I spent my last 3 blogs on Social/Development Impact Bonds (“Social Impact Bonds! Moving from outputs to outcomes…“, “After SIBs… now we talk DIBs!” or “An experiment – two SIBs to help Germany solve its migration crisis!? (1 of 2)“). I wanted to spend this one on an update on SIBs in the UK which is the country where actors have acquired most experience with this new tool. And BridgesVentures is the fund manager which has raised the world’s first fund dedicated entirely to investing in SIB-funded outcome contracts. In addition, since 2012 BridgesVentures has directly invested in 13 of these contracts, almost half of them commissioned by the UK government.Now 6 years of experience should lead to quite a list of lessons learned which I try compile from a number of documents. One of them a publication where BridgesVentures reviews their work with regards to SIBs. In addition, there is now information available on three SIBs which completed their original contracts. Please find below these lessons learned, benefits but also existing challenges of this innovative tool:
Investors achieved positive financial returns and used these to support follow-on SIBs
Outcomes contracts have considerable potential to help governments drive positive social change by improving performance, increasing efficiency, and re-aligning incentives in existing service provision.
In some key policy areas, outcome contracts are already delivering better results and there is strong support from central government.
Service providers receive much greater scope to adapt and improve their services.
In addition SIBs create clear financial incentives for providers to deliver better-than-expected results.
Commissioners can choose from a much broader pool of providers than they would otherwise have been able to.
SIBs drive better results from existing services, correct perverse incentives created by previous policy, bring together multiple stakeholders to tackle complex issues, unlock future savings by investing more up-front, trial new solutions; transfer financial risk of failure.
At the same time, there seem to be essential pre-requisites for a successful SIB:
- An ability to define a specific cohort (e.g., childern in residential care or adults with long-term health conditions)
- Positive outcomes that can be defined and measured objectively (e.g., qualifications reached or entry into employment)
- An ability to place a velue on these positive outcomes which generally requires reference to a tangible baseline/counterfactual.
From another article “Questions remain about Social Impact Bonds“, I also read about some of the challenges about them:
SIBs are inherently expensive due to the cost for setting up their complex structures and the fact that the funders pay the investors interest. Advantages of SIBs might justify these cost, since they help to transfer risk away from the public sector and bring in external funds.
The government’s strategy for the model doesn’t follow through when it comes to innovation. There doesn’t appear to be any provision for developing and scaling up new interventions that are shown to have worked under a SIB, via traditional forms of commissioning – which would save paying the premium that the SIB model entails.
And as for bringing in external funding, it’s not clear whether the money being put into SIBs is genuinely additional, or whether it would have been used for traditional philanthropic funding anyway.
Last year the National Audit Office published an overarching review of outcome-based payment schemes, and made recommendations for commissioners to follow when designing them. The framework it published alongside the review suggests there are limited circumstances in which payment-by-results will be the most appropriate model for commissioners to adopt.
Commissioners have been making some serious design mistakes when it comes to payment-by-results.
The evaluation report for the Peterborough SIB found that the programme had successfully reduced reoffending, but that with respect to the model, there was “no compelling reason to believe that SIB funding on its own fosters innovation”.