Are Social Impact Bonds immoral? (Social Finance)

A couple of days ago Steve Moore pointed me to a blog: “The Immorality of innovation – the Tale of Social Impact Bonds” and wondered what I thought about it. I was dismayed to read such a one eyed piece that actively avoids taking a practical look at whether SIBs are effective or not and instead attacks them ideologically. There have been a few pieces around like this recently, so it feels time to respond.

The principal allegation is that vulnerable people will be treated as objects to serve the profit of some speculative investor. It isn’t true. Unless Social Impact Bonds put beneficiaries and their needs at the centre of the programme, they cannot work. All Social Impact Bonds are designed to respond to the challenges that individuals face by delivering tailored support.

The supposed profits that investors make, are compensation for the risk they take in paying for untested interventions and providing upfront capital to voluntary organisations.  It is not about making money out of misery or commoditising individual distress. Any investor looking for a quick buck should look elsewhere as there are much easier and less riskier ways of making money. What Social Impact Bonds are trying to do align finance with social purpose. Finance always follows social purpose – not the other way round.

Perverse incentives remain a key concern. What we seek in developing SIBs is alignment. Alignment between the outcomes for payment with the needs of the individuals in the programme. Alignment in interests and values between the service provider and the needs of the population they serve. Alignment between the investors’ values and the needs of service users.

Almost all SIBs have had investors with charitable or social aims. Any profits from the programmes are typically going back into socially positive activity. The foundations who invest are clearly aligned. The impact investors usually have foundations as their underlying investors and missions to achieve positive outcomes. Where there has been more commercial or bank capital it has been to provide the secured, lower risk capital that doesn’t influence the programme.

So having aligned investors and outcomes with the needs of the populations served, the final piece of the puzzle is to ensure that the governance of the programme is aligned with those needs. The governing bodies of the SIBs we set up have a mix of people on them, sector specialists in the area of work, investors keen to see the programme succeed, and an independent chair. So if misalignment occurs it can be carefully managed.

So what are we trying to do with SIBs?

SIBs are about enabling positive social change. Government is generally cautious on spending money on new programmes, and when it does it often over specifies what it is looking for in a way that stops programmes from learning or improving the service they provide over time.

SIBs address these issues by allowing government to pay for the outcomes generated by a programme, not the inputs and processes that sit within it. This allows government to try things it wouldn’t try otherwise and it allows providers to focus on outcomes, adapting their programmes as they learn, rather than just sticking with what they were told to do. For organisations frustrated with restrictive contracts, or finding it hard to get government to engage, this model has proved very helpful. It solves a problem.

The finance is simply needed to make the thing work. Investment provides the money before the outcomes are paid and therefore takes the risk that they will fail. This does tend to add some additional rigour, as investors are likely to want to know how things are going and would look to implementers to try to improve their programme in the event it’s not as successful as originally envisaged. But we must careful to ensure that this is not an investment product – this is a social change programme and social activists need to claim it back from the financial community.

What’s wrong with the current system?

I take issue with the implicit assumption that most traditional government grant programmes are effective. As colleagues of mine who previously worked in the public sector tell me, Social Impact Bonds are more carefully thought through and monitored than a normal public sector programme.

There are serious perverse incentives in the present system. It can lead to bureaucratic one size fits all services that are ineffective, provided to deeply vulnerable people, delivered by overstretched, inexperienced staff who become inured to the pain surrounding them. Often government targets are too narrow and too short term. It would be wrong to hold them on a pedestal.

Many services on offer, whether delivered through the public sector or the voluntary sector, are not actually effective in achieving their goals. Why? They lack feedback and accountability. Social services are defined by one characteristic – the people who receive the service are not the ones who pay for it. With normal services there is a really quick feedback loop to the provider if they are no good – people stop paying for them. So if public or social services are poor, how do we find out? If they are mainstream services like schools and hospitals then the democratic process can provide a feedback loop to improve them.

The services for marginalised groups are too often not seen as a political priority, are not used by the majority of people and are not noticed if they are frankly not good enough. I’ve walked round orphanages in Romania with managers explaining why these deeply damaging institutions should be kept open despite all the evidence to the contrary. I’ve seen how voluntary sector provision can become focused on the people who walk through the door, with the wider population they are meant to be serving ignored. And I’ve watched programmes get diluted to save money without anyone checking whether they actually work in their new form.

There is an understandable concern that we will measure what is easy and not what is important.  Many scale payment by results models have fallen foul of this issue.  We have sought to resolve it through adding risk capital from people who care about real outcomes, but it is an area to continue to test.

So, no I do not think it is immoral to start measuring things, to focus on whether services are working, and to bring in a new set of actors that care whether services are good or not. Frankly I find it unethical to continue providing poor services to poor people and to complain at anyone trying to improve it.

Over promising

SIBs are not for everything. The roots of most social problems are structural, from economic forces and market failures, to political systems, to socio-cultural factors. We have never suggested that SIBs are appropriate for complex problems with uncertain influences or outcomes.  It would be irresponsible to do so precisely because of the complexity of underlying factors. What we are doing is identifying issues that should be but are not being addressed for those with complex needs.

Social Impact Bonds are part of a wider process for getting government more focused on the outcomes it is delivering and becoming more aware of the costs, both social and financial, of poor services to vulnerable people. As results are emerging real on-the-ground research is needed to improve them and to learn from early models.

I think that any critique of SIBs should be grounded in an understanding of what those us involved in the journey are seeking to achieve and how we are learning and adapting our approaches as we seek to achieve these better responses to significant social challenges.  Progressives, those who are trying to improve the world we live in for all of us – not just for the rich, should be building on each other’s ideas or at least giving them a chance to prove their worth. Now, with the world veering dangerously towards nationalism, where populism is making politics inward looking, and where the poor, refugees, marginalised groups, are likely to get a worse deal is this the time for in fightingThere are plenty of sensible critiques to make, and issues to resolve around any innovation. But declaring another group of people trying to improve the world immoral? I think that’s pretty poor.

Toby Eccles, Development Director, Social Finance

This blog was posted in response to The Immorality of Innovation – the Tale of Social Impact Bonds, by Meghan Joy and Dr. John Shields, on The Policy and Politics Blog.