Urban Wire Social impact bonds: Solving government problems in four (not so) easy steps
John Roman
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At the cutting edge of new social innovation financing are social impact bonds (SIBs), a potentially transformative idea. SIB transactions merge traditional public/private partnerships and performance based contracting. Private investors invest in demonstrated social programs, with a promise from government to repay that investment, plus a profit, if predetermined performance targets are met.

The deals transfer risk from the government to the private sector and generate new capital to invest in evidence-based interventions that would otherwise go unfunded.

But on their current path, they are unlikely to fully achieve their promise. Today's deals are bespoke, complex, and have large transactional costs. They also replicate current mistakes in how government purchases services, rather than reforming that process.

Today's deals are mainly efforts to fund well-intentioned programs that are appealing to all parties to the transaction: the government, investors, and social service providers. But in order to satisfy the interests of all parties whose incentives are not aligned, rather than creating real reform, they end up funding the lowest common denominator— something that sounds good, is low risk, but does not solve big problems.

There is a better way to use these transactions to create broader and deeper systems reform, using the SIB development process as the mechanism for reform.

The deals funded by social innovation financing should be the product of a real, intensive strategic planning process, rather than a one-off response to a particular opportunity.

Step one should be an effort to understand what drives the most frustrating costs to government: individuals, families, and places that cycle endlessly through our systems.

Who are these “frequent flyers” who continually touch many systems and generate disproportionately high expenses for taxpayers? Examples include:

  • Kids involved in juvenile justice, child welfare, and special education.
  • Adults who are chronically homeless, mentally ill, and returning from prison.
  • City blocks that the police, fire, and public works spend all their time patrolling.

Step two is to determine why government is ineffective in treating these frequent flyers. The answer is deceptively simple: government knows what it spends, but not what it buys. That is, we know what is in the budget, but in today’s system, we don’t know what outcomes that spending produces. The current procurement process creates no incentives to prioritize outcomes over outputs. A SIB requires that the outcomes are explicit.

Step three is to determine if there are evidence-based interventions that would alleviate the problem. It’s important to remember that not every significant problem has an evidence-based solution. Today, research evidence is generally constrained to a single problem, such as the effectiveness of drug treatment. There is much less evidence around broad social phenomena, like increasing high school completion. Care is thus warranted in prioritizing interventions for SIB funding.

For the final step, a clear-eyed decision must be made about whether SIBs are the right financing mechanism. It should be noted that SIBs are not the answer to every undercapitalized intervention. For example, some frequent flyer populations are so small that a reasonable comparison group cannot be found, and thus it is impossible to determine if outcome targets were met.

The social innovation field is currently in an evolutionary stage, with a focus on building a SIB-ready sector, which simply means educating and experimenting across all parties involved in these transactions.

In order to get to a stage where these innovations are scaled and serve high proportions of targeted populations, a much more strategic approach is required.

And that process is worth doing, even if no SIB is ever financed. The simple process of government articulating what its problems are, what its goals are, and what the potential solutions could be would be a tremendously positive reform in its own right.

Photo: Steve Pepple / Shutterstock.com


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Research Areas Neighborhoods, cities, and metros
Tags Corrections Courts and sentencing Crime and justice analytics Children's health and development Economic well-being Delinquency and crime