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Liberty or Bondage? Investigating Social Impact Bonds

Liberty or Bondage? Investigating Social Impact Bonds

 

Financial constraints are a near universal challenge for social service providers, no matter how effective or scalable their programs. As a result, a relatively new funding mechanism known as the Social Impact Bond (SIB) has received widespread attention, with implementations across Canada, the United States, the UK, and beyond.

SIBs bring together government, service providers, and private investors, who provide the upfront capital to deliver social programs. Rather than addressing acute needs, they tend to focus on solutions aimed at tackling chronic issues, like increasing high school graduation rates, reducing recidivism, and lowering risk factors for cardiovascular disease. If the program achieves previously agreed-upon outcomes, investors receive a return on their initial investment. This is paid out by the government, based on the premise that it is a portion of the money saved as a result of the preventative intervention. For example, a SIB-funded program that successfully encourages people to adopt better eating and exercise habits may alleviate future burdens on the healthcare system. A program that reintegrates formerly incarcerated individuals into society may cut costs to the criminal justice system. Also referred to as a “pay for success” model, one of the stated benefits of SIBs is that they transfer risk of failure from the government to private investors, who only see a return if the program produces the desired results.

Yet as the excellent documentary The Invisible Heart (dir: Nadine Pequeneza) makes clear, there is a dark side to funding models at the intersection between capitalism and charity, which is further complicated by government involvement. Investors who are driven by profit, rather than purpose, may negotiate a lower bar for success in order to increase the likelihood that they will be reimbursed. This in turn can compromise a program’s effectiveness, as service providers are driven to meet their standards. Critics have also pointed out that SIBs can have the unintended result of shifting the underlying objective of a program, from attending to the needs of its clients to satisfying the demands of investors. Finally, the short-term nature of many SIB contracts can see investors receive a payout before the long-term impacts of the program are even understood.

Proponents of Social Impact Bonds claim that they stimulate social innovation, as the private sector is often perceived as more willing to invest in risky ventures than governments. However, this assumption was called into question by a recent survey of SIBs around the world, which found that only 22% funded new solutions. The remaining 78% scaled up existing interventions, transplanted them to new contexts, or brought together multiple service providers to deliver an intervention as part of a new collaborative unit. As a result, one might be justified in wondering why governments didn’t simply fund the programs from the outset, rather than utilize the more expensive SIB mechanism. This is particularly relevant in the face of the cost- and time-intensive nature of designing the SIB contract, which was determined to be significant enough to deter the State of Maryland from piloting the model.

Other concerns aside, the fact that it is wealthy investors who profit off the value generated by SIB-funded initiatives seems to be inconsistent with the desire to deliver empowering and sustainable solutions for people in need. This tension is highlighted in The Invisible Heart, which juxtaposes an interview with J. B. Pritzker, private investor and heir to the Hyatt Hotel fortune, with a portrait of a four-year-old boy enrolled in the pre-kindergarten SIB program that Pritzker is involved in funding. Reginald is coping with the loss of his older brother, who was shot and killed in their high-crime Chicago neighbourhood the previous year. His family, school, and community are trapped in a perpetual struggle for resources, begging the question: if an intervention proves to be effective enough that it cuts down on other government expenditures, shouldn’t the savings be directed to the service providers and recipients responsible for its success? It seems like a model based on investing returns in organizations and communities would have greater potential for long-term transformation.

In their current incarnation, Social Impact Bonds seem more likely to perpetuate existing inequalities than reduce them. The fact that many service providers actively seek them out is a testament to the difficult trade-offs they are forced to make on a regular basis in order to stay afloat.

What do you think? Are there other promising approaches to funding social services? Is it enough to lobby government bodies and philanthropists to increase their financial commitments? Does our entire economic system need restructuring? I’m all ears!

Header image courtesy of The Invisible Heart.

 
Building Identity: The Revival of Jewish Life in Budapest

Building Identity: The Revival of Jewish Life in Budapest