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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How Donald Trump is slouching towards the Republican nomination

There was supposed to be a ceiling above which Trump’s popular support could not climb.

In America, you can judge a crowd by its merchandise. Outside the Connecticut Convention Centre in Hartford, frail old men and brawny moms are selling “your Trump 45 football jerseys”, “your hats”, “your campaign buttons”. But the hottest item is a T-shirt bearing the slogan “Hillary sucks . . . but not like Monica!” and, on the back: “Trump that bitch!” Inside, beyond the checkpoint manned by the Transportation Security Administration and the secret service (“Good!” the man next to me says, when he sees the agents), is a family whose three kids, two of them girls, are wearing the Monica shirt.

Other people are content with the shirts they arrived in (“Waterboarding – baptising terrorists with freedom” and “If you don’t BLEED red, white and blue, take your bitch ass home!”). There are 80 chairs penned off for the elderly but everyone else is standing: guys in motorcycle and military gear, their arms folded; aspiring deal-makers, suited, on cellphones; giggling high-school fatsos, dressed fresh from the couch, grabbing M&M’s and Doritos from the movie-theatre-style concession stands. So many baseball hats; deep, bellicose chants of “Build the wall!” and “USA!”. (And, to the same rhythm, “Don-ald J!”)

A grizzled man in camouflage pants and combat boots, whose T-shirt – “Connecticut Militia III%” – confirms him as a member of the “patriot” movement, is talking to a zealous young girl in a short skirt, who came in dancing to “Uptown Girl”.

“Yeah, we were there for Operation American Spring,” he says. “Louis Farrakhan’s rally of hate . . .”

“And you’re a veteran?” she asks. “Thank you so much!”

Three hours will pass. A retired US marine will take the rostrum to growl, “God bless America – hoo-rah!”; “Uptown Girl” will play many more times (much like his speeches, Donald J’s playlist consists of a few items, repeated endlessly), before Trump finally looms in and asks the crowd: “Is this the greatest place on Earth?”

There was supposed to be a ceiling above which Trump’s popular support could not climb. Only a minority within a minority of Americans, it was assumed, could possibly be stupid enough to think a Trump presidency was a good idea. He won New Hampshire and South Carolina with over 30 per cent of the Republican vote, then took almost 46 per cent in Nevada. When he cleaned up on Super Tuesday in March, he was just shy of 50 per cent in Massachusetts; a week later, he took 47 per cent of the votes in Mississippi.

His rivals, who are useless individually, were meant to co-operate with each other and the national party to deny him the nomination. But Trump won four out of the five key states being contested on “Super-Duper Tuesday” on 15 March. Then, as talk turned to persuading and co-opting his delegates behind the scenes, Trump won New York with 60 per cent.

Now, the campaign is trying to present Trump as more “presidential”. According to his new manager, Paul Manafort, this requires him to appear in “more formal settings” – without, of course, diluting “the unique magic of Trump”. But whether or not he can resist denouncing the GOP and the “corrupt” primary system, and alluding to violence if he is baulked at at the convention, the new Trump will be much the same as the old.

Back in Hartford: “The Republicans wanna play cute with us, right? If I don’t make it, you’re gonna have millions of people that don’t vote for a Republican. They’re not gonna vote at all,” says Trump. “Hopefully that’s all, OK? Hopefully that’s all, but they’re very, very angry.”

This anger, which can supposedly be turned on anyone who gets in the way, has mainly been vented, so far, on the protesters who disrupt Trump’s rallies. “We’re not gonna be the dummies that lose all of our jobs now. We’re gonna be the smart ones. Oh, do you have one over there? There’s one of the dummies . . .”

There is a frenzied fluttering of Trump placards, off to his right. “Get ’em out! . . . Don’t hurt ’em – see how nice I am? . . . They really impede freedom of speech and it’s a disgrace. But the good news is, folks, it won’t be long. We’re just not taking it and it won’t be long.”

It is their removal by police, at Trump’s ostentatious behest, that causes the disruption, rather than the scarcely audible protesters. He seems to realise this, suddenly: “We should just let ’em . . . I’ll talk right over them, there’s no problem!” But it’s impossible to leave the protesters where they are, because it would not be safe. His crowd is too vicious.

Exit Trump, after exactly half an hour, inclusive of the many interruptions. His people seem uplifted but, out on the street, they are ambushed by a large counter-demonstration, with a booming drum and warlike banners and standards (“Black Lives Matter”; an image of the Virgin of Guadalupe, holding aloft Trump’s severed head). Here is the rest of the world, the real American world: young people, beautiful people, more female than male, every shade of skin colour. “F*** Donald Trump!” they chant.

After a horrified split-second, the Trump crowd, massively more numerous, rallies with “USA!” and – perplexingly, since one of the main themes of the speech it has just heard was the lack of jobs in Connecticut – “Get a job!” The two sides then mingle, unobstructed by police. Slanging matches break out that seem in every instance to humiliate the Trump supporter. “Go to college!” one demands. “Man, I am in college, I’m doin’ lovely!”

There is no violence, only this: some black boys are dancing, with liquid moves, to the sound of the drum. Four young Trump guys counter by stripping to their waists and jouncing around madly, their skin greenish-yellow under the street lights, screaming about the building of the wall. There was no alcohol inside; they’re drunk on whatever it is – the elixir of fascism, the unique magic of Trump. It’s a hyper but not at all happy drunk.

As with every other moment of the Trump campaign so far, it would have been merely some grade of the cringeworthy – the embarrassing, the revolting, the pitiful – were Trump not slouching closer and closer, with each of these moments, to his nomination. 

This article first appeared in the 28 April 2016 issue of the New Statesman, The new fascism