The Immorality of Innovation – the Tale of Social Impact Bonds

meghan-joy-john-shieldsMeghan Joy and Dr. John Shields

In a post sub-prime mortgage induced financial crisis, another financial tool that risks increasing precarity for those most vulnerable is becoming increasingly popular in a political climate of austerity.


Social Impact Bonds (SIBs) are a social policy tool that claims to solve complex policy problems, such as homelessness, unemployment, and recidivism, through the scientific methods of financial modelling. Actively supported by several governments worldwide – there are currently 54 projects in 13 countries – SIBs provide a mechanism to turn the risky behaviours of vulnerable individuals into a form of profit making for private impact investors. SIB projects target population groups, such as the homeless, troubled youth, and obese, whose problems result in costly use of emergency-oriented public services such as shelters, prisons, and hospitals. In this way, SIBs are positioned as preventative, allowing future savings on costly public programs. These savings, also known as impacts, outcomes, or results are measured for their social value created (Dowling & Harvie, 2014). The SIB instrument places a current price on anticipated social value based on the assessed future risk that participants will not be reformed. Risks become a reward as investors bet on the extent to which vulnerable people will be transformed.

SIBs extend the public private partnership model to the social sector. A government department contracts a project intermediary to engage in SIB design and coordination. This intermediary then selects one or more private or non-profit social enterprises to deliver services that target vulnerable individuals. Private impact investors are sought to fund, and profit, from public service delivery. Rather than engaging in a broad public debate about social policy, SIB projects are often negotiated behind closed doors, subject to the rules of commercial confidentiality. SIBs are part of a broader trend for philanthropic actors – philanthrocapitalists – to make money off of their charitable endeavours through impact investments (McGooey, 2014; 2015). Here, the tools of venture capitalism are translated to the social sector as private investors select social enterprises that can deliver the best value for money. Non-profits risk being valued as apolitical and cheap delivery agents best situated to target vulnerable individuals (Joy & Shields, 2013). The institutions of the state are used to create new markets for private profit, sold as being in the public interest. While the idea is that SIBs provide value for money for the public sector, the state still has to pay for results and often at higher private sector interest rates. Furthermore, private investors are not risk averse and seek market rates of return and subsidies on their investments. The public subsidizes private risk while private investors reap the rewards.

The financial mechanisms of the private market attempt to solve complex policy problems that have long burdened the state by turning individual vulnerability into a form of profit-making (Kish & Leroy, 2015; Lake, 2015). SIBs in fact ignore the complexity of social problems as the underlying causes are considered behavioural and not social in nature. Problems are individualized and a complexity of variables are unexamined to prove causation and trigger a result. Individuals are blamed and shamed for their risky behaviour and socialized systems of inequity such as market failure, racism, sexism, ageism, and ableism are ignored as they are too complex. Individuals with the greatest need risk being excluded from SIB projects because the complexity of their vulnerability makes causation difficult to verify. SIB programs focus on behavioural change related to enhancing and flexibilizing job skills, parenting advice, nutrition and health education, mental toughness training and empathy. These measures ignore the importance of public programs such as childcare, access to affordable housing and recreational facilities, and job creation that recognize the larger structural and environmental realities that confront vulnerable populations. SIBs risk undermining social solidarity and mutuality as vulnerable individuals are recognized as commodified units that are a costly drain on responsible citizens, while worthy citizens are independent and active economic producers and consumers.

The measurement of social value tied to the incentive for profit opens the door for the oversimplification of problems to what can most easily be measured, the risk of quick-fixes rather than long-term policy solutions, and malpractice. It is thus not a surprise that SIBs have failed to prove that they work to produce social value. SIBs solidify the pre-existing social relations of capitalism, intersected with other modes of stratification such as race and gender. Though sold as neutral and technical instruments, SIBs are ultimately about the politics of inequality and are a deeply unethical policy tool (Dowling & Harvie, 2014; Kish & Leroy, 2015). An innovative approach to policy seeks to understand rather than tame complexity through over-simplistic behavioural solutions. Public policy must address the lack of good jobs, affordable and accessible housing, public transit, health care and social supports at the same time as tackling systemic issues of market failure and other ideological systems of inequity that limit opportunities for citizens.

If you enjoyed this blog post, you may also be interested to read Need and poverty by  Seosamh Mac Cárthaigh

One thought on “The Immorality of Innovation – the Tale of Social Impact Bonds

  1. A couple of days ago Steve Moore pointed me to a blog: “The Immorality of innovation – the Tale of Social Impact Bonds” and wondered what I thought about it. I was dismayed to read such a one eyed piece that actively avoids taking a practical look at whether SIBs are effective or not and instead attacks them ideologically. There have been a few pieces around like this recently, so it feels time to respond.

    The principal allegation is that vulnerable people will be treated as objects to serve the profit of some speculative investor. It isn’t true. Unless Social Impact Bonds put beneficiaries and their needs at the centre of the programme, they cannot work. All Social Impact Bonds are designed to respond to the challenges that individuals face by delivering tailored support.
    The supposed profits that investors make, are compensation for the risk they take in paying for untested interventions and providing upfront capital to voluntary organisations. It is not about making money out of misery or commoditising individual distress. Any investor looking for a quick buck should look elsewhere as there are much easier and less riskier ways of making money. What Social Impact Bonds are trying to do align finance with social purpose. Finance always follows social purpose – not the other way round.

    Perverse incentives remain a key concern. What we seek in developing SIBs is alignment. Alignment between the outcomes for payment with the needs of the individuals in the programme. Alignment in interests and values between the service provider and the needs of the population they serve. Alignment between the investors’ values and the needs of service users.

    Almost all SIBs have had investors with charitable or social aims. Any profits from the programmes are typically going back into socially positive activity. The foundations who invest are clearly aligned. The impact investors usually have foundations as their underlying investors and missions to achieve positive outcomes. Where there has been more commercial or bank capital it has been to provide the secured, lower risk capital that doesn’t influence the programme.

    So having aligned investors and outcomes with the needs of the populations served, the final piece of the puzzle is to ensure that the governance of the programme is aligned with those needs. The governing bodies of the SIBs we set up have a mix of people on them, sector specialists in the area of work, investors keen to see the programme succeed, and an independent chair. So if misalignment occurs it can be carefully managed.
    So what are we trying to do with SIBs?

    SIBs are about enabling positive social change. Government is generally cautious on spending money on new programmes, and when it does it often over specifies what it is looking for in a way that stops programmes from learning or improving the service they provide over time.

    SIBs address these issues by allowing government to pay for the outcomes generated by a programme, not the inputs and processes that sit within it. This allows government to try things it wouldn’t try otherwise and it allows providers to focus on outcomes, adapting their programmes as they learn, rather than just sticking with what they were told to do. For organisations frustrated with restrictive contracts, or finding it hard to get government to engage, this model has proved very helpful. It solves a problem.

    The finance is simply needed to make the thing work. Investment provides the money before the outcomes are paid and therefore takes the risk that they will fail. This does tend to add some additional rigour, as investors are likely to want to know how things are going and would look to implementers to try to improve their programme in the event it’s not as successful as originally envisaged. But we must careful to ensure that this is not an investment product – this is a social change programme and social activists need to claim it back from the financial community.

    What’s wrong with the current system?

    I take issue with the implicit assumption that most traditional government grant programmes are effective. As colleagues of mine who previously worked in the public sector tell me, Social Impact Bonds are more carefully thought through and monitored than a normal public sector programme.

    There are serious perverse incentives in the present system. It can lead to bureaucratic one size fits all services that are ineffective, provided to deeply vulnerable people, delivered by overstretched, inexperienced staff who become inured to the pain surrounding them. Often government targets are too narrow and too short term. It would be wrong to hold them on a pedestal.

    Many services on offer, whether delivered through the public sector or the voluntary sector, are not actually effective in achieving their goals. Why? They lack feedback and accountability. Social services are defined by one characteristic – the people who receive the service are not the ones who pay for it. With normal services there is a really quick feedback loop to the provider if they are no good – people stop paying for them. So if public or social services are poor, how do we find out? If they are mainstream services like schools and hospitals then the democratic process can provide a feedback loop to improve them.

    The services for marginalised groups are too often not seen as a political priority, are not used by the majority of people and are not noticed if they are frankly not good enough. I’ve walked round orphanages in Romania with managers explaining why these deeply damaging institutions should be kept open despite all the evidence to the contrary. I’ve seen how voluntary sector provision can become focused on the people who walk through the door, with the wider population they are meant to be serving ignored. And I’ve watched programmes get diluted to save money without anyone checking whether they actually work in their new form.

    There is an understandable concern that we will measure what is easy and not what is important. Many scale payment by results models have fallen foul of this issue. We have sought to resolve it through adding risk capital from people who care about real outcomes, but it is an area to continue to test.
    So, no I do not think it is immoral to start measuring things, to focus on whether services are working, and to bring in a new set of actors that care whether services are good or not. Frankly I find it unethical to continue providing poor services to poor people and to complain at anyone trying to improve it.

    Over promising

    SIBs are not for everything. The roots of most social problems are structural, from economic forces and market failures, to political systems, to socio-cultural factors. We have never suggested that SIBs are appropriate for complex problems with uncertain influences or outcomes. It would be irresponsible to do so precisely because of the complexity of underlying factors. What we are doing is identifying issues that should be but are not being addressed for those with complex needs.

    Social Impact Bonds are part of a wider process for getting government more focused on the outcomes it is delivering and becoming more aware of the costs, both social and financial, of poor services to vulnerable people. As results are emerging real on-the-ground research is needed to improve them and to learn from early models.

    I think that any critique of SIBs should be grounded in an understanding of what those us involved in the journey are seeking to achieve and how we are learning and adapting our approaches as we seek to achieve these better responses to significant social challenges. Progressives, those who are trying to improve the world we live in for all of us – not just for the rich, should be building on each other’s ideas or at least giving them a chance to prove their worth. Now, with the world veering dangerously towards nationalism, where populism is making politics inward looking, and where the poor, refugees, marginalised groups, are likely to get a worse deal is this the time for in fighting There are plenty of sensible critiques to make, and issues to resolve around any innovation. But declaring another group of people trying to improve the world immoral? I think that’s pretty poor.

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