Why I don't like Social Impact Bonds - Social Policy Bonds

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Why I don't like Social Impact Bonds


This page and the others under the Features head contain posts that appeared first in the Social Policy Bonds blog

When I first came up with the idea of Social Policy Bonds, their tradeability was an intrinsic part of their identity. Without tradeability, the bonds would be little more than prizes awarded to existing service providers for doing their jobs a bit more efficiently than previously. Social Impact Bonds, now issued by several governments are, unfortunately, Social Policy Bonds without the tradeability. They are therefore, in my view, less efficient than Social Policy Bonds at best, and prone to corruption at worst. The scope for gaming is obvious: service providers perform badly, wait till the government issues SIBs, perform better, then cash in. But perhaps more important is the necessity for allowing new service providers - or, in the world of Social
Policy Bonds, outcome achievers - to buy the bonds at any stage and receive extra rewards, in the form of a rise in the market value of their bonds, for performing well. Without tradeability, that won't happen.

The way of the world is that big business and government go hand-in-hand. The way of Social Impact Bonds is is equally familiar and equally dubious: government thinks it knows best who will deliver certain services and rewards them if they improve their performance. Under a SIB regime these will be existing service providers or, just possibly, new bodies upon which the government is equally keen to bestow favour for some reason or other. The whole point of my Social Policy Bond idea is to bring about creative destruction into the achievement of social and environmental outcomes; to subordinate entirely the identity and structure of outcome-achieving organizations to the achievement of our social goals. Under a Social Policy Bond regime the market will reward new approaches and new organizations if they are more efficient than the alternatives. Social Impact Bonds won't do that: existing organizations will be favoured; they will have some incentive to perform their existing functions more efficiently, and only a limited incentive to look at new approaches. For one thing, innovation risks rocking the boat. For another, SIBs, because they are not tradeable, are going to be restricted in their time horizon to that of existing organizations: they will take a short-term view, relative to the complexity of our social and environmental problems. This is a major deficiency: it restricts the scope of the bonds to narrow, short-term goals. As well, the costs of monitoring progress toward such goals is going to be large relative to the sums at stake.

All that said, there are going to be circumstances under which SIBs could show an improvement over existing policy. Not a great recommendation in itself, though such improvement could be valuable to the intended beneficiaries of a bond regime. Take for instance, SIBs targeting improvements in the employment prospects of the mentally unwell in New Zealand. As I write (June 2015) arguments for and against these SIBs are being made. I'm glad that they are controversial, as that means their terms will be carefully defined, their effects closely monitored, and that those in favour of SIBs will want to ensure compliance with their spirit as well as the letter of their redemption conditions. Despite my reservations, these bonds could represent an improvement over current policy. Partly this is because the mentally unwell are so disadvantaged that there is little danger that the SIBs' redemption terms will be satisfied to the detriment of those whose welfare isn't targeted for improvement. Partly because current policy is obviously inadequate. Under these circumstances, SIBs could encourage those already supplying mental health services to do so more efficiently, and to innovate.

Such innovation will be limited, however, compared to their tradeable equivalent: Social Policy Bonds are not limited by the prejudices of government (or anyone else) as to how our goals shall be achieved nor who shall achieve them. So we can target long-term social goals that will inevitably require diverse, adaptive approaches: reduced crime rates, for example, or improved health. We can even target global goals, like human development or the sustained avoidance of violent political conflict. Governments that issue Social Policy Bonds don't have to take a view as to which organizations are best placed to achieve such goals, nor as to how they shall go about achieving them. That work is done by bidders for the bonds who will be motivated by the rewards they get for helping achieve the targeted outcome. Note the word 'helping': a single organization need not achieve the entire goal to be rewarded under a Social Policy Bond regime: helping raise the likelihood of early achievement of the goal will generate reward in the form of the increased value of the bonds they (or a contracting agent) owns. Social Policy Bonds encourage a coalition of interests, whose composition and structure will change in response to changing circumstances, to co-operate in exploring and implementing a diverse, adaptive array of initiatives with the aim of achieving our broad social goals, even ones as seemingly remote and unattainable as universal female literacy or world peace.

For more on this see
the preceding page on this site: Why the bonds must be tradeable. Also see various other blog posts. For another critical view of SIBs (in New Zealand) see here.

This page updated 4 October 2016

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