piggy bank

Using SIBs to solve problems we already know how to fix

By Steve Goldberg 30 May 2017 3 minute read

I offer my respectful disagreement with House of Lord’s Select Committee on Charities, Stronger charities for a stronger society report, which maintains that ‘the Government’s focus on [Social Impact Bonds] has been disproportionate to their potential impact’. While the development of SIBs has certainly been a trying exercise for all concerned, it is far too soon to conclude that the game is not worth the candle. The UK Government and its many civil society partners have created and nurtured a financial innovation with transformative potential. It is incumbent upon the rest of us to harness its versatility and increase its horsepower.

Most SIBs are on track to improve the delivery of preventive social interventions at reduced financial and operational risk to government. But it’s fair to say that they take too long, cost too much and don’t yet serve enough people to move the needle on serious social problems. Some of these rough edges will be smoothed off over time, and public commissioners, providers and social investors will arrive at some natural market equilibrium for the right kind and number of SIBs.

But SIBs haven’t made a convincing case that they can attract mainstream investment to scale what works. We have not faced up to Phil Caroe’s ‘serious question about the potential scale of a market that relies on a very narrow band of social investors’. And Geoff Burnand, CEO of Investing for Good, put his finger on the problem when he said, ‘I don’t think they were designed by market practitioners’. 

If we want, as ClearlySo’s Rodney Schwartz has rightly urged, ‘banks, investment banks, insurers, private equity firms, the venture capital industry, fund managers and anybody else I have missed … [to] please get off the side-lines and get into social investing’, we need to invite them to the table to help develop robust transactions in the first instance. As Nick O’Donohoe, the former Chief Executive of Big Society Capital, and Antony Ross, Partner of Bridges Ventures, advised the Cabinet Office way back on 26 November 2012, ‘to ensure investor and commissioner appetite for risk transfer will ‘overlap’, investors should be involved as early as possible in the PBR procurement process—certainly at the conceptual or design stage’.

(There, I think I’ve dropped quite enough names for the moment.)

To that end, I offer my own roadmap, ‘Scale Finance: Industrial-strength Social Impact Bonds for mainstream investors (Full disclosure: it’s not a short or easy read. Hard copies are available.) The Scale Finance model asserts that there are a small number of potentially ubiquitous social programmes that have definitive proof of effectiveness and demonstrated cashable savings that substantially exceed both service delivery and financing costs.  A good example is Multisystemic Therapy (MST), which has been offered in the very successful Essex County Council SIB.

In the U.S., where we commit more than 60,000 juvenile offenders to ‘out-of-home placements’ at an annual cost of $5.7 billion, MST could keep most of these kids safely at home and in school at less than one-quarter the cost. Yet, after 30 years of rigorous evaluation and deployment, MST still reaches less than 5% of the eligible population. My paper shows how mainstream investors—and only mainstream investors—could develop SIBs that would be capable of scaling MST commensurate with unmet population needs, earn risk-adjusted, market-rate returns, and provide net savings back to the states.

It is too soon to conclude that ‘SIBs are too risky a proposition to ever attract genuinely “private” finance’, for the simple reason that we haven’t really tried. I invite you to call my bluff.