• Opinion
  • April 10, 2019
  • 8 minutes
  • 1

How to overcome three common challenges of social impact bonds

Opinion: For anyone new to the approach, SIBs seem very complex

This piece was written by Rachel Wooldridge, research manager at Ecorys UK. For more like this, see our public private partnerships newsfeed.

Social impact bonds (SIBs) provide an opportunity for public service commissioners (or outcome funders) to address some of society’s most complex issues, while only paying when outcomes are achieved.

However, for anyone new to the approach, a SIB seems to be very complex. When designing one, there is a lot to think about, from defining and pricing outcomes, to developing an intervention model and procuring a service.

Unlike other commissioning approaches, commissioners have to consider how they work with other stakeholders, like investors. Even the language can be confusing — after all, SIBs aren’t “bonds” in the traditional financial sense.

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For several years, through a number of research studies in the UK, Ecorys has been reviewing the evidence base and talking to commissioners about the challenges that they face when developing a SIB and what they have done to overcome them.

These are the three main things we have found:

  1. Not knowing enough

Commissioners struggle with a range of different aspects of SIBs, most commonly around how to test whether a SIB is feasible, how payment levels and mechanisms are agreed, how risk is split between different parties, and how and when commissioners should start working with investors.

These are all issues that those designing the SIB need to get their head around, not only to ensure an efficient development process, but also to enable them to communicate the need for a SIB to the non-experts who hold the purse-strings.

Gaining the knowledge needed to develop a SIB does take time

Gaining the knowledge needed to develop a SIB does take time, and commissioners should build in time and resource to upskill staff. While commissioners usually need to account for this in their budget, governments and other large funding bodies can kick-start the process to help commissioners draw on support to address a gap in their knowledge.

This has happened in the UK, where commissioners have been able to draw on funding (through pots such as the Commissioning Better Outcomes Fund, or the Life Chances Fund) to access technical support from specialist advisors.

Although the technical aspects of SIBs can seem daunting, commissioners that have gone through the process have told us that these aspects are usually the easiest to manage, because they can draw on specialist advice if needed. Instead, the partnership working that is required for SIBs is usually the more challenging aspect for commissioners.

  1. Getting buy-in from key people

Perhaps one of the most challenging issues that commissioners face when developing SIBs is getting buy-in from people within their organisation. Often these people — such as political representatives, policy area leads, or finance directors — need to be engaged to even get the SIB off the ground.

We have found that where commissioners struggle to get buy-in from these stakeholders, it’s because they have an ideological or ethical opposition to SIBs (seeing them as a form of the privatisation of public services) or because they do not understand them.

A key way that commissioners have tried to overcome this challenge is to get the key people involved right from the beginning. Setting up a “working group” with individuals representing different departments in a commissioning organisation (like finance, procurement, legal and policy) who come together regularly helps all parties gain a better understanding of the development process.

They can then share this knowledge with their respective teams, meaning learning around the SIB commissioning process can be shared.

  1. Balancing different stakeholders’ needs

Through the SIB development process, commissioners have to not only work with people within their own organisation, but they also have to encourage investors to be involved and reach out to potential providers of the service.

Commissioners and sector experts have told us that they often struggle with knowing how to approach investors because they don’t know what rate of return investors might expect on their investment and how this will impact on how they price outcomes.

In these instances, commissioners have brought on specialist advisors who can bridge the gap; advisors will explain investors’ terms and conditions in a way that is understandable to commissioners and can advise on what rates-of-return will make a SIB affordable.

SIBs also introduce a new dynamic between commissioners and providers. Often commissioners will leave the specific design of the intervention to the provider, and to get the most effective interventions, commissioners need to encourage a range of providers to bid for the contract.

Smaller providers have shied away because of the SIB language and narrative

This has been a challenge at times in the UK context, because smaller providers have not been as involved in bidding for SIBs as initially anticipated. We’ve been told by sector experts and commissioners that smaller providers have shied away from the market because of the SIB language and narrative. Commissioners have told us that holding “market engagement” days can help mitigate this issue because they are able to talk through the rationale for the intervention and what they hope to achieve.

By being prepared for these potential challenges, commissioners should be better placed to develop a SIB. But perhaps there is a bigger lesson here. Often underpinning these challenges is different stakeholders’ lack of understanding about SIB language — their focus is on the financial instrument, rather than an approach that can focus efforts on achieving better outcomes.

Our evidence suggests that a possible way to overcome this, and thus support commissioners’ uptake of the approach, is to reframe the narrative away from “SIBs” and towards social outcomes contracts. — Rachel Wooldridge

(Picture credit: Unsplash)


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