Social Impact Bonds – why so slow?

Could Social Impact Bonds be happening more quickly? There seems to be a great deal of interest in the structure and the potential for bringing innovative services to bear on difficult social issues at lower risk to government. But they seem to take a long time to develop. In this blog post I explore why.

Firstly, I don’t buy the theory that this is just how long it takes. The idea is that government is not used to developing outcome based models, service providers are not used to working to them, investors are not used to taking outcome risk so it just takes a long time. All true, but our experience is that each of these can be broken down by effective intermediation and support, in other words, a third party that guides the others through the process to reach a deal. So the real question is – where are the intermediaries and why are they not making more SIBs happen?

Here are some possible answers:

a)      The role of the intermediary is poorly understood. What do they actually do?

b)      Who pays for it? When nobody is sure a deal can be reached, who should pay for its preparation, particularly as early deals are going to feel expensive as everyone is learning by doing.

c)       How does this fit with procurement? Government procurement puts a wall down the middle of the process making consensus based co-development very difficult.

d)      Distrust of those outside government by those inside. A sense that an organisation is focused on its commercial interest so cannot be asked for support.

All of these have some truth to them but in a certain sense they all hinge on a) the role being poorly understood. So why is that the case?

Governments generally don’t quite get intermediation, seeing it as an expense in the middle that is possibly unnecessary. I discussed this with Gary Sturgess, adviser to the New South Wales Government, and former State Cabinet Secretary. His theory was that government doesn’t “see” certain types of organisation and intermediaries are certainly one. Government understands service providers: they do services; and investors: they provide money. But intermediaries? In a certain sense their role is more obviously invading the space normally taken up by government itself.

One of the things I have always found slightly strange in SIBs is how few people ask the simple question: “How did you do it?” You would have thought that the various governments interested in doing them, or the various nascent intermediaries around the world, would have got in touch to find out the activities that were necessary to get the job done.

Holding that for a second, I’m wondering whether this is connected to another surreal debate around SIBs, that of who first thought of them. If you look at Wikipedia for example, and various other publications around the place, there is an attempt by various people to claim credit for the idea. I’ve always found this irritating didn’t want to wade into because a) it feels petty minded and b) we’re grateful to a range of people who contributed to early thinking on SIBs so didn’t want to look like we were joining in the me, me, me thing.

But there is something more fundamental going on that is worth touching on. Why is the debate about who thought of the idea, rather than who delivered it? In every other walk of life the definition of invention surely includes implementation. If you look up the invention of flight or the light bulb, the credit typically goes to those that made it work. But in this context the debate seems to be who first mentioned it in a paper or publication. Does this say something deeper about the social sector that we should all be aware of? Is implementation simply not respected in the same way as it might be in other areas?

To take a different example, when we talk of supermarkets in the UK, we talk of specific brands, of implementations – Tesco, Sainsbury’s, Asda or Morrison’s. The idea that someone could just make their own supermarket to the same standard without access to those companies internal body of knowledge is slightly absurd. Yet in the social sector or governmental context codified models that can be replicated by others are the goal or perceived norm. Imagine if the government was procuring a “social” supermarket. Would it research supermarkets carefully, run a detailed procurement process and hand it to the bidder who wrote down the best answers to its questions (as assessed by someone who had never run a supermarket) and offered the best price? Or would it use information gleaned from going to a bunch of supermarkets and talking to their customers? My guess is the former (I will expand on this idea in a later blog).

I can see the value of codified models from a research and evaluation perspective, then you can run Randomised Control Trials comparing different models. But built up know-how has value in the normal course of business and the micro-developments that individual organisations will learn and deliver should lead to better outcomes.

One of the other impacts I have noticed from this focus on ideas is that much of the commentary on SIBs is focused on the idea aspects without a focus on implementation. So one for example said  something like “the Peterborough SIB is interesting, but I prefer Ronnie Horesh’s SIBs because they can be bought and sold on a secondary market”. All very interesting, but missing the point that one of the key reasons governments may not choose to implement the policy bond model (which I’ve always liked by the way) is the ability that the counterparty has to change through buying and selling the instruments. Government likes to know who it is dealing with. In fact the only way to such a secondary market, I might suggest, is by giving government confidence in the value of the model first, and then start thinking through the implications of fungibility and whether the benefits in terms of scale of available capital outweigh the concerns of policy makers.

So is there a cultural reason why SIBs are taking time? That implementation experience and knowledge is overlooked as those looking to do things start from a focus on the theory, the idea, rather than how it happened? Do procurement processes exacerbate this problem by building the divide further and reducing the perceived value of real world experience? Is the social world obsessed with newness and innovation and ideas, at the expense of effective implementation?

Answers on a postcard please… (or a comment, or a tweet, or an email…)

I know by the way that I am meant to be doing a series on Social Enterprise more widely… And I will, this has just been mulling round my head for a while so I wanted to get it out there. I will also blog on the role of the intermediary …

PS For the avoidance of doubt quite a few people have at various times thought about outcome based contracts or outcome based commissioning, others about government paying for outcome notes that could be bought and sold (Ronnie Horesh), others about structures where there were outcome payers and investors (Arthur Wood and Guillermo Maclean), and again others who were wondering about whether government could pay for preventative work out of the cost savings from reduced acute costs (Peter Wheeler and David Robinson). Social Finance combined its own thinking with the ideas and thoughts of Arthur, Peter and David in developing the SIB and heard about the others later.

Politicos vs bean counters – differing perspectives to cutting costs

A twitter response from Tom Gash (@TGCrime) at the Institute for Government to my last missive got me thinking further about how government allocates resources and perhaps more importantly how government reallocates resources when it is trying to reduce costs and cut back services.

Tom is a thoughtful man, particularly interesting on Criminal Justice. His response to my last blog on using PbR to assess the appropriate allocation of resources between probation/rehabilitation, and prison was “Thanks for this – agree migration strategy essential. You’d forgive HMT for not wanting to gamble on this right now…”.

My first reaction of course was actually no I wouldn’t forgive HMT for not wanting to gamble on this right now. If we are to reduce the costs of government we need to reshape it, and using outcome approaches can give you a low risk way of testing the reshaping of services and changing your resource allocation, without having to dual run prevention and acute services and run the risk of over spend.

I realised on reflection that this misses the point. From HMT’s perspective the normal solution to cutting costs is simply to stop doing stuff. Remove it from the budget and it ceases to be. While there are arguments that such reductions build up cost pressures for the future, they may be un-evidenced and the impact not easily forecast, so may come across as special pleading. This is obviously rather more politically troubling than reshaping services, but it is lower risk from a simple management of inputs perspective. It appears reasonably reliable and you don’t have to spend time doing due diligence on a reshaped model that someone is convincing you will save you lots of money if you only invest now (in fact the old “invest to save” argument has been so often used, so often not saving at all, that one would forgive Treasury for a degree of cynicism).

For politicos the situation is reversed. Simply cutting services is uncomfortable and unpopular. It is therefore a time for buck passing (for example giving local authorities more freedom, aka responsibility, at the same time as cutting their budgets), disparaging the receivers of the service or benefit to be cut, or trying to do it as quietly as possible. Reshaping services behind some grand vision on the other hand is much more interesting.

What are the implications of all this?

–       The first and most obvious is that large scale reshaping is therefore extremely difficult and requires huge political capital. So those areas that don’t get that political investment may end up with standard cost cutting as a default.

–       Second, where wider service reform is brought forward, the bean counters may seek cost cutting at the same time, as part of the deal. For example, the drugs PbR pilots or the present probation work. My suspicion is that this will lead to risk averse behaviour and may not lead to the level of innovation that we’d hoped for.

–       Third, supporting service areas in building their financial arguments around reshaping services would appear to be a useful contribution, as are outcomes based contracts, but as we’ve already seen, these may not be enough.