Warm-up for Social Impact Bond!
In July, the process to establish SIB will start in Estonia. We are also involved in the process. The next post refreshes our memory about SIB… and is also straightforward about the many problems of the approach.
Social impact bonds were first proposed and implemented in the UK. They are supposed to solve problems with social programs where certain attributes are underfunded. The problems include programs with large up-front costs, programs that affect a lot of people and risky programs. The solution was to use private capital to finance these programs.
Firstly, a public sector problem is identified which cannot be solved with the government resources. Secondly, the government identifies performance measures. Then private investors are found to finance the project which is supposed to solve the problem. When the program ends the impact is evaluated and determined if it was successful or not. If the program was successful, the government reimburses investors plus profit. If the program fails the investors do not get their money back.
Social impact bond is sort of a charity program which helps to develop measures to help the society. After these funded programs the government knows which measures work and which do not work at all, so they can implement programs which have a great social impact.
There are a lot of advantages when it comes to social impact bonds:
- Opportunity to fund programs which would otherwise not be funded because charitable funds usually do not find their way to the biggest problems but with SIBs it is the main goal.
- Saving public money because SIBs unlock new funding and use private sector’s investments as new sources of money.
- Government bears little risk because they do not have to pay investors back if the program fails.
- Encourages innovation because it makes the government more willing to fund risky projects since they initially do not have to come up with the program funds and only have to think about problem-solving.
- Allocating to greatest impact. This means that charitable funding often flows to emotionally more appealing areas but with SIBs it is possible to invest in areas which damage society the most, for example, crime prevention and avoiding youngster’s life ending in prison.
- Corrects poor incentives. SIBs can help to align activities in a systematic way. which means that multiple departments have to work together to acieve one goal.
- Promotes evidence based funding since after every program the impact is measured and evaluated whether the project was succesful
But there are also certain problems with social impact bonds:
- Complex structure which means that not everything is as clear as it should be
- Uncertainty makes investors want to invest less since they do not understand the concept
- Private sector may prefer profit to social impact which means that the whole idea of social impact bond and societal impact is worthless
- Private market may prefer to solve low-risk populations’ problems rather than high-risk ones’.
- Preferring short-term social outcomes to long-term social outcomes which deal with the fundamental problems. For example, when tackling poverty, initiatives which have short-term social outcomes like creating housing units are preferred to long-term projects like investing in education (which is the fundamental cause of poverty)
- Government saving / earning money to pay back investors might be difficult because government saves money if they do not have to pay welfare benefits to one person but it might not save any actual money before the entire prison wing closes.
- Reputational risk for the nonprofits if their program is unsuccessful
- Measuring the impact fairly and accurately. Different programs may have small impact on many departments that are hard to pool together and measure.
A nasty bunch of big problems, isn´t it? In the very next post we will see how to tackle these.
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