WASHINGTON, D.C., and NEW YORK — On May 1, the U.S. Senate Budget Committee’s Government Performance Task Force held a hearing on Social Impact Bonds. The hearing, titled “Investing in What Works: Exploring Social Impact Bonds,” was an exploration of the SIB model and its perceived benefits and downfalls. Although the committee heard testimony touting the many benefits of SIBs, slighted government accountability and responsibility entered the discussion as an undercurrent.
This line of thinking was echoed at the TBLI CONFERENCE USA 2014. During the opening roundtable panel on “Bridging the Investment Gaps of Urban Infrastructure With Sustainable Finance,” questions about regulation and its potential effect on the future of the SIB model were politely skipped over for “another time.”
During the Budget Committee hearing, Sen. Angus King, an independent from Maine, summed up the prevailing subtext: “This just strikes me as … a fancy way of contracting out. And as I say, I don’t believe government contracts very well; the government is always going to be outfoxed on the contracts, in my experience.”
King represents a view that is perpetuated by many others: that the government and the government alone should be responsible for solving social welfare issues. However, in reality, a plethora of nonprofits are tackling pressing social issues more effectively. SIBs provide a way for trailblazing social entrepreneurs and nonprofits to gain long-term funding and government and public approval through a funding stream that focuses on high accountability, but the current grant-based funding structure holds back scale and long-term thinking. Negative perceptions by government concerning SIBs could potentially prevent the development and scaling of highly innovative solutions to social sector problems.
Negative perception of SIBs is echoed by various governments and countries that are piloting this pay-for-success model. On Jun. 19, during a seminar on government and SIBs, Art Eggleton, a Canadian senator and former Toronto mayor, echoed King’s sentiments, stating that he thought “Social Impact Bonds [sound] like a germ of a good idea,” but he’s “concerned about government getting off the hook with social responsibility.”
At present, government’s misunderstanding of SIBs and their innovative approach to social sector problems may have adverse effects in the development of these bonds. Specifically, a low buy-in from government may result in limiting the scale and diversity of SIB pilot programs.
For those who don’t understand the vital role of government in the success of SIBs, Harvard Magazine provides a simple but thorough explanation.
SIBs offer governments a risk-free way of pursuing creative social programs that may take years to yield results. Usually, governments decide what problems they want to address and then enter a contractual agreement with an intermediary (or bond-issuing organization) that is responsible for raising capital from independent investors, including banks, foundations and individuals, and for hiring and managing nonprofit service providers. If the project achieves its stated objectives, the government repays the investors with returns based on the savings the government accrues as a result of the program’s success. (Taxpayers also receive a portion of the budget gains in the form of freed-up public resources, though the investors may need to be fully paid out first.) A neutral evaluator, agreed upon by both parties, is hired to measure the outcomes and resolve any disputes that may arise.
As the diagram and explanation above show, the government plays an integral role in the establishment and potential success of SIBs. However, the necessary buy-in may be needed at multiple levels of government. Jeffrey Liebman, director of the Harvard Kennedy School’s Social Impact Bond Technical Assistance Lab, a research and implementation organization that works with governments in the U.S. to implement SIBs, says that “most of the activity in the U.S. on this is coming from innovative governors and mayors who are trying to find some sort of technique to tackle problems more effectively.”
Liebman is working with 12 U.S. local or state governments to implement SIBs. One of the most well-known SIBs was launched by New York state, Bank of America Merrill Lynch, the Robin Hood Foundation, the Rockefeller Foundation, Chesapeake Research Associates and Social Finance to address the problem of recidivism. The SIB will provide $13.5 million (U.S.) over a 5½-year investment life to expand the work of the Center for Employment Opportunities, a world-class provider of evidence-based training and employment programs to recently incarcerated individuals in New York state. This flexible, multiyear funding will cover the full cost of the center’s program work and core costs. The center’s preventative program will assist 2,000 individuals over a four-year service period to break the downward cycle of recidivism while obtaining gainful employment for individuals.
Although this clearly demonstrates that there is buy-in at local, municipal and state levels, a lack of buy-in at the federal level may ultimately prohibit the growth and diversity of SIBs.
Liebman explains that cost savings and payment may be occurring at different levels of government. For example, governments are undertaking “investment in early-childhood intervention, where in [this] case there would be health care savings and two-thirds of the savings are going to go to the national government and one-third to the state, and, even though the total benefits for the project exceed the cost, the state benefits of the project don’t exceed [their] costs.”
As Liebman justifiably puts it, unless the federal government is willing to be a partner … to be willing to pay their share of the performance payments, we are not going to get those projects off the ground.”
Liebman’s nuanced understanding of the different levels of government support that are needed reveals that the federal government, in both the U.S. and Canada, is instrumental in launching innovative SIB programs. A lack of support and trust from the government will surely inhibit the development of diverse SIBs that address issues beyond easily quantifiable challenges such as recidivism.
For example, in Canada, there is a clear need for affordable and supportive housing, with a recent report titled “State of the Nation: Impact Investing in Canada” estimating an extreme funding gap at $200 billion (Canadian) a year. However, in Canada affordable housing is an issue that is addressed mainly at the municipal (but also the provincial and federal) level. If the government contracted a service provider to address mental health or homelessness through an SIB, potential cost savings could be gained at every level of government that deals with affordable housing.
Consequentially, municipal and federal government departments that realize cost savings would have to pay out the investors, pending the success of a SIB program. If government buy-in at the federal level did not exist, a municipal government may not be inclined to launch the SIB if it is solely responsible to paying investors. Therefore, a lack of buy-in may be prohibiting the development of more diverse innovative SIB models that address systemwide issues.
Although members of government feel that SIBs shift accountability away from government, Liebman says there still may be hopes for reversing that the thinking. “We do need to get the federal government there. … The way to get the federal government there is not by, honestly, showing up and testifying at hearings but by actually getting projects to work on the ground so that they are seeing [change] in their states,” he says. Once the federal government realizes “that this is actually a tool for innovation,” it’ll become something they’ll want to take on. It’s possible to get there, it’s just going to take a while. And it surely won’t be because of the government.