Leading the world round and round in circles

As someone who spends plenty of time talking to people doing something or other related to popular financial instrument, the Social Impact Bond (SIB), I’ve long since come to terms with the fact that almost everyone involved has as little idea of what’s going on across ‘the market’ as everyone else.

A prize specimen of confusiana is that the only defining characteristic of a SIB – in the sense that it applies to all SIBs but does not apply to other payment-by-results contracts – is that the people involved in funding and delivering the contracts choose to describe the contract as a SIB.

Usually, though, the disagreements around SIBs are blurry, nerdy ones about things like counterfactuals and special purpose vehicles. How refreshing then, in recent weeks, to see two social investment leaders taking completely opposite positions on a relatively simple point of contention within our world leading SIB debate.

The disagreement is a prime example of the knotty challenges faced by supporters of SIBs (and outcomes contracting more generally) even if, unlike (for examples) the National Audit Office  or Toby Lowe and Kathy Evans, we accept the arguments for these mechanisms on their own terms.

First up: in his the second part of his interview with me for this blog, Big Society Capital boss, Cliff Prior, called for SIBs to become more rigorous in proving their impact. He explained that: “We are doing all we can to get SIBs to be larger and repeat. The evidence that we’ve got from SIBs to date is pretty positive on the social impact but it’s not big enough, and it doesn’t have a sufficient control to compare what would have happened otherwise, with normal service, to convince the Treasury.

He then added: “… what we need to do next is design the next step of that methodology bigger, more focussed, and with a proper control, so that, in two or three years’ time, we can go to the Treasury saying, ‘Look, this is now convincing evidence of where it works.’ 

The alternative view came from Clearly So CEO, Rod Schwartz who, in his reliably provocative Third Sector column, criticised public sector commissioners on the basis that: “They tend, for example, in many of the SIB structures, to cap investor returns or share out only a portion of the savings.

Before asking: “Why not be more generous and encourage far greater investment? There is also bureaucratic resistance to the new and a preoccupation with precise monitoring, which can be very costly to implement—on many occasions, this undermines the process and creates deadweight loss.

And (my bolding): “Might there not be opportunities for considering less costly and maybe somewhat less rigorous oversight? I sometimes feel our search for the perfect is undermining the good.

BSC in correct shocker

BSC are rarely accused of being right but Prior is right about this – at least in terms of understanding the problem.

Schwartz is advancing a completely legitimate hypothetical position – that, in theory, he believes it would be better if the state spent more via SIBs/PbR and offered contracts that gave investors bigger returns – but it’s not entirely clear what it’s got to do with the actual state of ‘the market’ for SIBs in the UK at the moment.

The situation currently is that:

(a) there are plenty of social organisations who would like to be paid to deliver services via a SIB or another form of outcomes contract (and intermediaries that want to help them)

(b) there are large pots of subsidy from Big Lottery Fund (winding down soon) and Central Government (new phase launched recently) to cover development costs plus an average of 20% (and some cases far more than) of the cost of SIB contracts

(c) there are several investment funds dedicated to investing in SIBs or other PbR contracts delivered by social organisations – and other philanthropic investors who are keen to back SIBs i.e. plenty of investment

What there is not is large numbers of councils and CCGs seeking to fund there services via SIBs – even with Big Lottery or Central Government offering to pay 20%+ of the bill.

Whether or not we agree with Schwartz’s view that public sector commissioners should be setting up more SIBs, there are clearly practical reasons why most of them aren’t.

The biggest of these is that – even in instances where they work on their own terms – most SIBs in the UK don’t offer short term savings to the public sector agency that is actually paying for them.

Proxy abstainers

That hasn’t mattered so much until now because most of the completed or currently ongoing SIBs commissioned in the UK (22* out of 32) have been commissioned by central government departments.

For them, the logic just about works. It’s possible for the Department of Work & Pensions to theoretically bank the savings generated by improving a teenager’s ‘long-term employability’ with a SIB-backed intervention that gets them to pay more attention in school and get better exam results.

The current rounds of subsidy are focused on getting councils, CCGs and other local agencies to pay up.  Many councils, in particular, are currently strapped for cash to preserve vulnerable residents’ basic existences and dignity. They’re not in the market for some proxies for something really good that broadly-related statistics suggest might happen in the future.

If a council is looking to commission an alternative to a service it currently delivers, a SIB-funded option is only a viable option if it: (a) demonstrably provides a better service for the same money than an alternative option or (b) direct and specifically causes another service that the council is paying for to cost less in the near future.

More expensive and worse

At the current levels of rigour, very few councils are choosing to commission SIBs (at least partly because) they’re not confident they can achieve either (a) or (b) – even with 20% (and in some cases far more) subsidy on the table.

In suggesting the way forward is less rigour and bigger payouts to investors, Schwartz is effectively offering a plan to ramp up sales of a heavily-subsidised product that most customers already don’t want while making it more expensive and worse.

That may be the best way to bring in more investors but the UK SIB ‘market’ doesn’t currently need more investors, it needs more customers. Not for the first time in UK social investment, an honourably intentioned investor-focused approach misses almost all the practical points.

Things can only get subsidised 

Fortunately, there are some councils (and other agencies) who are interested in SIBs. Big Lottery’s Commissioning Better Outcomes fund is due to allocate its remaining funds over the next few months so anywhere between 10 and 30 SIBs could be launched in the UK over the next year.

All the indications from ‘the market’ though are that – even if the actual figure is at the higher end of that estimate – there is likely to be 10s of £millions worth of investment, available to invest into SIBs, with nowhere to go for the foreseeable future.

New SIB/outcomes models that offer a clearer demonstration of their value may or may not change that situation. Models that offer higher returns and less evidence probably won’t.









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3 responses to “Leading the world round and round in circles

  1. Dave Hunter

    Yep, you nailed it David. Unless the demand issue can be addressed with commissioners, SIBs are dead in the water. My view is the govt funding (pump priming effectively) needs to be targeted to prove the concept of different interventions in different sectors – which will or won’t demonstrate if those interventions are worth repeating (as SIB, PbR or fee for service in future). But the need to use social sector knowledge and money to develop new, more preventative and service user focused interventions is real and not going away, and better try the SIB solution than just carry on with same old, or ask private sector to come up with something.



    • Beanbags admin

      Hi Dave,

      Thanks for the comment. I definitely support government using social sector knowledge and, where applicable, money to develop new interventions.

      And pump-priming is good – as long as we’re pump-priming better public services, rather than an unsustainable ‘market’ in investment and related consultancy services.

      I worry that the political need to prove that SIBs are an effective funding model is currently taking precedence over the social need you rightly highlight – to work out which new approaches to delivering public services are worth repeating.

      Let’s hope not, though!


  2. Pingback: Metric martyrs | Beanbags and Bullsh!t

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