Goldman Sachs gets into social impact bonds - but what are they?

Ryan Shorthouse of the Social Market Foundation explains the reasoning behind social impact bonds.

Fiscal retrenchment is catalysing radical thinking among policymakers about how to get better public services for less money. Social impact bonds (SIBs) are currently fashionable in policy debates as a possible means of financing interventions. With SIBs, social investors fund a particular service, and only get a return if the intervention improves outcomes which will lead to reduced government expenditure in the long-term. In the current environment, Government wants to pay investors only out of identifiable savings. And an idea that started here in the UK has now gone global. Just last week Goldman Sachs announced that it was spending $9.6 million on a 4-year programme aimed at reducing recidivism of offenders at Rikers Island prison in New York.

SIBs are potentially an ingenious way of getting more bang for taxpayer bucks at a time when public money is short. They are a vehicle for encouraging innovation in public service delivery because they devolve the financial risk to investors and organisations who can affect outcomes on the ground. At a recent SMF conference, Iain Duncan Smith MP said:

It could mean a change to the whole way that Government and private sector work together to solve social problems.

The first ever SIB launched in 2010 and funds work to reduce re-offending among offenders released from Peterborough Prison. Philanthropic investors will receive a return on their investment if the interventions funded achieve at least a 10 per cent reduction in reoffending each year, or at least 7.5 per cent across all three years. Other schemes are now emerging: in Manchester, for example, the Council is sourcing funds from social investors to provide intensive support for eight young people with challenging circumstances to live in foster care rather than in residential care.

SIBs are an important part of the funding jigsaw. But they are not the magic bullet for all public services. Social investment – where investors invest in the work of charities and expect a return – is still small: in 2010, £190m was sourced for social investment compared to £3.6bn in philanthropic grant funding and £55.3bn in wider bank lending. And SIBs only constitute a small part of all social investment. The small scale is mainly down to a lack of decent investable propositions. There are at least three big reasons for this.

First, because SIBs are embryonic market information about the likely risk and reward in different service areas is poor. Investors are jumping into the unknown. Little is known about how effective new interventions could be at, say, cutting re-offending levels, so investors don’t have much to go on in assessing the investment proposition. This uncertainty is exacerbated by the length of time it may take for outcomes to be observed, especially for early intervention programmes. The Government has helped set up Big Society Capital which it hopes will co-invest with private investors to send a signal to them and mitigate their risks by accepting lower interest rates or taking on the junior part of a debt. It is also hoped that Big Society Capital will fund new products that support impact measurement.

Second, there is a risk that investors are not paid appropriately. In most public services it is difficult for government to identify whether outcomes have improved, let alone to attribute those improvements to the work of the provider. If re-conviction rates fall after an intervention how can government distinguish between its being the result of the intervention or perhaps a change in the local policing strategy? An up-tick in re-offending could be the consequence of high local unemployment, or a statistical blip, rather than ineffective interventions. Correctly attributing outcomes to their cause is notoriously difficult. But without resolving that challenge both government and investors will remain reluctant to embark on large scale SIBs.

Third, even where outcomes are measurable, quantifying the financial benefits for taxpayers is tough. Improved employment outcomes for unemployed people or better GCSE results for children in care may be good in themselves, but quantifying the public savings is no simple task. All the more so if those savings are spread across a number of government departments, making coordination difficult.

The potential for SIBs and other payment by results schemes to revolutionise public service delivery lies in the incentives they create for providers to innovate. But there are many hurdles for government to overcome if this approach is to enter the mainstream. Improving measurement and data collection, working across departmental silos, and simply taking a punt on financially risky ventures to find out what works may all be necessary steps. In time SIBs could save government money. But the first steps on the road will be costly. And right now that’s not something that government wants to hear.

A guard at the entrance of Rikers Island in 1955. Photograph: Getty Images

Ryan Shorthouse is the Director of Bright Blue, a think tank for liberal conservativism 

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The most terrifying thing about Donald Trump's speech? What he didn't say

No politician uses official speeches to put across their most controversial ideas. But Donald Trump's are not hard to find. 

As Donald Trump took the podium on a cold Washington day to deliver his inauguration speech, the world held its breath. Viewers hunched over televisions or internet streaming services watched Trump mouth “thank you” to the camera, no doubt wondering how he could possibly live up to his deranged late-night Twitter persona. In newsrooms across America, reporters unsure when they might next get access to a president who seems to delight in denying them the right to ask questions got ready to parse his words for any clue as to what was to come. Some, deciding they couldn’t bear to watch, studiously busied themselves with other things.

But when the moment came, Trump’s speech was uncharacteristically professional – at least compared to his previous performances. The fractured, repetitive grammar that marks many of his off-the-cuff statements was missing, and so, too, were most of his most controversial policy ideas.

Trump told the crowd that his presidency would “determine the course of America, and the world, for many, many years to come” before expressing his gratefulness to President Barack Obama and Michelle Obama for their “gracious aid” during the transition. “They have been magnificent," Trump said, before leading applause of thanks from the crowd.

If this opening was innocent enough, however, it all changed in the next breath. The new president moved quickly to the “historic movement”, “the likes of which the world has never seen before”, that elected him President. Following the small-state rhetoric of his campaign, Trump promised to take power from the “establishment” and restore it to the American people. “This moment," he told them, “Is your moment. It belongs to you.”

A good deal of the speech was given over to re-iterating his nationalist positions while also making repeated references to the key issues – “Islamic terrorism” and families – that remain points of commonality within the fractured Republican GOP.

The loss of business to overseas producers was blamed for “destroying our jobs”. “Protection," Trump said, “Will lead to great strength." He promised to end what he called the “American carnage” caused by drugs and crime.

“From this day forward," Trump said, “It’s going to be only America first."

There was plenty in the speech, then, that should worry viewers, particularly if you read Trump’s promises to make America “unstoppable” so it can “win” again in light of his recent tweets about China

But it was the things Trump didn't mention that should worry us most. Trump, we know, doesn’t use official channels to communicate his most troubling ideas. From bizarre television interviews to his upsetting and offensive rallies and, of course, the infamous tweets, the new President is inclined to fling his thoughts into the world as and when he sees fit, not on the occasions when he’s required to address the nation (see, also, his anodyne acceptance speech).

It’s important to remember that Trump’s administration wins when it makes itself seem as innocent as possible. During the speech, I was reminded of my colleague Helen Lewis’ recent thoughts on the “gaslighter-in-chief”, reflecting on Trump’s lying claim that he never mocked a disabled reporter. “Now we can see," she wrote, “A false narrative being built in real time, tweet by tweet."

Saying things that are untrue isn’t the only way of lying – it is also possible to lie by omission.

There has been much discussion as to whether Trump will soften after he becomes president. All the things this speech did not mention were designed to keep us guessing about many of the President’s most controversial promises.

Trump did not mention his proposed ban on Muslims entering the US, nor the wall he insists he will erect between America and Mexico (which he maintains the latter will pay for). He maintained a polite coolness towards the former President and avoiding any discussion of alleged cuts to anti-domestic violence programs and abortion regulations. Why? Trump wanted to leave viewers unsure as to whether he actually intends to carry through on his election rhetoric.

To understand what Trump is capable of, therefore, it is best not to look to his speeches on a global stage, but to the promises he makes to his allies. So when the President’s personal website still insists he will build a wall, end catch-and-release, suspend immigration from “terror-prone regions” “where adequate screening cannot occur”; when, despite saying he understands only 3 per cent of Planned Parenthood services relate to abortion and that “millions” of women are helped by their cancer screening, he plans to defund Planned Parenthood; when the president says he will remove gun-free zones around schools “on his first day” - believe him.  

Stephanie Boland is digital assistant at the New Statesman. She tweets at @stephanieboland