• Opinion
  • April 30, 2019
  • 9 minutes
  • 0

What’s the point of a social impact bond if government is doing well?

Opinion: SIBs are complements not substitutes to innovative governments

This piece was written by Kevin Tan, founder of Tri-Sector Associates, and Sikai Chen, project leader at Tri-Sector Associates. For more like this, see our public private partnerships newsfeed.


In the 10 years since the first Social Impact Bond (SIB) launched in the United Kingdom, SIBs have been replicated around the world. Each jurisdiction has added its own adaptations to the terms, structure and issue areas of SIBs.

We believe it is critical to also adapt the rationale behind the use of a SIB. Getting the rationale behind SIBs right will be key in developed East Asia, where we work, but should also be of interest in more mature ecosystems to help this powerful tool reach its full potential.

In the West, the narrative around SIBs can sometime start from a negative place about the effectiveness of government. Yet in developed East Asia, government is mostly viewed as an effective force for good. The rise of the four Asian Tigers is a classic story of government-led development. In Singapore and Hong Kong, the government runs consistent budget surpluses.

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Drawing on the Confucian tradition of highly competitive selection of the bureaucracy, governments in this region are often seen as a prestigious employer, allowing them to attract the brightest minds. In Japan, leaving a government post for the private sector even has a special word for it: “amakudari”, or “descent from heaven”.

Why then should an effective and well-resourced government in East Asia go through the effort and expense of developing a SIB?

SIBs are an innovation tool for governments at the frontier of policymaking

The answer is that SIBs are an innovation tool for governments who are already at the frontier of policymaking. The tool works by tapping into the collective resources of society in a way that plays to each party’s strengths. This is necessary as the next wave of social problems demand solutions that even the most sophisticated governments cannot — and should not — take on alone.

This is true firstly for instrumental reasons. The overall forces that have made the world more complex apply to social problems too. But this complexity is compounded for social problems, such as mental health issues or drug addiction, because the underlying causal mechanisms are the highly unpredictable and interdependent fields of human psychology and social relationships.

This makes it difficult for governments to implement a traditional top-down solution, no matter how well-designed. Instead, a SIB allows for tailored solutions to emerge from the bottom-up, while providing a mechanism to determine which ones are effective.

It is also true for intrinsic reasons. Across the world, there has been a backlash against national governments by elites. The next wave of social problems will be even more resistant to top-down solutions from elites, because in many cases solving such problems involve difficult trade-offs that benefit some groups and cost others.

The next wave of social problems will be even more resistant to top-down solutions

The best way to make progress on these issues is for citizens to make such hard choices for themselves. A SIB can serve as a platform that allows different parts of society to be part of the same solution, and thereby own the results.

The idea that government cannot solve problems on its own is not new. A hot topic in academia is “government as a platform”, or “governance beyond government”. Many East Asian governments have recently encouraged the development of solutions from civil society, such as via social enterprises.

The difficulty is in implementing the concept of “co-creation” in a way that provides benefits beyond what each sector can do on its own. This is where we believe a SIB can play a unique role amongst the various tools in the policy toolbox.

What, then, are the comparative advantages of each sector of society? The public sector has scale in funding, as well as administrative data needed to rigorously measure impact. The people sector (or third sector) has proximity to the ground and purity of intent. The private sector has an appetite for risk-taking, a strong accountability mechanism and is quick to adapt.

What makes a SIB unique is that it can bring the different sectors together and play to their strengths in a cohesive manner. The people sector creates bottom-up solutions and delivers services. The private sector absorbs the risk of non-performance and provides incentives for ongoing improvement. Finally, the public sector measures and scales the most effective solutions.

If this analysis is correct, what are the practical implications in terms of who should use a SIB, and for what issues a SIB should be used?

Jurisdictions that benefit most from a SIB are those where citizens expect their government to bear primary responsibility in solving social problems, but where the people and private sectors have not yet fully played to their strengths.

SIBs can bring different sectors together and play to their strengths in a cohesive manner

To generalise, this is reflected in the East Asian context. Here, governments have traditionally been primary solution providers, with government social spending exceeding charitable giving by over 10:1 in most jurisdictions. At the same time, government’s size and effectiveness has crowded out other sectors or turned them into followers; “hands” or “wallets” to the government’s proposed solutions.

Additionally, SIBs are best used in issue areas where the government feels like it has already reached the known limits of policymaking. This would include areas where effective and replicable solutions have yet to be found. For example, reducing drug recidivism, controlling chronic diseases, employing the disabled, or delaying elderly frailty, just to name a few.

As importantly, this would exclude the provision of essential services such as housing, healthcare, and education — services that good governments have already shown they can provide efficiently via direct intervention.

We should not forget that SIBs are just one tool in a broader policy toolbox. In the long-run, as SIBs help to generate new solutions that work, these solutions should be incorporated into mainstream government subvention. This will allow SIBs to be used in their role of maximum utility, as a way to push the frontier in new issue areas.

In East Asia, where our firm, Tri-Sector Associates, is helping to develop pioneering SIB projects, we hope to repurpose the powerful SIB tool to serve a pressing need in our societies: to solve the next wave of social problems, by solving them together. — Kevin Tan & Sikai Chen

(Picture credit: Unsplash)

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