In today’s blog, Robert Ogman argues that success stories on the social investment market are hiding inconvenient truths, and require honest rethink about such risky and expensive policy experiments
In 2009, when governments took on enormous debts to rescue the crumbling financial sector, they sought to address the fiscal crisis by slashing funding to the public sector in the turn to austerity. The conservatives called for a “Big Society” to fill the gap for scaled-back social protections, but quickly realising that nothing comes for free, sought to link the resource-weak social sector to capital markets ‘awash with liquidity’ (IMF), through the Cabinet Office’s new “social investment bank”, Big Society Capital. Private surpluses, could be ‘mobilised’ to offset government funding gaps, through loans to civil society groups coping with deepening social crises. In the ‘age of austerity’ (Cameron), the Social Investment Market is a magic bullet: It should offset fiscal problems by securing new pools of capital, address social problems by expanding the social sector, and make capitalism responsible by directing investors towards products with societal benefit. So were the praises sung by the father of venture capitalism, Sir Ronald Cohen, now involved in Big Society Capital, the Social Finance organization, and a host of ‘impact’-oriented initiatives.
Central to this broad policy initiative is the Social Impact Bond, a mechanism to address three interlinked problems, namely, to create ‘inclusive growth’ and ‘shared value’ as a new economic model, to offset public fiscal deficits with private investment, and to ‘solve society’s most intractable social problems’ by expanding preventative services. This experiment was tested in Peterborough as the world’s first SIB, bringing together market, government, and societal actors seeking to ‘break the cycle of reincarceration’. Investors provided £5 million as working capital for organisations, who adapted an anti-recidivism programme by St. Giles Trust , to reduce reconvictions of people released from short-term sentences at the local prison. If it reduced reconviction by 7.5% compared to a control group, the Ministry of Justice anticipated related reductions in its budget. It hoped that lower court, police, prison, and other criminal justice expenses could amount to up to £90m. If the project succeeds, a portion of these savings would be used to repay investors plus dividend. If it missed its mark, investors risked losing their capital. The idea was that this would “transfer the [financial] risk to the investors”, as Social Finance writes.
A central pillar of SIBs is the fiscal argument. As project manager of the Peterborough project and major driver of U.K. SIBs, Social Finance describes as a “precondition of a successful [SIB]”, that the savings are larger than the service intervention costs. In a time of fiscal constraint, the SIBs were meant to ‘do more with less’, downsizing prisons, and in doing so, ‘paying for themselves’. They were sold to the electorate under the mantra of presenting “no risk to the taxpayer”. In fact, without such fiscal pressures, one might ask whether this policy would have gotten off the ground at all, let alone accelerate an international diffusion of nearly 90 projects in 19 countries in the value of £300, according to Social Finance.
The final results for the Peterborough project came in this week achieving a 9% reduction in recidivism among its 2,000 person target group. In their statement, Social Finance praised the reductions in reoffending and the repayment of investors. The Ministry of Justice played the same tune and Gordon Brown praised the project in the same manner. Yet, as advocates were patting themselves on the backs, they were also moving the goal posts, with negative implications for the public. The new storyline neglected any reference to fiscal issues. This covered up the inconvenient truth that the Peterborough project would not pay for itself, as Rand wrote in a report for the Ministry of Justice. Absent savings, investors would effectually be paid through new expenditure, from tax payer dollars in the Ministry of Justice’s budget, and public money from the Big Lottery Fund, who rescued the project with a multi-million pound subsidy. While the project was supposed to allow government to ‘mobilise private capital for public good’, the Peterborough experiment appears to inverse this, compelling the government to “fill the funding gap for UK social impact bonds”, when they fail to create expected savings. This fiasco is just the latest example of a blunders associated with the uncritical approach to market-style governance.
While mistakes are common in policy innovations, there appears little concern to reassess the project. Instead, new efforts are being made to shore up the model despite its problems. Anticipating future failures, the Cabinet Office and the Big Lottery Fund conjured up £60 million of special “outcome funds” to subsidise investor returns when SIBs fail to create anticipated efficiency gains.
But now one really has to ask what the fiscal logic is for these projects. If SIBs were partially designed to help government out of a fiscal jam, now they’re placing more pressure on the budget, simply to pay investor returns on projects they’ve contributed no social value to. One wonders why the government should continue a project meant to reduce fiscal pressure, when it is now increasing expenditure with no added value?
So long as the government continues to cut public resources, and refuses to draw in revenue through taxation of concentrated private wealth, we’ll likely see more of such unhelpful market governance schemes, with attractive language but poor outcomes.
While many supporters of SIBs view them sympathetically, they do so because they would like to see more investment in social protections, more market actor involvement in societally beneficial endeavors, and more private contribution to the rebalancing of public finances. But the Peterborough problems show that joining market governance to ‘public responsibility’ are a weak compromise, they can inhibit these goals, and may produce contradictory results. The shortcomings of the Peterborough pilot require more than a tinkering with existing market governance models, and instead an honest rethinking of broader policy directions, asking how the economy may be more adequately ‘re-embedded’ in structures of public accountability.
Robert Ogman is a member of CURA and a doctoral researcher at the Department of Politics and Public Policy at De Montfort University.