Social Impact Bonds: Emperor’s new clothes or the next stage of responsible capitalism?

Social Impact Bonds (SIBs) are taking the world by storm. Versions of this contract have been cropping up everywhere from the UK[i] to the USA[ii], Australia[iii] and even South Korea[iv], but what exactly are SIBs? And what do they mean for the UK public sector?

SIBs are an innovative way of leveraging funds for public sector initiatives. Now also variously referred to as Pay for Success Bonds, Social Benefit Bonds and Social Policy Bonds, all of these schemes are essentially a version of Payment by Results for investors. Private and third sector individuals and organisations are able to invest in public sector backed initiatives by purchasing SIBs. After a fixed time period the impact of the service/initiative is assessed. If it can show it has achieved specified social outcomes (and therefore a long term saving for the state) the investors receive a return[v]. If not, they do not.

The theory is simple; ‘let the free enterprise system solve a social or even an environmental problem’[vi]. SIBs are seen as a means of reducing risk to the public sector (unlike with many PPPs and PFIs, if a programme fails, they do not have to pay out), creating notable efficiency savings, correcting poor incentives and unlocking new sources of funding[vii]. At its heart it involves ‘harnessing market forces’ in order to produce ‘better social outcomes with a much smaller public sector[viii], or, if you prefer, a ‘possible tool for achieving more for less’[ix].

However, with their apparently ever increasing popularity (in the USA, the 2012 Federal Budget included $100million ring fenced for Pay for Success Bonds[x]) it is worth examining whether these initiatives really are all they’re cracked up to be. As eloquently expressed by The Young Foundation, it is preferable for SIBs to ‘‘under-promise and over-deliver’ rather than the opposite’[xi].

Mulgan et al identify three main challenges facing SIBs; first the weakness of the evidence base. SIBs are a relatively new phenomenon and, as shown by the dearth of academic literature on the subject, there is a fundamental lack of evidence regarding their long term impacts[xii]. The first formal UK SIB scheme, focused on reducing re-offending rates amongst short term prisoners at Peterborough Prison, is less than halfway through its six year pilot[xiii]. The long term impacts, relative benefits compared to other frameworks and level of risk to investors is unknown.

Secondly SIB initiatives are likely to significantly overlap with existing programmes. Target demographics are likely to be receiving public support from providers other than the SIB initiative itself. This will make proving cause and effect on improved outcomes a challenge[xiv]. Finally, they fear that the transaction costs of implementing this new finance initiative are likely to be high, potentially higher than can be suitably accommodated in the relatively small scale pilots currently underway[xv].

Add to this debate the longstanding issues facing commissioning based on outcomes of how does one accurately value the cost reduction of improved outcomes to the state? And how does one select outcomes that encourage a holistic approach to intervention, as opposed to facile box ticking based on headline targets[xvi]? (See a previous essay of mine for more information on historical challenges facing defining outcomes in PbR schemes[xvii]) And it appears that Social Impact Bonds are not as uncomplicatedly brilliant as they might at first appear.

This is not to say that SIBs cannot be an excellent tool for leveraging in non-public sector funds and delivering improved outcomes. It is simply a warning to public managers everywhere; before you leap, look carefully at whether your service or target demographic is suitable for SIB based intervention. Correctly applied SIBs could very well be the next stage of responsible capitalism, incentivising investment that creates positive outcomes for the wider community. However, poorly applied, wide spread failure to achieve returns may drive away potential investors and leave this idea dead in the water for decades to come.


[i] Gov.uk, (2013), Social Impact Bonds, [Online] Available from: https://www.gov.uk/social-impact-bonds [Accessed 15 April 2013]

[ii] Unknown (2011) Performance Bonds: Who Succeeds Gets Paid,  The Economist, Thursday, 17th February 2011 [Online] Available from: http://www.economist.com/node/18180436?story_id=18180436  [Accessed 15 April 2013]

[iii] New South Wales Government (2013), Social Benefit Bonds, [Online] Available from: http://www.treasury.nsw.gov.au/site_plan/social_benefit_bonds [Accessed 15 April 2013]

[iv] Ki-Yong, P. (2013) Public-Private Sector Partnership to Prevent Suicide, The Hankyoreh, Friday, 12th April 2013 [Online] Available from: http://www.hani.co.kr/arti/english_edition/e_national/582565.html [Accessed 15 April 2013]

[v] Shiller, R. J. (2013) Capitalism and Financial Innovation, Financial Analysts Journal, 69(1)21-25, p.23

[vi] ibid

[vii] Mulgan , G., Reeder, N. Aylott, M. and Bo’sher, L. (2011) Social Impact Investment: The Challenge and Opportunity of Social Impact Bonds, London: The Young Foundation

[viii] Horesh, R. (2000) Injecting Incentives into the Solution of Social Problems: Social Policy Bonds, The Journal of Economic Affairs, 20(3):39-42, p.42

[ix] Mulgan , G., Reeder, N. Aylott, M. and Bo’sher, L. (2011) Social Impact Investment: The Challenge and Opportunity of Social Impact Bonds, London: The Young Foundation, p.5

[x] Office of Management and Budget, (2013), Paying for Success, [Online] Available from: http://www.whitehouse.gov/omb/factsheet/paying-for-success [Accessed 15 April 2013]

[xi] Mulgan , G., Reeder, N. Aylott, M. and Bo’sher, L. (2011) Social Impact Investment: The Challenge and Opportunity of Social Impact Bonds, London: The Young Foundation, p.4

[xii] Ibid, p.5

[xiii] Strickland, P. (2010) Social Impact Bonds: The Pilot at Peterborough Prison, London: House of Commons Library, [Online] Available from http://www.parliament.uk/briefing-papers/SN05758 [Accessed 15 April 2013]

[xiv] Mulgan , G., Reeder, N. Aylott, M. and Bo’sher, L. (2011) Social Impact Investment: The Challenge and Opportunity of Social Impact Bonds, London: The Young Foundation, p.5

[xv] Ibid, p.6

[xvi] Fox, C. and Albertson, K. (2011) ‘Payment by results and social impact bonds in the criminal justice sector: New challenges for the concept of evidence-based policy?’, Criminology and Criminal Justice, 11 (5): 395-413

[xvii] Brealey, H. (2012) Tackling Gaming and Unwanted Behaviours in Implementing Payment by Results, Msc Public Management Essay, University of Birmingham

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