Are Social Impact Bonds the answer to the fiscal crisis?

Social Impact Bonds (SIBs) have been causing a “frenzy” of interest in Whitehall over the past few months. Hardly surprising given the current fiscal challenge and their apparent ability to attract external investment to our public services. If you are unfamiliar with SIBs, see our beginner’s guide to Social Impact Bonds.

Putting it into practice

There is only one SIB in existence at the moment (in the world) which is focused on reducing re-offending in Peterborough prison. The Ministry of Justice has agreed to pay for a reduction in the re-offending rates of short-sentence prisoners. On the back of this a group investors have stumped up £5 million to pay for a range of services focused on areas such as employment and housing to help offenders as they are rehabilitated. In truth, implementing SIBs requires a lot of hard work and negotiation between three different parties (commissioners, investors and the providers of services). In particular, there are three main challenges that must be overcome.

Challenge 1: the savings must be bankable

Firstly, the government needs to be able to stop spending money on something like welfare payments or healthcare. The problem is that savings can often be distributed, for example across a number of Whitehall departments, or distant in the future, making banking them tough for the Treasury. In Peterborough, the savings from reduced re-offending become bankable when you can actually close a prison wing, but given this pilot only covers 3000 prisoners over 6 years the scale is too small (for now). However, savings from reduced crime and improved social outcomes for ex-offenders are harder to measure directly in cash terms.

Challenge 2: there must be a causal link between the interventions today and the future outcomes

In Peterborough, re-offending may be reduced by factors (such as the economy) that are nothing to do with the interventions in the SIB. Getting round this problem requires careful measurement, ideally with a control group something the Peterborough team spent a long time working on.

Challenge 3: Investors require a commensurate return for the risk taken

The return will depend on the amount of risk being taken which is often extremely difficult to assess for complex social interventions. Of course, the investor may be happy with a “social return” in which case the financial returns offered can be below market rate, but all of this needs to be worked out in advance. The financially minded might point out that as government can borrow far more cheaply than private investors the entire concept is just a complicated, and expensive, off-balance sheet vehicle for the government.

No silver bullet

There is no doubt that the government is very keen on the idea of SIBs (see recent comments by Nick Clegg and Francis Maude). That’s understandable given their apparent “win-win” nature and its fantastic that the UK is leading the world in developing innovative new ways of financing public services. It’s still, however, very early days and even the most optimistic assessments foresee only a few dozen social impact bonds being developed over the next few years, primarily because they are tricky to implement. Social Impact Bonds are certainly not a silver bullet that can solve the immediate funding crisis but they’re nevertheless a worthwhile and intriguing experiment to watch in the years ahead.