Social Impact Bonds

Today I begin a series of posts based on an academic research paper I co-authored with Christine Cooper and Darlene Himick, two outstanding researchers at Strathclyde University and the University of Ottawa respectively. I have adapted the paper considerably, so any oversimplifications are entirely my own fault. Nonetheless, what I've written here draws heavily on their thinking and their words. I hope I have done them justice.


In my last post under the Theory section of this website, I explained the notion of biopolitics. This is the idea of governing populations by treating people as individual enterprises.

This way of governing has been in vogue since Thatcher and Reagan. It doesn’t see people as citizens, it sees them as entrepreneurs responsible for generating their own cash flows. This is supposed to force people to be more responsible for themselves. In terms of government policy, it means attempting to bring the principles of free-market economics to bear on social problems.

You will notice that I used the word “populations” above, instead of “society.” Biopolitics is about populations, not society. It’s about aggregations of individuals. The whole notion of society, with structures and classes, disappears. Biopolitics is what Margaret Thatcher had in mind when she said, “There is no such thing as society.”

In this post and the ones that follow it, I want to explore what happens when this thinking is put into practice. We’re going to look at how some enterprising finance people convinced the UK government to try funding homelessness programs in London through the private placement of financial instruments, instead of just paying for the homelessness programs out of tax revenues.

The financial instruments in question are called social impact bonds. I’ll explain the basic concept here, before getting into the details of the London experiment in the next part of the series.

Social Impact Bonds

The notion of a market-based bond connected to social outcomes appears to have originated in 2000 with a New Zealand economist named Horesh. His concept has since been implemented, with some significant changes, in the United Kingdom.

The UK model doesn’t require any liquidity in the market for the bonds. Instead, it actively seeks out a small number of investors to purchase the bonds and then pays them interest. The UK model gives investors an opportunity to make profits by investing in the treatment of specific individuals with specific social problems.

The first SIB in the UK was intended to reduce recidivism (further criminal activity) amongst prisoners after their release from prison. It was issued in 2010. The effects of the bond on recidivism are still not known, but by January 2013, a total of thirteen other SIBs had been launched in the UK to address a variety of social problems. The one we examine here was the latest of these.

The UK version of a SIB is not simply a bond. It is a set of contracts involving the government, a delivery agency such as a nonprofit or a charity, and one or more investors who are paid interest. The diagram used by the UK Cabinet Office in its brochures is shown here:

 Conceptual model of social impact bond  Source:          ADDIN EN.CITE <EndNote><Cite
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name="Web Page">12</ref-type><contributors><authors><author>Cabinet
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definition</title><secondary-title>Centre for Social Impact
Bonds</secondary-title></titles><number>20 May
2015</number><dates><year>2015</year></dates><urls><related-urls><url>https://data.gov.uk/sib_knowledge_box/sib-definition</url></related-urls></urls></record></Cite></EndNote>    Cabinet Office (2015)

Conceptual model of social impact bond
Source: Cabinet Office (2015)

The first contract is between a government department, or “commissioner,” and the delivery agency. This contract specifies a set of measurable social outcomes which, if achieved by the delivery agency, will activate payments from the commissioner. In the case we are going to look at, the commissioner was the Greater London Authority (GLA) and the delivery agency was St Mungo’s, a financially successful London-based charity with a long history of helping homeless people.

The second contract is between the delivery agency and the investors. This contract sets out the returns to the investors, contingent on the delivery agency achieving the measured outcomes set out in the first contract. There were five investors in the St Mungo’s SIB. Two were charitable foundations and two were wealthy individuals. The fifth investor, interestingly, was St Mungo’s, the delivery agency, which decided to take on some of the financial risk and potential reward itself.

In the diagram, the delivery agency contracts with service providers. In the case of St Mungo’s, these service providers were St Mungo’s employees who were actually contracted to a special purpose vehicle called Street Impact Ltd., set up by St Mungo’s to deal with the SIB.

The target population in the diagram represents the people with the specified social problem. In this case, the target population consisted of 830 homeless individuals who had been hand-picked from a database of homeless people maintained by St Mungo’s on behalf of the government.

Missing from this diagram are all the intermediaries who worked behind the scenes to bring the SIB to fruition. The two most significant intermediaries were Social Finance, a consulting company that promotes SIB solutions to the government, and Triodos Bank, a Dutch bank that acted as financial broker and enlisted the investors.

Waxing enthusiastic

The UK government has been so enthusiastic about SIBs that it has sweetened the pot with £5 million of additional funding, over and above what it normally spent on the poor. Half of this money (and half of the 830 homeless people) went into the St Mungo’s arrangement. The other half went into a parallel arrangement involving another nonprofit called Thames Reach. The government was hedging its bets.

In the next article in the series, we’ll examine the arrangements between the government and St Mungo’s and see how a particular population of homeless people was targeted for intervention.



Photos of some rocks that presumably became this way through their own individual choices, taken in Northern Ireland in 2013. This is the Giant's Causeway leading to Scotland.

 

References

Cabinet Office. (2015). SIB definition. Centre for Social Impact Bonds.  Retrieved 20 May 2015, from https://data.gov.uk/sib_knowledge_box/sib-definition

Horesh, R. (2000). Injecting incentives into the solution of social problems: Social Policy Bonds. Economic Affairs, 20(3), 39-42.