social impact bonds

How the world’s first Social Impact Bond drained public resources, and why the market model fails forward

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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.

Impacts of the Global Financial Crisis on Cities in Europe: Chapter on the Social Investment Market

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CURA Researcher Robert Ogman has published a chapter on the social investment market in a recently published book on Urban Austerity in Europe.

Robert’s chapter discusses the relationship between austerity policies and the social investment market, showing government’s turn towards Social Impact Bonds in the hope of offsetting public sector budget cuts by attracting private investment to social service provision. He first explains the historical emergence of SIBs in the financial crisis of 2007/8, and SIBs’ narrative of cost-savings, before turning to their implementation in a concrete case, where the city of Peterborough hoped to use investor dollars to fund probationary services to reduce prisoner reoffending. He identifies a set of contradictions between the promises of SIBs as a cost-cutting mechanism and the resulting expansion of public expenditure, challenging the idea that this new public-private partnership may provide an easy solution to social and fiscal problems created by austerity. This chapter is part of Robert’s doctoral research on SIBs and the social investment market as part of a “social neoliberal” strategy to manage the crisis of neoliberal hegemony. His analysis of the Peterborough SIB is part of an international comparison between SIB development in the US and UK.

You can buy the book either directly from the publishing house (http://www.theaterderzeit.de/buch/urban_austerity/) or, of course, at your favorite book store. An e-book will soon be available as well.

Description and details are below:

Schönig, Barbara; Schipper, Sebastian (Hg.) (2016): Urban Austerity: Impacts of the Global Financial Crisis on Cities in Europe. Berlin: Theater der Zeit. 296 pages. ISBN 978-3-95749-083-4. 22€

What started as a mortgage crisis in 2007 and became a global financial and economic crisis in 2008 has been transformed into a sovereign debt crisis since 2010. In all of these interwoven phases, cities have been, in multiple ways, at the heart of the turmoil as indebted home-owner have been evicted, masses of people impoverished, public budgets squeezed, municipal infrastructures privatized, public services downsized, and, above all, austerity measures implemented. In view of the above, this book puts an issue into the center that affects most people living in urban regions across Europe – the idea that fiscal austerity is an unavoidable necessity that politics cannot escape no matter how harsh the consequences might be. To bring the effects of austerity politics at the forefront, contributors to this book expose actual urban problems in their spatiotemporal dimensions, discuss regulatory restructurings under a new regime of austerity urbanism, and reflect on the role of urban social movements struggling for progressive alternatives. We hope that this collection of counter-hegemonic narratives to neoliberal policies can make a small contribution to inspire critical urban scholars, political activists, and social movements in their struggle for progressive social change in Europe and elsewhere.

Investigating the Ethical Turn in Finance: Symposium Report

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On 17 September 2015, a one-day symposium was held in Leicester to discuss the “seeming ‘social’ and ‘ethical’ turn of finance in the context of the global economic crisis”. The symposium was a joint endeavour organised by academics at three universities, including PhD Student at De Montfort University, Robert Ogman, Middlesex University Lecturer in Sociology, Emma Dowling, and Senior Lecturer in Finance and Political Economy at the University of Leicester, David Harvie . Robert Ogman reports back on the day’s proceedings.

One peculiar outcome of the economic crisis and austerity policies of the last few years is the emergence of the “social investment market”. This “seeming ‘social’ and ‘ethical’ turn of finance in the context of the global economic crisis” was the topic of a recent symposium held in Leicester. The gathering was an opportunity to discuss the recent growth of financial products in “responsible” investing, and government efforts to increase private sector involvement in public provisioning, and to offset the resource gap arising from fiscal austerity measures.

Scholars from a host of academic disciplines and from a handful of European countries came to discuss together with practitioners from NGOs and trade unions, the development and implications of these new initiatives, as the programme stated, to “financialise the social”. A central aim was to discuss “the implications for the relationship between state, society, and (financial) markets, and for the users and front-line providers of services.”

Introducing the one-day workshop, the symposium’s co-convenor Emma Dowling, co-author with David Harvie of a recent paper on the nascent social investment market, framed a set of questions that participants were to discuss:

  • What new financial institutions, instruments and practices are being developed? By whom? How do they work? For example: what is the ‘social stock exchange’, what are ‘social investment financial intermediaries’, ‘social impact bonds’ or ‘development impact bonds’? What kinds of social projects are being promoted and developed? (For example, particular concerns include youth unemployment and the urban poor.). The United Kingdom, Australia and the United States along with other G8 member states are at the forefront of social investment, but is this a global phenomenon?
  • What new discourses are emerging to describe an apparent rupture with previous forms of finance, and the concern with making finance ‘work’ for society (as opposed to the other way around)? How have terms such as ‘social value’, ‘shared value’, ‘triple bottom line’ and ‘impact investing’ arisen and what do they seek to describe? To what extent is ‘social finance’ a response to criticisms of the vicissitudes of financial markets in light of the 2008 crisis?
  • More generally, to what extent is social finance a response to a perceived impasse of neoliberal capitalism? Does social finance represent a break with neoliberalism or a deepening and development of it? Will finance’s ‘ethical turn’ address capital’s legitimation crisis? Will social investment provide a source of capital accumulation and profitability? If market and financial logics are further penetrating social life, what are the implications for social relations and social discipline?
  • What is the role of the state in developing social finance and a social investment market? What are the implications for the welfare state, for public service provision and for social policy? Will public-service users – individuals and communities – really benefit? How will front-line providers – both waged and unwaged – be affected? What is the likely impact on civil-society organisations, charities and the third or voluntary sector more generally?
  • Finally, is there any alternative to social investment? How might radical social movements interpret, engage with or challenge and resist the development of social finance? What fault-lines can we detect? Does finance’s ‘social and ethical turn’ signify a point of its vulnerability, the outcome of a legitimacy crisis, and hence a space within which new opportunities may exist to advance critique from a social and ethical perspective?

The first panel opened with a presentation by Dexter Whitfield, from the University of Adelaide, and Director of the European Services Strategy Unit (http://www.european-services-strategy.org.uk/). He focused on a central initiative of “impact investment market”, namely, the increasingly popular policy experiment by the name of “Social Impact Bonds”. He explained the structure and idea of SIBs, and also pointed to a host of weaknesses.

The Social Impact Bond claims to respond to public sector funding gaps (caused by public sector budget cuts) by incentivising private investment in public provisioning. They do so by offering financial rewards to investors when a specific social policy goal is achieved, by an organisation tasked, for example, with reducing prisoner reoffending, homelessness, or the number of children in care. This functions as a public-private partnership, involving a government commissioner which identifies a social policy target, and a non-governmental organisation acting as a project manager, an investor which lends money to a civil society organisation involved in meeting the agreed-upon policy goal. If this organisation hits the set target, so the theory goes, government have reduced expenditures in criminal justice or welfare costs, and these savings will be shared between public authorities and non-governmental investors. The idea is that the government will be “leveraging private capital for public goods”. In the aftermath of the global financial crisis of 2007/08, the G8’s Impact Investment Taskforce writes, that “impact investment” will “harness the power of entrepreneurship, innovation and capital for public good”. It is “the invisible heart to guide its invisible hand”.

This theory is being promoted on the national and international levels. As Whitfield writes in his paper, “Alternative to private finance of the welfare state: A Global Analysis of Social Impact Bond, Pay-for-Success and Development Impact Bond Projects”, “there are currently 54 operational social impact bond projects in 13 countries with at least a further 23 at the planning or procurement stage. The UK is the global leader with 32 operational projects with outcome payments valued at £91m, followed by the US with 9 projects.”

Whitfield provided a list of “30 financial and public policy flaws” in SIBs, arguing that, contrary to the purportedly innovative qualities of SIBs, that they are deeply path-dependent, calling them a “mutation of privatisation”. He criticised the increasing role of market ideas and private sector actors in the design, implementation, and evaluation of social and welfare policy, and the further commodification of state welfare functions. SIBs “extend markets and market forces further into the welfare state that could ultimately threaten social rights.”

Going beyond a critique of SIBs, Whitfield also sketched an “alternative vision of public services”, taking up some of the central themes of the SIB policy experiment, such as “early intervention and prevention” and “new public service management”, but placing them in a strongly public framework that limits market forces. This, he argued, would involve the “democratisation of public services”, “social justice and reducing inequalities”, “public ownership and investment”, “progressive taxation”, and “good quality jobs”, which he discusses in his paper.

Turning the focus to an earlier wave of “ethical finance” initiatives, Mareike Beck of the University of Sussex, provided a look at microfinance. Her presentation focused on the supply-side of these trends, looking at the case of German banks in “expanding the provision of ‘poor appropriate’ financial products into the Global South”. She provided a look at the Deutsche Bank in particular. She argued that microfinance cannot be understood simply as a response to the failures of Structural Adjustment Programmes in the 1990s, but also reflect the efforts of these institutional actors to become international investment banks, and of German finance to address legitimacy problems at home.

Claire Parfitt of the University of Sydney contrasted the new wave of “responsible investment” initiatives of the World Economic Forum and the United Nations with earlier, often faith-based, divestment or “ethical investment” campaigns that pressured firms to halt business practices considered to be unacceptable or unethical. She also discussed the role of pension funds within responsible investment portfolios, and the tensions this creates within trade unions by the “worker-investors” who take on “dual subjectivities.”

Norbert Wohlfahrt and Monika Burmester, from the University of Applied Sciences in Bochum, Germany, focused on changes in welfare from provision to “impact”, and from aftercare to preventative care, and the shift from public to private hands, organised around a business model. Their presentation showed how this strategy is connected to the E.U. “human capital” strategy, which, “equates optimal prevention strategies with the active valorisation of labour power as a commodity”. The result is that “the political ideas of supply-side economic and social policy are imposed on social work”.

Allison Roche, of the public services trade union, UNISON, provided a labour perspective of the “social finance” turn. Her comments focused on the growth of social enterprises known as “public mutuals”, which are increasingly taking over the delivery of public services and dismantling the public sector and welfare institutions. She challenged this blending of public and private values in these developments, as well as the informalisation of labour standards as employees shift from the public to private sector.

Robert Ogman’s talk focused on the resonance of “social finance” initiatives, pointing to their success in framing a purported “social neoliberal compromise” in response to austerity’s legitimacy crisis. He argued that SIBs implicitly legitimate the argument of austerity critics by acknowledging social crises. Yet, while they see the funding gap for social provisioning as having to do with a resource imbalance between public and private hands, they reject a redistributive approach, instead pursuing a plan of private investment, which has had mixed results and contains significant risks. SIBs too respond to critics’ objection to neoliberalism that warn of its socially destructive capacity (most recently seen in the financial meltdown of 2007/08). Yet they reject re-regulation, instead calling for the incentivisation of “ethical” investment. Thirdly, SIBs acknowledge the persistent fiscal crises of the state, yet, rather than increasing revenue through progressive taxation, they suggest that governments can replace social expenditures with private capital investment in social provisioning. Hence, SIBs acknowledge a set of arguments advanced by austerity opponents, yet channel these into the expansion of market-centred “public responsibility” initiatives. This is a contradictory process which austerity opponents could intervene in and point out the limits and dangers to, and by doing so, also advance a real paradigm shift.

Additional presentations included: Davide Caselli’s (University of Turin, Italy) paper on the “Financialisation and the Restructuring of the Italian Welfare State”, Marco Andreu from the University of Warwick on “Impact Investing and the Contingency of Market Ethics”, Julian Müller  from the Centre for Research on Multinational Corporations on “Harnessing Private Finance for Public Policy Goals”, and Jane Lethbridge (University of Greenwich) on “The Role of the State in Developing Social Finance and a Social Investment Market”. External discussants, Chris Clarke (University of Kent), Donatella Alessandrini, (University of Warwick), Adrienne Roberts  (University of Manchester), and Ekaterina Svetlova (University of Leicester) moderated and provided important outside perspectives to the discussions.

The meeting provided a rare opportunity to present critical perspectives on the emerging paradigm, which is mostly dominated by the think tanks and advocacy groups of the social finance policy network spanning the state, market, and non-governmental organisations.

The session closed with discussions about future research collaborations and public outputs. To contact the organisers, please contact Robert Ogman (robert.ogman@email.dmu.ac.uk).

Robert Ogman is a PhD candidate at the Department of Politics and Public Policy at De Montfort University, as well as a core member our team at CURA