Value for Money

Part 4 of a series based on a paper I co-authored with Christine Cooper and Darlene Himick.

We have seen, in the previous installment in this series, how performance metrics were created to measure the success of St Mungo’s work with the homeless of London. These metrics would make the cash flows of the social impact bond (SIB) agreement contingent on a narrowly defined version of success.


It would never proceed if it promised to achieve better outcomes for the poor at a higher cost.

The implicit argument for the SIB arrangement was that it would somehow achieve success through social innovation, stimulated by financial incentives lacking in the traditional forms of program funding.


This argument was weakened by the fact that the SIB program drew on £5 million of government money that had not already been budgeted for addressing homelessness. It is impossible, therefore, to know whether any success by St Mungo’s would be due to social innovation or simply spending more money.

The evaluation of success was entirely framed in economic terms. Accounting for the program would be as important as service delivery. It was not enough to measure success in human terms. The economic value of this success had to be calculated.

The Value for Money Calculation

The outcome metrics identified in the prior section were entered into a value-for-money calculation. This calculation takes into account the payments that would be made by the government if all the outcome measures were achieved.

Social Finance, the technical consultant, laid out the calculation as follows in one of their brochures:

20140608_141758.jpg
  1. Current costs to government of a particular target population
  2. Costs of a proposed SIB intervention
  3. Estimated impact of proposed intervention
  4. Potential cost savings to commissioner(s)
  5. Estimate of investor returns

As a calculation, this is not particularly clear. There are no arithmetic operators. In fact, in the original Social Finance document, there are just bullet points. I have numbered the items myself so that I can refer to them.

Interpreting this list, it appears that the cost of delivering the social services would be calculated (item 2) and compared to the cost of the current way of doing things (item 1), to determine the cost savings, if any (item 4). This would then be evaluated against the hopefully positive economic impact (item 3) and the returns to investors (item 5). Why these items are listed in this order is anyone’s guess.

It is important to recognize that the cost savings could be negative. It could be more expensive to fund the program through an SIB. Nonetheless, item 4 is described as “potential cost savings” rather than “potential additional cost” or "difference in cost." The entire exercise is predicated on it being cheaper than traditional funding. It would never proceed if it promised to achieve better outcomes for the poor at a higher cost.

This is obvious from one of the figures in a Social Finance brochure explaining how SIBs work:

Cost saving schematic Source: Social Finance (2013, p. 18)

Cost saving schematic
Source: Social Finance (2013, p. 18)

This is a misleading graph. The evil black rectangle on the left has been shrunken far too much in the second column: it is obvious that the investor return and the cost of interventions should be included in “Cost to Government.” The arrow showing the impact of the SIB therefore should not be nearly as steep. It should point to the top of the element labeled “investor return.”

In addition, there is no guarantee whatsoever that the arrow will point downwards at all. Funding a program with a SIB could well be more expensive than the status quo. Remember, the St Mungo's SIB was funded with new money from the UK government, over and above the government's existing spending on homelessness programs. Every social program funded by government these days is already subject to strict budgeting and financial reporting requirements. The "status quo" in this graph has already been subjected to decades of cutbacks and so-called "fat-trimming." There is only one place for further cost savings to come from, and that is employee wages and benefits. I'll discuss this further when I wrap up this series next week.

It is important to note that even if the overall cost was the same as before, the fifth item in the value-for-money calculation, investor returns, would be considered a beneficial outcome of the SIB. That is, if the existing funding model could be rearranged so that the same amount of money was spent by the state, and the same outcomes were achieved for the homeless, the new arrangement would be considered a success, so long as some of the money previously paid to government employees as salary, or to the nonprofit agency for its workers' wages, or to the shelter providers of the cost of accommodating and feeding the homeless, went into the pockets of investors.

If you are a passionate capitalist, you may well agree that this is a great outcome. If not, this looks like a money grab.



So if the value-for-money calculation is ambiguous, what is the point of a SIB? It is hard to understand because it is not spelled out, but I think the main benefit to the government is that a SIB allows, in theory, the financial markets to decide which social services the government should fund. The government can allow bonds to be floated for a portfolio of programs, and the ones that get assessed by the financial markets as likely to provide a return would be successful in raising funds.

This is, in effect, a crowdsourcing of government priorities. However, the crowd in question isn’t the population as a whole, as in an election. It’s a crowd made up only of people who have money.

Getting more specific

The graph above is a generic one. It shows what the consultants at Social Finance hoped would be achieved if people with money were permitted to decide government priorities. In the next part of this series, we’ll look at the specific cost savings calculation used in the case of the St Mungo’s SIB.


Photos of Bath Abbey and the old Seventh Day Adventist chapel nestled in its shadows taken in Bath in 2014.

 

References

Social Finance. (2013). A Technical Guide to Developing Social Impact Bonds. London: Social Finance Ltd.