SIBs and the role of private capital

The Social Impact Bond (or ‘SIB’ for short) has long been the darling of politicians and policy makers. Sir Jeremy Heywood, head of the civil service, wrote proudly a couple of weeks ago about how “the UK is leading the world in this area”, with 32 SIBs live across the country and lots more in development. This oft-repeated statement always sits uncomfortably with me. While the jury is still out on the effectiveness of the SIB model, the government is staking its international reputation to further roll-out, making any deviation from this policy direction extremely difficult.

Last week, at a roundtable event organised by Oxford University, we got a much more balanced view from academics who have conducted objective evaluations of a set of different SIBs and the role of private capital. It was a fascinating discussion amongst academics, practitioners and investors, with refreshing honesty about the challenges and problems.

‘Private’ capital?

Over the last five years, one of the central arguments for the SIB was that it would harness private capital to promote innovation in service delivery and enable greater social impact. The first observation was that it’s debatable how much harnessing of genuinely private capital has actually happened. The research shows that most funding for SIBs has come from ‘social investors’ motivated primarily by social impact rather than financial return. These investors were willing to take lower returns and often happy just to get their initial investment back to ensure that projects remained viable and social impact was created. Attempts to raise commercial finance were generally either unsuccessful or the money was offered with unacceptable terms. The conclusion was that SIBs are too risky a proposition to ever attract genuinely ‘private’ finance. This presents a serious question about the potential scale of a market that relies on a very narrow band of social investors.

There is also a question of whether commercial, profit-driven investment would ever be appropriate, even if the issues of risk and return could be managed. In a number of SIBs, service delivery organisations had the opportunity to help certain beneficiaries even though this wouldn’t trigger any additional payments – either because the level of outcomes achieved had already hit a fixed cap, or because the support would benefit the individual but wouldn’t deliver the specific outcome to trigger the payment. The researchers noted how socially-motivated investors in these instances agreed to allow the services to continue, even though it would lower their returns. The SIB premise is supposed to be that financial and social goals are aligned, but clearly this isn’t always the case. Trying to attract investors with a mix of social and commercial motives could become a recipe for conflict.

It’s not about the money

Setting that aside though, the question remains whether the provision of finance from third parties (or ‘external capital’) has delivered the promised enhancement in outcomes. And so far, the answer seems to be that there’s little evidence that external capital per se leads to more innovation and more impact.

Indeed, external investment can actually prove to be problematic at times, resulting in tension between investors and delivery partners. In interviews, some investors expressed the view that they were helping delivery partners to become more sustainable and professional, implementing a rigour that would help them in future. But those on the other side reported feeling more restricted in their activities and burdened by the level of reporting expectations. One even described the need to ‘fend off’ investors and protect frontline staff from pressure to deliver outcomes.

That’s not to say that SIBs haven’t promoted innovation. Daniel Edmiston at Oxford observed that “SIBs do appear to have the capacity to foster innovative outcome-focused service interventions”. However, the research suggests that this innovation is mainly down to the novel and experimental way that public sector bodies have created payment-by-results contracts, not the presence of private capital.

It’s also clear that SIB interventions are definitely delivering impact. Edmiston says (in typically understated academic fashion), “outcome-focused provision underpinned by service learning and flexibility has the capacity to produce a number of positive outcomes for target populations”. From the data available it’s hard to say whether the outcomes achieved are better or greater than those delivered through existing service interventions. But again, it appears to be the way that contracts are designed around outcomes, with the opportunity for learning and flexibility that provides, that is the key factor.

What this all means is that we need to get our priorities right. SIBs have been sold to the world on the basis of using private capital for public good. But in fact, what really makes the difference is simply smarter public sector commissioning. Rather than focusing on building social investment models, we should be focusing on supporting the design of better outcomes-focused contracts. And if in some cases service providers need to raise ‘private’ capital to deliver those contracts, that’s just a secondary issue.

Part one of two.


View next: What do we mean by Social Investment? Chapter 1

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