The solution to the crisis in public sector finances is simple. If we could create a financial mechanism so investors’ funds are used up front, thereby transferring the risk to the independent sector, and then over the long term, if the public sector received £1 for every time someone talks about Social Impact Bonds, then we could wipe off the deficit tomorrow.
Cabinet Ministers talk excitedly about their potential, the Chief Economist of Goldman Sachs writes in the Financial Times about how they could solve the crisis in public finances, the Americans are sniffing around and all across the UK, social enterprises are desperate to get a piece of the action.
But if we listen properly to Social Finance – the leading proponents of Social Impact Bonds – they make it clear in their own publications (which are carefully thought through and of a high quality) then we can read about their limitations (albeit slightly hidden away in an annex).
Social Finance stress the preconditions for a successful Social Impact Bond include:
- all stakeholders need to agree how to assess outcomes;
- a target population must be identifiable, accessible, large enough but targeted enough;
- there must be confidence in the impact of the investment and that the interventions will achieve the outcomes;
- public sector savings must be larger than the costs of interventions, must be cashable and should accrue to one or two public sector agencies; and
- it must be a priority area for the public sector and for investors
Social Finance also note that the first Social Impact Bond is in a pilot phase and has not yet developed a track record.
So we have an idea in its early phases, which will only be replicated where everyone wants to address a problem and can agree how to measure the solution with a handful of beneficiaries, where we know the services deliver and where we can deliver actual cash for a budget-holder.
Social Finance should be congratulated for developing a brave and innovative idea. But we should also listen to them when they say we maybe shouldn’t get quite so excited just yet.
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I went to the Social Impact Bond conference run by Social Finance a couple months ago. It’s an interesting concept and yep, plenty of ground still to cover.
Firstly, from a structural perspective, they only work for certain types of social issues. In particular, social issues where preventative interventions can be clearly measured and thereby monetised through a government contract that rewards the prevention. That’s not a criticism, it’s just one of the realities.
Secondly, from an investment perspective they pose a lot of problems – For a start they’re not actually bonds – they’re more like a private equity fund with limited partners – that makes them pretty illiquid (i.e. once you buy it you’re kind of stuck in it for like 8 years or so). Also, they’re pretty risky, especially seeing as though you can’t get out of them once you’re in and there’s no real guarantee that the prevention will actually take place. Finally, they’re too small still for most investors to notice.
Again, those are not criticisms per se, they’re just the normal hurdles that new stuff has to go through. Will be interesting to see how they progress.
I’m wondering if there is a way of offering the beneficiaries themselves a share in investment opportunity, under certain Social Impact Bonds. It seems reasonable they too should engage and be incentivised to make a new approach work. Could the beneficiaries have an investment ‘allocated’ ( or held in trust) to them, underwritten by other investors. The capital and a proportion of the returns could be refunded to these guarantors if the intervention is successful, with a remaining proportion of returns allocated to the beneficiaries. Over large samples, it will be small returns, but it stops the sense of having something done to them, instead they become part of the outcome not just the investment opportunity. The proportion of returns allocated to the beneficiaries could be set at any figure, and they could be tied to mentoring obligations.