Social Impact Bonds: Promises and Pitfalls - Expert Seminar - Expert seminar with the financial support of the European Commission - 15 April 2015, Paris, France

1. WILL SOCIAL IMPACT BONDS CHANGE POLICY FOR THE BETTER?
Dan Gregory, Paris, April 2015
COMMON CAPITAL
Mutual and social enterprise
Funding and finance
Policy and practice

2. SHORT ANSWER!
• They won’t change very much
• If they do, this may not be entirely for the better.
Excessive hype has misled us. The potential for SIBs
may be quite limited because of issues with cost,
difficulty and future popularity.

3. HYPE
For example…
• SIBs are in the Tory manifesto but no mention of co-operatives or
much on the role of charities in public service delivery for instance.
• Politicians argue that “UK leads the world in social investment
because we have more SIBs”
• Media articles suggesting “SIBs can help prevent the next Rana Plaza
in Bangladesh”

4. JUSTIFED HYPE?
1. These models are not so new. Clara Miller describes energy savings models from the
70s which tuned out to be too complex and involved just 2 or 3 parties and some
heating equipment.
2. SIBs are largely just the singular of Payment By Results. A successful SIB would lead
to a programme of PBR not more SIBs. PBR has been around for a while, hasn’t really
taken off and lots of people hate it.
3. SIBs only work in certain circumstances. Social Finance themselves say only when:
• we have an objective mechanisms for assessing and agreeing outcomes
• target groups are identifiable and large enough
• benefits accrue In cash…
• …and in reasonable timescale
• to just one or a few budget-holders
• we have a model of intervention that works
• and costs less than the savings

5. COST ISSUES
• Returns need to be high enough to attract investors
• Yet no-one can access finance cheaper than the Govt. So arguably
SIBs only make sense when models are unproven.
• Even then they may not make sense. In the long run, investors will want
to see returns average out high enough across the ‘asset class’ to
again, put average returns above rate at which government can borrow.
• Even if somehow returns were not too high, they are perceived to be too
high (as per PFI) which compromises their popularity and potential
• Risk is not always shared appropriately. In some US models, investor
risk appears to be almost entirely underwritten by others. Clara Miller
agues that “Non-profits often take more risk than they should, and
investors take less”

6. COSTS TO THE STATE
• Some examples in the UK where government pays for investment readiness, government pays
if it works, government provides some of the investment and government provides a tax break.
Significant costs to taxpayer and transaction cost.
• Sometimes various public agencies need to join up budgets to make a SIB work. It’s difficult
enough getting two budget holders to join up normal budgets let alone longer term ones.
• Lack of clarity over whether future costs are off balance sheet or sometimes unaccounted for
i.e. factoring in redundancies, impact on those who lose jobs, etc.
• Significant measurement and monitoring, inspection and attribution costs. I.e. CAF say they
need to see 6.5% return to break even with a zero cost of capital. Sometimes its just so
complex its too costly.
• Homelessness SIB evaluation says “There was a significant amount of work involved for both
commissioners and providers in developing a SIB and the payment mechanism for a PbR
approach.”

7. DIFFICULTIES AND COMPLEXITY
• Complexity. People are more complex than bacteria, social programmes are not
vaccines, homeless people are not a disease. Evidence can be as unreliable
and contingent as humans are irrational and unpredictable.
• Perverse incentives – gaming, creaming and parking.
• Unintended consequences – means and ends. When is impact? Even if x leads
to y, might y not lead to z? i.e. Zhou Enlai said it was too early to tell the impact
of the French Revolution.
• Can we ever really know what would have happened otherwise? We may make
a saving we may have made anyway because something else happened. New
tech emerges, economy blossoms or collapses. The likelihood of success of an
intervention shifts.
• RCTs are not the answer to everything and not all SIBs have RCTS. WHO say
“As the complexity of interventions or contexts increases, randomization alone
will rarely suffice to identify true causal mechanisms.”

8. POPULARITY RISKS
• Clara Miller says risk of focusing “resources on remedies that have the most reliable and short-
term savings.. where the remedy closest to the incurred costs, and the financial savings high and
relatively easy to measure.” Suggests we should “leave old people to die outside the igloo”.
• Backlash to NPM. Commodification of social outcomes, contractual and transactional approaches
can undermine and erode reciprocal trust-based relationships and public service ethos. See the
likes of Jon Cruddas and John Seddon putting emphasis on incentives, governance and
ownership rather than targets and metrics. NB the evaluation for the London homelessness SIB
suggested that the ethos of the provider organisations was critical
• Ideological hurdles for some (many?) people:
• turning not-for-profits into for profits through an intermediary
• backdoor privatisation as SIB leads to PBR leads to open tender lead to private sector role
• if savings go to investors this implies the state is spending less rather than spending savings
on other ways to improve lives
• Cultural problems - suspicion of ex-City folk and government right wing agenda
• Giving – do I give less to St Giles because I think it will be used to lines investors’ pockets?

9. CONCLUSION
Criticisms of PFI included
•investors making too much money out of the scheme
•perverse incentives
•‘off balance sheet’ problems when financing costs are higher than government borrowing
•risk is not really transferred to private partners
•problems with the way costs and benefits for projects are calculated
•refinancing gains
•lengthy and costly procurement which discourages competition and leaves the usual suspect
contractors
•a lack of accuracy and transparency
PFI has learned to evolve - we have some new models with community ownership, not-for-profit
models, profit caps, PF2, etc. Yet it is still widely loathed!
If SIBs are to succeed they need to learn the lessons from PFI.

10. RECOMMENDATIONS
1. Don’t throw hundreds of millions of taxpayers money at an idea
before we understand it better.
2. Learn from PFI and from SIB critics. Listen. More transparency and
genuine engagement.
3. Stop the hype. Stop irresponsibly triumphantly peddling a model
around the world.
4. Government and Lottery should put half resources they put into
SIBs into models like Alliance contracting, multi-stakeholder co-
operative models, transparency in public services, new governance
models and into understanding how values, behaviours,
ownership, co-operation, openness, transparency, partnership
accountability and trust can improve public services.

11. THANK YOU!
dan@commoncapital.org.uk
@commoncapitai