Social finance supporters vs skeptics

In “Eight Sobering Thoughts for Social Impact Bond Supporters,” Rick Cohen voices several concerns about “the tendencies toward irrational exuberance on the parts of some promoters of SIBs.” As an ardent SIB promoter myself, who nonetheless agrees with Mr. Cohen that “‘the market’ doesn’t make everything right, doesn’t automatically make better choices or decisions than government, and doesn’t guarantee better outcomes,” allow me to offer some earnest answers and countervailing considerations for SIB skeptics.

First, most SIB proponents, myself included, agree with Mr. Cohen’s recommendations about improving government practices. Yes, federal and state government should pursue broad policy initiatives that would expand the same innovations that SIBs target. Yes, they should extend established tax credits beyond brick-and-mortar programs. And, yes, they should provide full cost reimbursement and increase overhead rates in all nonprofit contracts. 

And (since Mr. Cohen asks) yes, we should all encourage SIB investors to seek credit under the Community Reinvestment Act, as that’s exactly the kind of lending the law is designed to promote. Many SIB supporters are actively working on these issues, and none of us are impeding them in any way. 

The problem is that the public sector has failed to make meaningful progress on any of these fronts for decades. Optimistic rhetoric aside, there’s little reason to expect significant change.  Much of the impetus for SIBs comes in response to governmental stasis and retrenchment.

Also, SIB skeptics (and many supporters) fail to acknowledge that the federal and state fiscal situation is going to get much worse soon and stay that way for decades.  According to Accenture, “future demand for public services, driven by an aging population, will cost [federal and state] government an additional $940 Billion by 2025.” 

Second, Mr. Cohen makes a fair point about financial returns for the New York City SIB. The 75% guarantee that Bloomberg Philanthropies generously provided to attract Goldman Sach’s investment in the first US SIB will not be repeated without another billionaire mayor. That project got the SIB ball rolling and brought a major financial institution to the table, but it’s not a model for future SIBs.

Mr. Cohen's math about Goldman Sach's returns is way off (he doesn't discount the time value of money), but investors don't need exorbitant rewards. In January, 2013, Sir Ronald Cohen, the founding father of social investment, called for SIBs “that can deliver a financial return of about 7%, a high social return and limited downside risk,” which he described as “reasonable returns that are uncorrelated with equity markets.” That’s a sound benchmark for assessing SIBs going forward.

The president of the California Endowment makes a strong case when he writes that “We Need More Scale, Not More Innovation"

Third, debates about funding innovation versus “scaling what works” and supporting mature versus younger nonprofits are ongoing debates that aren’t limited to SIBs, as the Social Innovation Fund can attest. Big Society Capital, the social investment bank, launched to develop the social investment market in the UK, and its many UK partners, as well as field-builders like the Nonprofit Finance Fund in the US, are avidly working to help more nonprofits become “investment-ready.” 

More power to them, but some of us believe that helping “a much broader array of nonprofits” doesn’t necessarily meaning helping a lot more people in need. Neither approach has to come at the expense of the other, but the president of The California Endowment makes a strong case when he writes that “We Need More Scale, Not More Innovation.”  SIBs that work with established providers have much better chances of raising entirely new funding from prudently risk-averse investors, and stronger SIBs can enable greater scale. As the Urban Institute’s John Roman points out, "what social-impact bonds and pay-for-success do is potentially unlock the capital that’s necessary to make that big leap from the pilot stage to the business-as-usual stage.”

At the same time, it’s absurd to worry that “private capital might overly influence the decision-making and priorities of government.” Yes, SIBs are getting a lot of attention these days, probably too much. But at a time when, as Mr. Cohen rightly points out, SIBs haven’t even demonstrated proof of concept, they are nowhere near being able to displace the billions of dollars that government spends on public services. 

As for the unexpected changes curtailing the UK’s Peterborough SIB, to make way for a nation wide programme to reduce re-offending rates, let’s wait and see what the Ministry of Justice actually does to reduce recidivism among short-sentence offenders. The privately-funded SIB model, has enabled the encouraging progress made by the partners in the Peterborough SIB, Social Finance UK and the One* Service, and we should reserve judgment about whether public commissioners will prove as nimble and resourceful.

Finally, Mr. Cohen isn’t the only one to ask “if the programmes are well established and proven,” why doesn’t “government ... simply adopt the ideas as more broadly applicable programs”?  This reflects a common misconception. Certifying a social innovation as “evidence-based” means that we know that it works, how well it works, why it works, and how to implement it. It does not mean that it’s simple to adopt. 

To the contrary, implementing evidence-based programs like Nurse-Family Partnership and Multisystemic Therapy is extremely challenging, and we know they don’t work without rigorous quality controls that most government programs don’t have. Poor implementation always trumps a good model.