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 

Gage Skidmore via Creative Commons
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Donald Trump brings home his dark vision of America at the Republican convention

The Presidential nominee pledged: "Safety must be restored."

Donald Trump brought home the Republican convention Thursday night with a dark vision of contemporary America – a darkness he claimed only his leadership could lift. It was a lengthy, tightly-scripted speech framed around polarities – insiders and outsiders, criminals and victims, the United States and the rest of the world – and infused with righteous anger. And yet against the darkness, he offered not lightness but “greatness” – a bombastic, personalistic vision of how through sheer force of will he could right the American ship before it plunged irretrievably into the depths. “I alone can solve,” he famously tweeted earlier in the campaign. This was the 80-minute version.

Any presidential challenger, of course, has to lay out a set of problems they believe need fixing and a case for why their leadership might make a difference. It was the breathtaking scale and intensity of Trump’s diagnosis, and the lack of optimistic alternative to counterbalance it, that was notable compared to other acceptance speeches. He portrayed the United States as a country riddled with crime and corruption, a “rigged system” in which politicians like Hillary Clinton can evade justice, while police officers trying to protect its citizens become targets; a fearful country, its economy sluggish, its infrastructure crumbling, its security an illusion, and its international stature in freefall

For a candidate who has mocked the soaring rhetoric of President Obama (the “hopey-changey stuff,” as Sarah Palin once called it), it was perhaps not surprising that Trump’s speech would be short on uplift. It was at least more disciplined than his other campaign speeches, if in keeping with their tone and content – the much-maligned teleprompter rolling a script to which he largely stuck. (“He sounds presidential,” a lady behind me remarked, though his press conference Friday morning marked a reversion to free-wheeling form).

It was short on substance too, though acceptance speeches aren’t designed to be policy laundry lists like a State of the Union. Still, there were few specifics, beyond a pledge to revise tax laws which inhibit religious groups from political advocacy, and a newfound concern with student loans. It was daughter Ivanka’s speech that had the greater substantive heft, promising her father would push for new labour laws to help working mothers, and for affordable childcare in the US. Neither are traditional Republican positions, but the crowd seemed on board for anything Trump might offer.

He even had them cheering for LGBTQ rights, after recalling the tragedy in Florida last month, and the need to protect gay Americans from a “hateful foreign ideology” in radical Islam. “It is so nice as a Republican to hear you cheering for what I just said,” he commended the delegates in an unscripted moment. But whether they had really embraced this unexpected message – or if it was the anti-terror chaser that really got them on their feet – remains to be seen. In either case, it was a rare grace note in an otherwise bruising speech.

Presenting himself repeatedly as the candidate of “law and order,” Trump evoked Richard Nixon’s 1968 presidential campaign. At a time when American cities were erupting in race riots and protests over the Vietnam War, Nixon had pitched himself as the face of stability and security. Likewise Trump has reacted to the simmering racial tensions and terrorist attacks this summer with a hard-line stance on “lawlessness.” “Safety must be restored,” Trump said, in one of the eerier lines he delivered. Yet in his convention speech, Nixon had balanced his tough talk with a positive message – speaking of love, courage, and lighting a “lamp of hope” in partnership with the American people. 

Trump channeled another president in his speech, too, when he promised to give voice to “the forgotten men and women of our country” – drawing on the language of Franklin Roosevelt. Roosevelt had promised to aid “the forgotten man at the bottom of the economic pyramid” during the 1932 campaign. But Roosevelt’s solution to the forgotten man’s distress was economic internationalism – tearing down tariff walls and trading freely with the world – which the Republican Party then opposed. Trump’s solution is the protectionist policies Roosevelt had railed against.

Trump’s economic and security philosophy is encapsulated in another, more notorious phrase associated with that era: “America First.” A rallying cry for isolationists seeking to avoid US entanglement in World War II, it acquired an anti-Semitic taint. But Trump has employed it nonetheless, capturing as it does his core argument that America must do more to protect its own citizens against threats from within and without – from illegal immigrants, from radicalized Islamic terrorists, from the downsides of free international trade. Little wonder that former George W.

Bush staffer Nicolle Wallace announced that the Republican party she knew “died in this room tonight.” In embracing elements of isolationism, protectionism, and nativism, however, it is perhaps truer to say that Trump’s Republican party reverted to an earlier form.

Often disconcerting, at times mesmerizing, the question remains how effective this speech will be. The delegates responded enthusiastically to Trump’s fierce rhetoric, but many prominent Republicans had stayed away from the convention altogether. Combined with Senator Ted Cruz’s non-endorsement, Trump goes into the general election campaign without a fully united party behind him. For both partisans and the public, Trump’s speech offered a cast of villains to rally against, but no positive, unifying vision to rally behind – beyond the much-touted yet elusive “greatness,” of course. In a typical election year, that would seem a critical flaw in a campaign – but Trump loves to confound the naysayers. As his convention speech showed, he thinks the formula that got him this far - showcasing his fame and fanning Americans’ fears – can land him in the White House.