Utilizing Social Impact Bonds to Help Innovate Government
The term ‘Social Impact Bond’ was coined in 2007 by the Young Foundation in the U.K. They introduced the concept of adding additional financing from such sources as private investors, philanthropist organizations and the government itself to help solve social challenges through innovation in such areas as health, education, and social programs.
The purpose of these bonds is not to fund the day-to-day operations of government, but to support the introduction of new innovative programs. The key intent would be that the funds would only be used when they would actually achieve outcomes that reduced costs by at least 10 percent.
If the funds came from an external source and the new innovative program achieved clearly identifiable and objectively measurable outcomes, then the external source would be paid back all its investment and a fair portion of the government funds that its innovation had effectively saved.
To date, about 90 percent of the investments in Social Impact Bonds have come from governments who have taken on most of the risk. Although private investors have participated, they have been more risk-adverse. Some private-public-partnerships (PPP) have now been established in social areas, and in some cases, these have included the actual service provider as a private partner.
Benefits of Social Impact Bonds
Reducing Government Budget through Innovation
There is so much demand on government to complete its annual budget cycle that little time is left to step back and consider new innovative approaches. Yet, without adopting new management practices that foster innovation and continuous improvement, new more efficient and effective service delivery methods will not be developed.
Correcting or Developing Incentives
It seems that in many fields of public policy, incentives for service providers to become innovative and find ways to reduce costs are either poorly developed or non-existent. For example, one action that government may consider taking when dealing with its service providers is to pay an additional fund for achieving specified outcomes. This performance-based reward system would cause service providers to focus greater attention on specific measurable outcomes that are important to government. For example, increase the college graduation rate for immigrants in professional programs by a specified amount or reducing the cost of knee operations by x percent.
Attracting New Funds
When budgets get tight, it is often the less socially or emotionally desirable programs that get cut such as treating drug abuse, training the unemployed, assisting parolees to re-integrate, or helping school dropouts to become successful. Yet, by utilizing Social Impact Bonds government may tackle these problems in their early stages. This may result in the reduction of much larger costs later on to government and society.
Focusing on Outcomes Rather than Outputs
Governments tend to focus a lot on inputs, process, and outputs and not very much on outcomes. For instance, in higher education, the focus may be on how many seats are purchased in a program. If the seats are all filled, then the institution is considered to have achieved its output. However, two variables may be overlooked:
- the added financial program cost related to students who do not graduate
- the added financial program cost related to the percent of graduate students who were not employed in their field of training
Although the institution may have reached an acceptable level of outputs, it may have not reached an acceptable level of outcomes.
This may be one of several measures incorporated into Social Impact Bonds that help investors and government to ensure there is a real and measurable outcome or return on investments.
Measuring and Reporting Outcomes and Costs
Over the years, government has become quite good at being accountable for its actions both in what programs it spends money on and how much it spends. In fact, many departments have been cut so far back that they are not much more than a skeletal structure. However, more attention could focus on the outcome costs of large service providers such as health providers, school boards, and post-secondary institutions who spend upwards of 70 percent of the annual government budget. For example, by objectively measuring outcomes, determining unit costs, and then comparing those outcome costs with alternative public and private providers, it may help the government to determine where it is getting the best bang for its buck.
To assist such service providers as well as other stakeholders to see how effective they are in relation to similar providers, the government should provide this and other key performance information in a comparative manner on each department’s web sites. This would assist providers as well as other stakeholders to see areas of strength and areas needing attention. It may also act as a motivator to improve performance.
Establishing a New Culture and Paradigm
To help Social Impact Bonds become part of the fabric of government, an Innovation Centre should be established. Its mandate would be to help departments and service providers in developing Social Impact Bonds, pilot programs, public-private partnerships in social programs, and other innovative practices aimed at improving services to the public. This would lead to more efficient and effective operations and help to address social issues (such as those faced by disadvantaged members of society). It would also help to reduce the overall long-term cost of government.
Barriers to Social Impact Bonds
In February 2011, Jeffrey B. Liebman authored a report for the Center for American Progress. In it he described six significant barriers to Social Impact Bonds and innovation:
- Government funding is insufficiently focused on results and performance.
- Inadequate performance evaluation allows ineffective programs to persist.
- The proof-of-concept process for social innovation is slow.
- Innovation is risky and public officials are wary of failure.
- Preventative programs often don’t get funded out of budgets they help reduce.
- Performance-based funding requires upfront investments and the ability to absorb risk.
In March 2011, Geoff Mulgan and his Associates from the Young Foundation described four challenges they felt would need to be addressed when considering Social Impact Bonds. These include:
- Execution Risk – this suggests looking at impacts that result in a 10% – 20% improvement
- Measurement Risk – which suggests that the metrics used should have no systemic bias and are a fair measure of performance
- Basic Risk – this states that “achieving ‘real’ savings for government stakeholders can be difficult as existing structures may not allow savings to be counted as genuine”.
- Unintended Consequences – which states, “a key challenge for Social Impact Bonds will be ensuring that they don’t displace existing spending and interventions by incentivizing existing funders or providers to cut spending or provision.”
The Expansion of Impact Investing
Almost 20 years ago many governments around the world began funding programs under various names such as “welfare-to-work” in the United States and the “Canadian Job Strategies” in Canada. Most regional governments developed similar programs with the same intent. Collectively, they were referred to as “Impact Investing.” Their mission was to invest public funds in programs that had a direct and meaningful impact on high-barrier individuals and communities. By investing in individuals with barriers such as language, education, and training, they were able to get these individuals off welfare, keep them out of crime and jail, and help them to become contributing members of society.
Unfortunately, these programs have lost their favor in recent years and are experiencing a reduction in funding; furthermore, this is happening at a time when most governments are actually forecasting shortages of high skilled labor. This may suggest that government needs to revisit its priorities in this area and instead of funding short-term intervention programs, government should consider funding more comprehensive programs that help prepare more high barriered members of society for more high skilled occupations. The current interest in Social Impact Bonds may re-ignite and strengthen this area of government attention.
It is also hoped that the interest in Impact Investing will extend to other government departments such as health, education, children’s services, housing, solicitor general, and higher education.
Key Aspects of a Social Investment Bond
Not every intervention should be considered a Social Impact Bond. Although many innovations may be of great value to government and society, they may be so small or complex that to work with an external investor may prove more difficult that it’s worth. Jeffrey B. Liebman (2011) cited five main criteria when considering externally funded Social Impact Bonds:
- The intervention must have sufficiently high net benefits.
- The interventions must have measurable outcomes.
- The treatment population must be well-defined upfront.
- Impact assessments must be credible.
- Unsuccessful performances must not result in excessive harm.
Key Questions Regarding Social Impact Bonds
In March 2011 Social Finance released “A Technical Guide to Developing Social Impact Bonds”. Included in it was a document outlining key questions that need to be considered when developing a Social Impact Bond. The guide is presented as Appendix 1.
During the same month, the Young Foundation released “Social Impact Investment: The Challenge and Opportunity of Social Impact Bonds.” This document presented a list of seven essential criteria for an externally funded Social Impact Bond. This list is presented below.
- Preventative intervention – The intervention is preventative in nature and sufficient funding or the intervention is currently unavailable.
- Improves wellbeing in an area of high social need – The intervention improves social wellbeing and prevents or ameliorates a poor outcome.
- Evidence of efficacy – The intervention is supported by evidence of its efficacy and impact, giving funders confidence in the scheme’s likely success.
- Measurable impact – Whether it is possible to measure the impact of the intervention accurately enough to give all parties confidence of the intervention’s effect, including a sufficiently large sample size, appropriate timescales and impacts that closely related to the savings and relatively easy to measure.
- Aligns incentives – A specific government stakeholder achieves savings or lower costs as a result of actions undertaken by others. These savings need to be cash releasing and provide an actual saving to government stakeholders.
- Saving greater than costs – The savings for specific government stakeholders are relatively immediate and much greater than the cost of the intervention and transaction costs. This provides investors with enough return to absorb the risks inherent in the scheme, and can provide significant funds for social investment.
- Government preference for a SIB – Government policy for the specific agenda is keen or at least open to the use of a SIB.
Such factors mean that Social Impact Bond schemes are not appropriate for every field where prevention is a priority – fields where impact is diffuse, where small numbers are affected and/or it is difficult to attribute causality to interventions.
APPENDIX 1
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| What is the social issue you are trying to solve? | e.g. high number of avoidable emergency hospital admissions of patients with long-term health conditions (such as diabetes and asthma) |
| What are the systematic causes of this issue? | e.g. under-provision of specialist support and care in the community to improve the health of patients with long-term conditions |
| Are there interventions that have been shown to improve this issue? | e.g. provision of interventions such as community nurse support, telehealth and self-management education |
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| What would the desired outcome of the social impact bond be? | e.g. reduction in hospital admissions, improvement in the health of patients with long-term conditions |
| How would the improvement in the social outcome be measured? | |
| Are there existing objective measures of the outcome? | |
| What is the current outcome for the target population? | |
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| How would you define the target population who would receive services funded by a SIB? | e.g. patients in the local area identified as being at high risk of hospital admission due to long-term conditions |
| Can you define the target population objectively? | e.g. application of risk assessment tools |
| What criteria would you use to define the target population objectively? | |
| How do we identify people who are in the target population? | |
| How many people are in the target population? | |
| What are their needs? | |
| How does the support vary across the target population? | e.g. for different age groups or different conditions |
References
Bolton, Emily and Savell, Louise, 2011, Towards a New Social Economy, Blended
Value Creation through Social Impact Bonds. Social Finance.
Brown, Adrian and Noizman, Will, 2011, Lighting the Touchpaper, Growing the Market
For Social Investment in England, the Boston Consulting Group.
Liebman, Jeffrey B., 2011, Social Impact Bonds, A Promising New Finance Model to
Accelerate Social Innovation and Improve Government Performance, Center for American Progress.
Mulgan, Geoff, etal. 2011, Social Impact Investment: the Challenge and Opportunity of
Social Impact Bonds. The Young Foundation.
Social Finance, 2011, A Technical Guide to Developing Social Impact Bonds.