors with a conscience get undue influence over the implementation of government policy, because they get to pick and choose which programs they will fund.”
SIBs, he adds, are inherently reductionist. They are useful for focusing on discrete, measurable problems–like how many parents are addicted to opioids. They may be less good at attacking complex social problems with many causes and effects. “It is hard to ensure measurements are always interpreted in a rich qualitative context, where there is a fighting chance of the complexity of the field being acknowledged,” Graham says.
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