Keeping the “social impact” in social impact bonds

By , November 26, 2012

Governments are experimenting with a new financing model for social services called social impact bonds (SIBs). The first SIB was developed in the United Kingdom to fund prevention services for repeat offenders. And just this summer, the first SIB in the United States was launched to finance a New York City program designed to reduce recidivism for young men in jail.

The model is exciting because it appears to be one of those rare innovations that benefit everyone: social service providers obtain access to scarce dollars, clients get expanded prevention services, governments pay only for results, and private investors—not taxpayers—bear the risk of program failure. But one of the paradoxes of social impact bonds is that the model has an inherent bias toward promoting financial rather than social impacts.

So what, exactly, is a social impact bond? SIBs are essentially a twist on performance-based contracts. They are similar in that the government pays providers only if they meet predetermined performance objectives. But the twist is that a third-party investor provides a loan to launch the program. If the program meets performance goals that generate a taxpayer savings, the government uses the savings to pay the program provider. The provider can then repay the loan from the third party (potentially with interest). If the provider does not meet the performance objectives, it is the investor who takes the financial loss.

Because taxpayer savings are the cornerstone of the financing scheme, there’s a focus on measuring the financial benefits of reducing the need for expensive “deep-end” services such as homeless shelters, foster-care boarding homes, and prisons. Although these financial impacts are important (all government spending has an opportunity cost), we shouldn’t lose sight of the social impacts that can help us understand how clients benefited and why prevention programs worked. Did education and employment outcomes improve? Did participants have better relationships with their family and community members?

SIBs present a challenge common to all performance-based funding. As Alison Shames discussed last week in relation to public safety initiatives, performance incentives based on imperfect measures have the potential to distort performance. So if the most important indicator is financial savings, providers will work to maximize those savings—and their efforts could be at odds with the program’s social returns.

One of the ways to address this problem is to conduct a comprehensive cost-benefit analysis along with assessing the financial return to taxpayers. Such an analysis would provide critical information about the social (i.e., non-taxpayer) returns to program participants and society at large.

These are important questions to answer, because otherwise we run the risk of undervaluing the total benefit of the program. The novelty of SIBs is that they illustrate how the solutions to some problems create social and financial benefits. But if we don’t measure the social benefits, we’ll lose sight of the ultimate purpose of social impact bonds.

As we focus on outputs, outcomes, and cost-benefit analysis (CBA) this month on the blog, we encourage you to leave a comment below or
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