The social impact bond wars: The defense responds and the prosecution rests

BY Jane Hughes and Alisa Helbitz  February 20, 2014 at 12:57 PM EDT
Are social impact bonds, like the kind used to finance a cognitive behavior therapy program at Rikers Island, above, a profit-maker for investors or a way to hold government accountable? Photo by Emmanuel Dunand/AFP/Getty Images.

Are social impact bonds, like the kind used to finance a cognitive behavior therapy program at Rikers Island, above, a profit-maker for investors or a way to hold government accountable? Photo by Emmanuel Dunand/AFP/Getty Images.

Editor’s Note: Social impact investing sounds like an innovative way of uniting private investors, nonprofits and government to deliver social services with demonstrable outcomes. But who’s profiting from that financing model?

It’s too early to say whether the cognitive behavior therapy program at Rikers Island, which Making Sense profiled last spring (watch below), has reduced recidivism in New York City. That’s the outcome required for the city to repay Goldman Sachs’ investment. But fights among young offenders at Rikers are down since implementation of the Osborne Association’s cognitive behavior therapy program last year.

The problem, social impact bond skeptic Mark Rosenman argues, is not that these programs don’t help young offenders, it’s that banks like Goldman Sachs are also benefiting from these bonds — at the expense of taxpayers. If Goldman paid more taxes, he says, there wouldn’t be a need for private financing in the first place.

And when nonprofit foundations are the primary investors, the efficacy of social impact bonds can really only be assessed on a case-by-case basis, according to a 2013 National Bureau of Economic Research paper. The hypothesized benefit, the paper explains, is that investors will have more agency and more stake in achieving the social goal. But, it cautions, altruistic and financial goals can always conflict.

Here to defend social impact bonds as a way of ensuring efficient use of taxpayer dollars are two of its champions from Social Finance, a nonprofit intermediary that directs investment capital toward social services. Jane Hughes is director of knowledge management at the U.S. branch of Social Finance and Alisa Helbitz is director of research and communication at Social Finance U.K.

And with a last word, Mark Rosenman responds.

Simone Pathe, Making Sense Editor


As the originator and now global leader of the Social Impact Bond (SIB), also known as “pay-for-success,” market, we believe that it is important to lay out the rationale for SIBs. In a time when demand for social services is rising, but resources are increasingly constrained, SIBs bring additional sources of funding and support for underserved populations who are most in need.

The partners in a SIB — government, private investors, social service providers and a (nonprofit) intermediary like Social Finance — come together to generate social and economic value. Government only pays for successful, measurable outcomes (how many ex-offenders stay out of jail and find gainful employment, for example). If the programs fail to achieve positive outcomes, government owes nothing and investors lose their money.

The core concept of SIBs — that investors benefit if and only if society benefits — is transformational.

Moreover, SIBs drive government accountability by transferring the risk of failure to investors and by focusing attention on outcomes rather than outputs (how many people enroll in a program, for example) in public services. Rigorous evaluation of outcomes is at the core of the SIB concept. In addition, SIBs are designed to direct resources to social interventions that try to prevent problems from emerging rather than address problems after they have emerged, embodying Benjamin Franklin’s maxim that an ounce of prevention is worth a pound of cure.

It is also important to highlight what SIBs are not. They are not meant and will never be able to enrich investors or intermediaries. As an intermediary, Social Finance is a nonprofit organization dedicated to mobilizing investment capital to drive social progress.

In the U.K., U.S., Australia, Canada and elsewhere around the world, SIBs and pay-for success enjoy support across the political spectrum. In particular, SIBs are not instruments of enrichment for wealthy investors; they are appropriate for impact investors who seek both financial and social returns on their money, rather than commercial investors who are focused on the financial bottom line.

At the same time, SIBs are not promising solutions to all social problems. They are not appropriate for every area of social welfare activity. They are an attempt to change a very bureaucratic culture of government funding of the social sector and encourage investment into deeply rooted challenges that have either been overlooked or not properly funded before.

SIBs need to have a clearly defined outcome that can be independently measured and attributed to the SIB. That doesn’t mean that less tangible outcomes, such as wellbeing and community cohesion, are any less valuable. It just means that they are more difficult to quantify and assess for an investment contract.

SIBs are not intended to replace public services nor do they allow governments — local, state, federal or central — to relinquish responsibilities for those people they care for. They are intended to complement existing services and bring new funding resources and innovation to overstretched social services. Governments remain the ultimate payor in SIB transactions; they still pay for positive outcomes, but only after these outcomes have been demonstrably achieved.

In the U.S. and UK, we work closely with the existing social providers and the local social services so that we can enhance public sector efficiency and accountability. Moreover, experts estimate the size of the U.S. SIB market over the next few years at $300 million. This is an impressive number, but minuscule relative to the fact that total social expenditures by the government are a towering $5 trillion per annum.

SIBs are multidimensional, complex and challenging to implement — but so are the social problems that they are designed to tackle. While the limits of SIBs are clear, we believe that they can drive social progress by unlocking new forms of investment and by funding social innovation. They are not intended to drive tax relief; rather, they are intended to drive efficient use of taxpayer dollars.


Editor’s Note: Mark Rosenman, emeritus professor at Union Institute & University, was our social impact bond skeptic in last spring’s Rikers Island series. Wednesday on Making Sense, he made the case that private investors exploit the social impact bond model while skirting their own tax burdens. Here he responds to Hughes and Helbitz.

Mark Rosenman: I appreciate Alisa Helbitz’s and Jane Hughes’ sincerity and motivation. I do not, however, appreciate their argument that the best way to address shortages of “funding and support for underserved populations” is for them to pioneer a financing model now being exploited by the likes of Goldman Sachs and Morgan Stanley.

Further, for them to conflate pay-for-success approaches exclusively with such a model is to deny efficacy to government and philanthropic support and to nonprofits themselves. “Rigorous evaluation of outcomes” does not require a profit motive.

What I argue in my piece is that the creation of new profit-generating models to finance necessary social programs substitutes the pursuit of private gains for the exercise of public responsibility.

It is wrongheaded that financial institutions, banks, investment houses and even nonprofit (as well as for-profit) intermediaries promote market models to meet public needs. This is especially true when, at the same time, many of those very entities and their allies fight to starve government of the tax revenue necessary to meet the needs of “underserved populations” and other social and environmental programs.

And make no mistake about it — those financing Social Impact Bonds (SIB) and similar models do indeed expect a significant return on their investments. If this weren’t the case, why would Goldman Sachs and others refuse to limit their possible income from them to a modest cap or socially-responsible percentage?

While the Social Finance advocates argue that their investment schemes are “aimed at preventing problems from emerging,” that clearly is not the case demonstrated by their initial focus on prisoners’ recidivism. The very nature of such a financing model depends on a pool of people who have already engaged in criminal behavior — behavior that is highly correlated with poverty and other social problems which have in no way been prevented.

If prevention is a goal, why not finance anti-poverty, community development and social and economic justice programs that decrease the likelihood of criminal behavior in the first place? Since the answer given by SIB advocates and advocates for similar models is that such program outcomes are “more difficult to quantify and assess for an investment contract,” then shouldn’t we be promoting funding models that are more appropriate for the needs at hand? Shouldn’t we be generating the public revenue for the social investments and enhanced public institutions necessary to improve lives and address poverty so that fewer people fall into crime in the first place?

I fully agree that we need to “encourage investment into deep
rooted challenges that have either been overlooked or not properly funded
before,” as Helbitz and Hughes wrote in response to my article in The Chronicle of Philanthropy. But while social investment advocates argue that their models “are an attempt to change a very bureaucratic culture of government funding of the social sector,” they insist on rigid evaluation mechanisms that have discouraged innovation.

Certainly government and philanthropic funding mechanisms need to be improved significantly, but a private-profit market model isn’t the way to do that.

There is little consolation in the fact that “governments remain the ultimate payor in SIB transactions” when, under many of these schemes, public savings flow to private investors. An example is the Head Start/early childhood education example I cited in my piece that’s diverting public benefit to private financiers.

SIB advocates are working hard so that their scheme might generate $300 million in private investments over the next few years. I’d much rather see their efforts and those of their financial partners (such as Goldman and Morgan Stanley) instead working for a Wall Street Sales Tax that could generate well over $200 billion a year in much needed public revenues for the kinds of programs we all want to see funded.

We don’t need financiers working for private gain from social programs; we need citizens working for greater public revenue and its more effective use by government in funding nonprofit services and programs that reduce inequality and raise the quality of life for all of us.