Social Impact Bonds: Are They Too Good to Be True?

By Mildred E. Warner and Allison E. Tse

Imagine a world in which multinational investment firms teamed up with city governments to provide the public goods that we need most—education for our children, housing for the homeless, or a new start for the formerly incarcerated. This is the dream of advocates for a new kind of public financing, social impact bonds (SIBs). While not a bond in the conventional sense, SIBs are a performance-based contract used to secure private investment for important social programs. If the programs deliver on pre-determined goals, then the public sector pays the investor a return.

Social Impact Bonds represent a promise and a risk. The promise is to attract new private investment for social programs that work, expanding services and saving society money in the long run.  The risk is that by monetizing welfare gains, they turn our most vulnerable (children, elderly, homeless, formerly incarcerated) into investment targets for private finance. Our recent article in the Journal of Urban Affairs, “The Razor’s Edge: Social Impact Bonds and the Financialization of Early Childhood Services,” highlights the razor-thin margin of societal benefits that SIBs might produce. The requirements of short-term, financial returns to investors and quantifiable outcome metrics can make SIBs narrow, inflexible, and short-sighted. But our research also shows they can be designed to achieve broader impact, if attention is given to long-term, sustainable public funding.

As SIBs proliferate around the world, so too does evidence that questions their effectiveness. A new documentary, The Invisible Heart, attempts to untangle the complicated bundle of risks and rewards that SIBs encompass. The film examines SIBs from design to implementation, through the eyes of clients and service providers, as well as government leaders, venture capitalists, philanthropists, labor leaders, and academics, many of whom question the impact of profit incentives on the delivery of social services.

“As a filmmaker who has spent many years looking at difficult social issues, I am encouraged by the SIB model’s focus on prevention, and its ability to highlight not just the social but also the financial value of early intervention,” says award-winning Director/Producer Nadine Pequeneza. “But my optimism is tempered by the dangers of introducing a profit incentive driven by ‘success’ outcomes.”

Profit incentives may create new ways to pay for social welfare, but they also shift public values toward private ends.  Inviting powerful investors into public services for the most voiceless, vulnerable members of society may mean inviting a Trojan Horse through the front door—a Trojan Horse that only supports profitable social services and narrows our conceptions of what social welfare should mean. This danger should caution SIB designers.  Lessons from SIBs in the early childhood sector, however, demonstrate how strong state actors and coordinated networks of social advocates can work together to scale up policy change and secure broader public investment for the future, especially in politically conservative states.

SIBs must overcome their internal risks to achieve broader social impact. The details of context, contract negotiation, and program design determine on which side of the razor’s edge SIBs fall—whether they use the market to broaden investment or merely to extract resources from an already overburdened public sector. Both the article and the film offer critical insights for providers, policymakers and concerned citizens when considering whether to walk the razor’s edge of financializing social services through SIBs.

The article is available as open access at http://doi.org/10.1080/07352166.2018.1465347

The film is available for educational and community screenings. For more information, visit www.theinvisibleheart.ca