Do Social Impact Bonds Work?

 

Ounce of Prevention, Pound of Cure

Governments spend a great deal of money and effort fixing things. They try to fix homelessness, fix poverty, fix crime. As any good mechanic will tell you, fixing things is expensive, and, as any good dentist will tell you, it is often cheaper to prevent problems than to try to fix them afterward.

Governments are not always good at implementing preventative measures. They are probably more risk averse than the private sector, and more likely to simply keep doing what they have done in the past. Preventative projects can be difficult and risky, and It may be more difficult to secure funding for these unproven projects.

This reticence is a bummer, because if these are genuinely good projects, they could both improve outcomes and reduce government costs. It is entirely possible that the cost savings would more than pay for the project.

If only someone else was willing to pay to try new programs.

How Do Social Impact Bonds Work?

A Social Impact Bond is an arrangement where investors fund programs designed to improve a societal outcome and save the government money. If this occurs, the government will reimburse the investors (often plus a bit) using a portion of the money it would have otherwise spent. Social Impact Bonds are linked with pay for success policies, but the two are not synonymous.

While there is no exact standard or formats for Social Impact Bonds, they typically have the following structure:

Investors who believe in a certain program provide money to fund it.

Program Operators take their money and use it run the program.

An Evaluator measures the outcomes of the program with respect to certain targets.

After the program The Government pays back the investors depending on how successful the program was at meeting pre-determined targets.  A more detailed illustration can be found here.

smilingchild

This is a picture of smiling children. It has nothing at all to do with Social Impact Bonds. When writing about anything having to do with social responsibility, pictures of smiling children, attractive landscapes, and water, are very important.

Essex

The British county of Essex has an issue with young people ending up in state care. This can get expensive, with costs running between £20,000 to £180,000 per person per year. In an attempt to reduce the number of young people entering state care to begin with, the county used a Social Impact Bond to fund a program that provides therapy for 380 individuals and their families. This therapy will help families better deal with some of the issues that lead children to end up in state care in the first place. The £3.1 million upfront cost of the program is being largely funded by social impact investors Bridges Ventures and Big Society Capital[1]. This money goes to[2] a group called Action for Children, which provides the actual therapy.

To determine what payments the investors receive, a comparison is made between those who have received treatment and a predetermined historical control group. For two and a half years after their referral into the program, each participant is tracked on a quarterly basis. The difference in observed days spent in care between the participants and the control group determines how much the government of Essex will pay to the Investors. As of fall 2016  82% of the 208 adolescents[3] who have received treatment remain with their families.[4]

Kent England Sky United Kingdom Landscape Scenic

This has nothing at all to do with Social Impact Bonds. But it is lovely.

Do Social Impact Bonds work?

Social Impact Bonds are new enough that this is a mostly unanswerable question.  Based on this report from SocialFinance, there are few Social Impact bonds that have been around long enough for payments to begin. Of the 22 early projects that SocialFinance reports on, 12 have made payments and 4 have fully repaid investor capital. This is a higher percentage than it might seem, as many of the projects are too new to be able to report results. Only one project, a project to reduce recidivism at Rikers island[5], has demonstrably failed to return value to its investors.

This appears to be a positive outcome. If very few social impact bonds pay out, then both the specific programs and Social Impact Bonds in general would fail. For Social Impact Bonds to work, there needs to be sufficient motivation for investors (even the socially minded ones who currently make up most of the Social Impact Bond investors) to invest. If Social Impact Bonds aren’t paying out, this source of funding will vanish. If social impact bonds are paying out, it means that they are achieving the measurable outcomes that they are designed to. If these outcomes are being achieved, the desired positive social change and associated cost savings, should be achieved as well.

Low Hanging Fruit

It may be that Social impact bonds are a deeply clever idea and there are lots of projects that provide opportunities for them to be used effectively. This would require many issues where early interventions can return cost savings down the road, and lots of places for social impact bonds to come in and make these interventions happen.

This might be true, especially in the early stages of Social Impact bonds. Many of the social impact bonds deal with similar issues such as homelessness or recidivism. If this is the case, Social Impact Bonds should be less successful as time goes on, as the easy improvements are all exhausted.

Not Enough Failure?

One of the motivations for social impact bonds is that they allow riskier, more unusual or innovative projects to be implemented. It seems only reasonable that many of these unproven projects should fail.

If they don’t fail, this is concerning. Some possible reasons for a lack of failure might be:

  • The riskiness of these projects has been vastly overestimated. This brings into doubt how the government and other institutions decide on what projects to undertake and the measures they use to evaluate risk.
  • Social Impact bonds are not driving risky innovative projects, but instead are only providing an alternative method to undertake relatively safe projects. This might mean that the projects are successful, but it seems like a key promise of Social Impact Bonds would be missing.
  • The measures of success of social impact bond funded projects are being artificially inflated. Even with third party evaluators and pre-determined metrics of success, most indicators can be manipulated. If money and success is on the line, the temptation to do what it takes to achieve this outcome will increase.

 

So far, It is not obvious what the failure rate should be, what is an appropriate rate of return for a social impact bond is, what sort of projects are best suited for them, and who are the appropriate partners, and how the answers to all these questions might vary across projects and issues.

raindrops_on_water

Some water. This has nothing to do with Social Impact Bonds.

What Gets Funded?

Not every project is well suited to Social Impact Bond Funding. A necessary attribute for is to have a clearly measurable outcome.  There are many important issues for which this is not the case. Any program tackling a problem that cannot be easily quantified will not work for a Social Impact Bond.  If Social Impact Bonds work, they will funnel resources toward things that are measurable, and not necessarily the most important. Social Impact bonds will also lead to the funneling of resources toward the sort of projects that investors want to fund. This might channel resources toward projects that tackle very visible problems such as homelessness.

A Cautious Optimism

When I first heard about them (while researching this post) I thought they were super clever. I like the ‘you get what you pay for’ concept- if you pay someone to run a program that reduces recidivism, you’ll get a program. If you pay someone to reduce recidivism, you’ll get reduced recidivism. I also think the programs undertaken should be more innovative than traditional programs and possibly more effective for it.

As with nearly anything, there are issues and potential issues. Social Impact bonds only work in certain situations, but when used properly, they appear to be beneficial. One of the nice things about them, as an outsider, is that most of the risk is borne by the original investors.  I wish these investors the very best of luck in their investments. Maybe the rest of us will get something out of it as well.

 

Related Posts from PARTYSHEEPHATS

How should companies that operate private prisons get paid?

Sources, References, and Further Reading

Essex:

http://www.socialfinance.org.uk/wp-content/uploads/2014/11/Essex_A_year_in_review.pdf

Other Reading

http://www.economist.com/node/18180436?story_id=18180436

http://www.goldmansachs.com/our-thinking/pages/social-impact-bonds.html

http://www.frbsf.org/community-development/files/social-impact-bonds-lessons-learned.pdf

http://harvardmagazine.com/2013/07/social-impact-bonds

http://www.socialfinance.org.uk/wp-content/uploads/2016/07/SIBs-Early-Years_Social-Finance_2016_Final-003.pdf

https://www.rockefellerfoundation.org/our-work/initiatives/social-impact-bonds/

https://www.theguardian.com/voluntary-sector-network/2015/dec/10/do-social-impact-bonds-really-work-for-charities

http://www.scholarsstrategynetwork.org/brief/appeal-and-limitations-social-impact-bonds

http://cspcs.sanford.duke.edu/blogs/social-impact-bonds-do-benefits-outweigh-drawbacks

http://www.kauffman.org/blogs/policy-dialogue/2015/october/doing-business-with-government-difficult-for-startups

 

[1] Due to a mostly fortuitous set of circumstances, there was a period of my life where I spent a great deal of time looking at Corporate Social Responsibility reports. These inevitably consisted largely of images of smiling children and attractive landscapes- all completely insufferable. The people who designed those reports appear to be well employed designing the websites for Social Impact investment firms.

[2] Via a SPV called Children’s Support Services Ltd

[3] I have No idea if that is a good number or not.

[4] For other examples of social impact bonds see Social Finance’s database of social impact bonds.

[5] Maybe a social impact bond to improve the Yelp rating would have been more successful.

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How should companies that operate private prisons be paid?

Private Prisons

I am not a proponent of privatizing prisons. Since I am not yet in charge, there are private prisons in the United States. In 2010 there were just under 100,000 people incarcerated in private prisons in the US. (Although no longer for federal prisoners). There are also private prisons in other countries, both the UK and Australia have a higher percentage of their prisoners in private prisons than the US does.

Payment per Inmate

Private prison operators get paid by the government. This takes several forms, but is typically based on the number of prisoners that are incarcerated[1]. For a profit-minded business, the incentives are clear: maximize the number of people incarcerated while keeping costs as low as possible. These motivations can reduce overall costs of prisons[2]-which is why privatized prisons can be attractive to governments.

This often doesn’t work out too well for inmates, private prisons tend to have more issues with violence, overcrowding, and general unpleasantness. A 2016 DOJ report found that privately run federal prisons were 9 times more likely to place prisoners in solitary confinement, and had higher levels of prisoner complaints on issues like food and treatment by prison staff.

Paying per inmate creates three different perverse incentives for the prison management company. First, unlike most of us, the company would prefer a world which has as many people incarcerated as possible. Second, they are encouraged to keep costs as low as they can get away with. This isn’t necessarily bad, a true efficiency gain is a genuine improvement, but excessive cost cutting can contribute to the problems cited above. Lastly, private prisons have no incentive to keep prisoners from reoffending, and may even have an incentive for them to come back to the prison after they have been released.

Melaleuca, Peterbourough, and Doncaster

In a women’s prison in Australia called Melaleuca, the last point is being addressed. For each prisoner that doesn’t return within two years Sodexo (the company that runs the prison) will get AUS $ 15,000. This is supposed to get the company to provide programs and services to reduce recidivism.

The UK has piloted similar programs at two privately run prisons for about half a decade now. At one prison, Peterbourough, the project is conducted through a Social Impact Bond.[3] At another prison, HMP Doncaster, Prison management company Serco’s payments are partially dependent upon the reconviction rate of released prisoners. If the rate does not fall from 58% to 53% the government will get 10% of the value of the contract back, if it falls below 52% Serco will be entitled to additional payments.

One motivation behind these sorts of programs is that the government only needs to pay for programs that are successful in meeting a certain target. Programs that do not meet their goals do not cost the government anything. This should allow for attempting a greater variety of programs and policies. 

Did it work?

Despite somewhat positive early results, the most recent results out of the prisons were mixed. At Doncaster, the most recent cohort of released prisoners had a proven reoffending rate of 54.6% as this is greater than the 53% target, Serco must pay back part of the contract. At Peterborough, larger scale policy changes meant that the social impact bond could not be properly evaluated.

The success of the individual programs and policies used to reduce recidivism need to be evaluated separately from the general payment policies. Just because recidivism was not reduced does not mean that the pay for success program failed. It just means that the programs used to reduce recidivism were not as successful as hoped. Maintaining these sorts of payment schemes should encourage companies to experiment with different policies and ideas.

 

Careful What You Pay For

Having some payment based on reoffending is almost certainly an improvement over simply paying on a per prisoner basis, but it is not without risks. The advantage of any sort of metric based rewards system is that it encourages performance on a certain specific metric. The problem with these systems is that they encourage performance on a certain specific metric. Funders will get exactly what they pay for and very little else.

There are myriad examples of this happening: Food corporation Green Giant had a problem, customers kept finding bits of insects in their bags of frozen peas.  Presuming their customers were not fans of entomophagy, Green Giant management decided to institute a rewards system for workers who found insect parts. The employees started finding many insect parts, because they were bringing insects from home, just to ‘find’ them and claim the reward[4].

How to reduce reoffending (without doing any work)

Even without outright fraud, there are lots of ways for a company to meet a target without actually making improvements. Imagine a prison which exclusively makes money from rehabilitating prisoners. Pretend the prison management company gets paid $10,000 for every year a released prisoner goes without committing a crime, and that this is its only source of funding. The prison management company likely would do some of the following[5]:

  • Try to house inmates who are unlikely to commit crimes after their release. The most valuable inmates are the ones who are least likely to commit crimes in the future. Additionally, the prison will try to avoid those people who it deems more likely to commit crimes in the future.
  • Release a lot of prisoners. A prisoner in prison has no chance of making the prison any money, whatever the prison can do to get people out so they can not commit crimes, it will do.
  • Take In a lot of prisoners. To release as many as possible, the prison management company will need to get as many people into the prison as possible.
  • Provide services for those that can be cheaply helped. It might benefit the prison’s bottom line to fund programs that increase the likelihood of someone not reoffending in the future. They will not offer these programs for everyone, but just for the prisoners who they believe are worth the cost.
  • Release young prisoners. If a prisoner is released at 25 and lives a crime free life until they are 80, the company will get $550,000. A prisoner who is released at 60 and lives a crime free life until 80 is only worth $200,000 to the company. This means that younger prisoners are more likely to get whatever services the company can offer, and older prisoners are likely to be ignored.
  • Keep costs as low as possible. Presumably the prison would still need to house prisoners for the duration of their sentences. It would have no incentive to fund improvements, unless it thought these improvements would help recidivism.

 

Most of these depend on the particulars of the exact payment metric. A payment metric that paid out based on the percentage of released prisoners who reoffended, would not encourage prisons to take in and release as many prisoners as possible.

A single clear metric is very easy to manipulate. It is likely better to use a lot of metrics. Prison management companies could be paid based on how many prisoners they housed, how many went on to commit crimes, the number of violent incidents, the type of prisoners, and possibly dozens of other metrics. While this might be harder to manipulate, it is also harder to keep track of, and may be difficult to find the right balance of metrics and payments.

All payments are based on some sort of metric. Currently that metric is the number of prisoners incarcerated. In select prisons, such as Melaleuca, another metric involving recidivism has been added. While finding the perfect mix of metrics is somewhere between difficult and impossible, improving on the current system seems manageable. Certainly, it is worth trying.

 

 

 

 

 

 

References, Sources, and Further Reading

http://www.bbc.com/news/world-us-canada-37124183

http://www.pri.org/stories/2016-09-01/australia-uk-have-higher-proportion-inmates-private-prisons-us

http://www.investopedia.com/articles/investing/062215/business-model-private-prisons.asp

https://www.theguardian.com/us-news/2016/aug/12/private-federal-prisons-more-dangerous-justice-department

http://www.newyorker.com/news/news-desk/why-the-u-s-is-right-to-move-away-from-private-prisons

http://qz.com/849774/in-australia-sodexo-owned-private-prison-company-melaleuca-will-get-cash-for-every-freed-inmate-who-does-not-come-back/

http://www.abc.net.au/news/2016-11-28/prison-to-get-2415k-for-every-prisoner-who-does-not-return/8062174

http://www.russellwebster.com/disappointing-outcomes-for-peterborough-and-doncaster-prison-pbr-pilots/

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/341682/pbr-pilots-cohort-1-results.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/449505/doncaster-pbr-pilot-cohort-2-results.pdf

https://www.theguardian.com/us-news/2016/aug/12/private-federal-prisons-more-dangerous-justice-department

http://knowledge.wharton.upenn.edu/article/the-problem-with-financial-incentives-and-what-to-do-about-it

 

 

 

 

[1] In addition, many contracts provide a guaranteed income for the prison company regardless of how many prisoners they actually house.

[2] Although it is not clear if they actually do

[3] A social impact bond allows private parties to pay the upfront costs of a program, and the government only pays the investors if certain targets are met. Private parties buy into the social impact bond, the money from which is used to provide programs (mostly mentorship) to help short term prisoners not reoffend. If the reoffending rate does not drop by 7.5% The investors don’t get any money.

[4] http://knowledge.wharton.upenn.edu/article/the-problem-with-financial-incentives-and-what-to-do-about-it/

[5] Admittedly, I do not know what sort of control prison management companies have on decisions of release and who enters the prison. I would guess their roles in these things are largely indirect.