Scottish independence: The unintended consequences of Brexit on SIBs (Urban Institute)

By Sarah Guminski

On June 23, the United Kingdom voted to leave the European Union, sending the financial and political world into a frenzy.

Although a formal “Brexit” will not happen immediately due to the complex process of severing EU membership, global spillover effects are already brewing, including the resurgence of Scottish sentiment to leave the U.K. This potential consequence raises serious questions about government-financed projects, including pay for success (PFS) projects, also known as social impact bonds (SIBs).

One of the 32 existing SIBs run out of the U.K. Cabinet Office’s Centre for Social Impact Bonds (CSIB) is a U.K.-wide initiative to reduce barriers to child adoption called It’s All About Me (IAAM). This SIB aims to place looked after children, or children held in state care, in permanent homes by utilizing economies of scale to connect children in need with adoptive parents across all four U.K. nations (England, Scotland, Wales, and Northern Ireland).

The participating Voluntary Adoption Agencies (VAAs) offer specialized training in therapeutic parenting and support for adoptive parents for two years after a child is placed to improve outcomes and reduce the cost of publicly funded care for parentless children. Although contingencies for unexpected events vary by contract, it is possible that Scotland’s potential separation from the U.K. would leave Scottish children and adoptive parents ineligible for participation in IAAM.

This is a salient reminder of the risk associated with SIBs and PFS projects: There is always a chance that political upheaval will disrupt the initiative, affecting the people participating in the program and the integrity of the evaluation measuring the program’s success.

In the case of IAAM, Brexit could also disrupt the cost and benefit estimates that were calculated using the entire current population of the U.K. For example, the initial outcome payment projections estimated that over the ten years of the program, 650 children will be placed in permanent homes. Since adoption information is private, the geographic distribution of these children is unknown; however, if they were equally selected based on the size of each country’s population, about 50 (8.3 percent) of them would be Scottish.

According to the CSIB, local governments agreed to pay £54,000 per successful child placement to the VAAs. This sum is about half of what it would cost to keep a child in government-funded care for the same two-year period–putting potential government savings at £2.7 million if the project is successful in finding permanent homes for those 50 children.

On the one hand, Scottish independence might just mean that 50 more English, Welsh, and Northern Irish children will be placed in permanent homes. However, since local governments are responsible for the outcome payments, this could force an additional £2.7 million burden on governments that might not have budgeted for it.

Although the savings to each of these governments should be double what they have to pay out, short-notice policy changes might pose a liquidity problem.

On the other hand, if the VAAs in the rest of the U.K. cannot increase their capacity to serve more English, Welsh, and Northern Irish children, then the decrease from 650 to 600 total placements would result in a similar decrease of £2.7 million worth of government savings because those additional 50 children will remain in public care.

Beyond current projects, even the threat of Scottish independence could affect future funding for SIBs in Scotland through the CSIB.

In early 2016, the CSIB opened an application portal for stakeholders to register interest for “locally commissioned SIBS in complex areas,” and allocated £80 million for these projects. The application requires candidates to indicate which region of the U.K. the project will serve, so it is possible stakeholders will not take a chance on Scottish proposals, knowing that the country could leave the U.K. before the SIB is complete.  

Technically, the EU referendum is not legally binding, and David Cameron has stated that he will leave the decision to trigger article 50 of the Lisbon treaty up to his successor. However, this is a reminder that good governance and thorough contingency planning is crucial for the stability of SIBs and PFS projects globally. 

As an organization, the Urban Institute does not take positions on issues. Scholars are independent and empowered to share their evidence-based views and recommendations shaped by research.