Canadian Research Center Explores Limitations of Social Impact Bonds (Nonprofit Quarterly)


As Social Impact Bonds have spread in terms of their acceptance in a variety of nonprofit, investment, and government circles, there are more reports from policy research centers (as opposed to SIB promoters and institutional investors) exploring the potentials and limitations of the tool. One recent report is from the Manitoba office of the Canadian Centre for Policy Alternatives. The brief report, co-authored by John Loxley and Marina Puzyreva from the Department of Economics at the University of Manitoba, provides useful data on SIBs and some provocative ideas to consider.

On the data side, Loxley and Puzyreva count 23 SIBs in five countries either being implemented or close to being implemented. Fifteen are in the UK, but the four U.S. SIBs they write about involve much more funding: The four U.S. SIBs add up to $57.1 million in comparison to the 15 UK SIBs, accounting for only $54.5 million. Social impact bonds addressing recidivism among people released from prison account for nearly 44 percent of the SIB dollar investments, programs on children 29 percent, and employment 13 percent. Thirty more SIBs are in the works.

The analysis that Loxley and Puzyreva generate hints that SIBs may be something of a new generation of public-private partnerships. They cite Heather Whiteside’s characterization of public-private partnerships “as a specific form of commodification of public services by the private sector, a form of dispossession which benefits private capital at public expense,” an intriguing approach that is just about never heard south of the 49th parallel, where public-private partnerships are viewed uncritically as an automatic good thing.

Like public-private partnerships, where much attention goes into creating “enabling fields” of “legislation, government policy, budgetary practices and institutions and lobbyists,” Loxley and Puzyreva note a similar set of activities worldwide to lay the groundwork for successful SIBs. “There is, indeed, evidence of widespread activity in the development of necessary background supports for SIBs,” they observe, “including significant government subsidization directly through the guarantee of returns to private investors or indirectly through project grants.” NPQ has noted the same in the U.S. in the form of subsidies such as grants from the Social Innovation Fund to SIB packagers and resources from private foundations such as Pritzker, Bloomberg, and Rockefeller that subsidize or guarantee returns to institutional investors.

The two Manitoba economists share Nonprofit Quarterly’s cautiousness about the small sample size of SIBs from which SIB enthusiasts draw their conclusions: “Only six SIBs have been completed and there is information on outcomes for only two of them, but this does not deter proponents from waxing eloquent about the success of the approach.” The same probably applies to SIB skeptics, though detailed information about even the handful of SIBs with significant histories of implementation should point to new areas for research. For example, they quote David Ainsworth in an article from Civil Society, examining the first highly publicized SIB, the Peterborough prison recidivism project in the UK:

“The pricing structure for the first SIB was inevitably pretty finger-in-the-air, because no one quite knew what could be achieved. In order to tempt government into putting up the money, the first SIB made some stretching promises. And even then the Big Lottery Fund had to promise to put up much of the cash to pay for it. As far as I can see, future SIBs have been priced in a way that’s more generous to the investor, and indeed, several of them have already paid out.”

Loxley and Puzyreva conclude with a note of caution about SIBs that seems as much focused on values and ideology as the specific mechanics of SIBs. They cite the opposition of the Alberta College of Social Workers to SIBs because of their opposition to the commodification of human suffering with a concern that “the motive becomes profit, not service.” However, in public policy that frequently involves or even relies on the involvement of private capital, with both liberal and conservative governments almost equally obsequious to the owners and managers of private capital, the primary concern of policy makers regarding SIBs seems to have been making the profits for investors attractive and safe through mechanisms for reducing or virtually eliminating risk or subsidies to boost returns.

What are we testing in the current crop of SIBs? They quote David McDonald, who wrote in 2013:

“There is no free lunch with the social impact bond model. Make no mistake: the government always pays. Even if the project misses its targets, investors will be paid off so that they’ll pony up for next year’s bond. Otherwise, the house of cards collapses.”

That may be the ultimate problem. If the emphasis is to find projects that involve minimal risk and to craft mechanisms that guarantee investors’ returns, Canada, the U.S., and the UK may be missing the boat on deploying private capital to test social programs where private capital might really do good—to front-end ideas that are not so proven as to be nearly automatic, and to provide working capital to the smaller, community-based nonprofits that might have amazing innovations in the works but for their lack of access to the capital markets.—Rick Cohen