• Opinion
  • March 20, 2019
  • 6 minutes
  • 1

Are social impact bonds simply too good to be true?

Opinion: Monetising welfare gains can turn the vulnerable into investment targets


This piece was written by Professor Mildred E. Warner and Allison E. Tse, Cornell University. For more like this, see our public private partnerships newsfeed.

Imagine a world in which multinational investment firms teamed up with city and state governments to provide the public goods that we need most — education for our children, housing for the homeless, or a new start for the formerly incarcerated.

This is the dream of advocates for a new kind of public financing: social impact bonds (SIBs).

While not a bond in the conventional sense, SIBs are a performance-based contract used to secure private investment for important social programs. If the programs deliver on pre-determined goals, then the public sector pays the investor a return.

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Social impact bonds represent a promise and a risk. The promise is to attract new private investment for social programs that work, expanding critical services and saving society money in the long run.

The risk is that by monetising welfare gains, they turn our most vulnerable (children, elderly, homeless, formerly incarcerated) into voiceless investment targets for private finance.

Our recent article in the Journal of Urban Affairs, The Razor’s Edge: Social Impact Bonds and the Financialization of Early Childhood Services, highlights the razor-thin margin of societal benefits that SIBs might produce. The requirements of short-term, financial returns to investors and quantifiable outcome metrics can make SIBs narrow, inflexible, and short-sighted.

But our research also shows they can be designed to achieve broader impact, if attention is given to long-term, sustainable public funding and policy change.

Profit incentives… shift public values toward private ends

As the number of SIBs grows around the world — over 100 by 2018 in countries from the United Kingdom to Peru to Japan — so too does the evidence that questions their effectiveness.

A recent Canadian documentary, The Invisible Heart, attempts to untangle the complicated bundle of risks and rewards that SIBs encompass. The film examines SIBs from design to implementation, through the eyes of clients and service providers, as well as government leaders, venture capitalists, philanthropists, labour leaders and academics, many of whom question the impact of profit incentives on the delivery of social services.

Profit incentives may create new ways to pay for social welfare, but they also shift public values toward private ends. Inviting powerful investors into public services for the most vulnerable members of society may mean inviting a Trojan Horse through the front door — a Trojan Horse that only supports profitable social services and narrows our conceptions of what social welfare should mean.

Critics have shown that the discrete, quantitative outcome metrics that SIBs rely on risk shifting the attention within social programs to only what can be easily measured, instead of comprehensively serving needy families and individuals.

The SIB mechanism is driven by metrics to trigger payment. These narrow metrics conceal an internal logic that translates the broad public value of social welfare into more limited private values of financial worth. This danger should caution SIB designers.

However, SIBs, if well designed, could help expand support for critical social services. Lessons from SIBs in the early childhood sector demonstrate how strong state actors and coordinated networks of social advocates can work together to scale up policy change and secure broader public investment for the future, especially in politically conservative states.

Providers, policymakers and concerned citizens should be cautious

Two SIBs in the US have made progress toward shifting public funding at the state level to expand access to early childhood healthcare and preschool, through strategic design choices in how their projects were structured.

SIBs must overcome their internal risks if they are to achieve promises of broader social impact. The details of local context, contract negotiation, and program design determine on which side of the razor’s edge SIBs fall — whether they use the market to broaden social rights and investment or merely to extract resources from the public sector and squander investments on narrow solutions.

Providers, policymakers and concerned citizens should be cautious when considering whether to walk the razor’s edge of financialising social services through SIBs — they may be too good to be true.

Our article, The Razor’s Edge is available as open access. The film, The Invisible Heart, is available for educational and community screenings.
— Mildred E. Warner & Allison E. Tse

(Picture credit: Unsplash)


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