Social Value Capture: an idea whose time has come

Building social value

Following innovations in the UK and New Zealand, some of Australia’s more forward looking State governments are looking at two related innovations. The first is ‘social investment’ with social impact bonds leading the vanguard.

Social impact bonds

As Wikipedia tells us, a social impact bond “also known as a Pay for Success Bond or a Social Benefit Bond is a contract with the public sector in which a commitment is made to pay for improved social outcomes that result in public sector savings”. Thus philanthropic knowhow and funding together with some commercial funding might invest in a program that can be expected to achieve some socially beneficial outcome like reducing recidivism of some cohort of prisoners exiting a prison.

The idea is that this can help underwrite innovative social investment. At least as a novice it all looked pretty dodgy to me. And there is plenty to cavil at. For instance:

  • As with PPPs, the announcement of a political intention to proceed with social impact bond financed projects creates political incentives for such deals to be done even if there are lower cost means of achieving the outcome. This circumstance can lead to makeshifts in contracts whereby ultimate risks are underwritten by government, even where the apparent and immediate risk is with the private financier. The experience with PPPs offers many cases in which risk transfer to the private sector was inadequate, producing the worst of all worlds – higher costs to the public sector without the effective transfer of risk.
  • The scope to generate a new political economy of rent seeking, both in the immediate term in delivering the project, and over time as politicians and officials retire to take on lucrative jobs with the financial institutions that benefited from the financial innovations.
  • Also, just as there are many causes of social dysfunction, there are many causes of social healing, but this is all simplified in the accounting for social impact bonds. There will often be problems of attribution. To what extent did the SIB fund the observed benefit, and to what extent was it some other initiative? Not only can this muddy the accountability trail, but it does so in a pointedly invidious way. Most successful social endeavours tap into the good will and actions of many in the community and they may well think twice if they envisage some merchant banker making off with the dividends of their good deeds.

Still, I was more censorious of this before I understood just how poor the situation is at the moment.

I’d like to see us walk before we can run – by paying the NGO deliverers of social programs by results or at least paying bonuses for unusually good results. Alas that’s virtually non-existent, as is properly, objectively measuring results in my experience. Family by Family has been operating for over four years in South Australia and for around two in NSW and we’ve yet to get good data from either jurisdiction on our success or otherwise in preventing the kids in the families in the program from graduating to out of home care. Yet that’s the whole point of the program!

By contrast, once there’s a social impact bond, the money on the table means that Treasury and Finance Departments get involved in tying down evidence of impact as for instance they do in this social impact bond.  Tragically it seems very difficult to get that happening without such hijinks. And social impact bonds also provide nice ‘announcables’ for politicians.

The investment approach to welfare and other social expenditure

Meanwhile in New Zealand they’ve been pursuing what they call an ‘investment approach’ to welfare and attracting plaudits beyond the land of the long white cloud. Breaking out from the usual four year budget round, the aim is to manage welfare in the way insurance companies try to manage long tail liabilities like workers’ compensation. Australia’s NDIS is also set up to manage disability as long tailed liabilities.

Still there are a few things that stick in my craw about the New Zealand arrangements. The single minded goal is to minimise welfare payments. That’s a fairly niggardly view which I’d like to see replaced with something a little more focused around the needs of those on welfare – though obviously the community also has an interest in minimising its welfare liability. The thing is I expect a broader view of welfare might, in addition to improving lives, improve long-term welfare liabilities. Even if one were not thinking of the wellbeing of those on welfare, there are lots of other government liabilities beyond welfare – namely health – physical and mental, education, housing and corrective services. Likewise the impact of some good social programs may not be in lower liabilities but in better outcomes. We have some anecdotal evidence that Family by Family improves educational outcomes. Kids get their motivation back and perform better in school – but the direct effect on educational outlays alone is ambiguous. If they’re in remedial programs and we help kids recover from social dysfunction and deprivation they may exit remedial programs lowering outlays. But they may be playing hookey already so their return to school could increase outlays. The point is that it raises educational outcomes. So even if one disregards wellbeing as experienced by the target group, just minimising government outlays calls for a much wider perspective.

Another bugbear of mine regarding the ‘investment approach’ is the spurious precision and vast cost that come from professional actuarial reporting. This is a classic case of heading to a profession for some kind of respectability, when all the expertise and expense one gets from engaging actuaries is largely beside the point – the point being to move from an arbitrary four year perspective to a much more commonsensical approach which looks at long-term liabilities. You don’t need the theatre of actuaries reports to do the main thing which is look beyond the forward estimates. In all the excitement of following New Zealand’s investment approach, the Commonwealth has spent about twenty million dollars no doubt a good deal of it on actuaries, when the approach is complete commonsense and doesn’t need heavy outlays on actuaries. (Still, in the scheme of the literally trillions of dollars of liabilities, these baubles are not that important.)

Social value capture

Anyway, another commonsensical and important point is this. For New Zealand, a unitary state, the national government bears the liability of welfare and other social programs both on the outlays and the revenue side. Thus getting those in families into work not only reduces outlays on welfare social programs and unemployment, it increases tax revenue. By contrast in Australia, fixing up families that might otherwise be dysfunctional reduces what are predominantly State Government outlays liabilities. But the Commonwealth Government also has a fair bit of exposure on the outlays side – by way of its funding of unemployment benefits. And it has a far larger exposure on the revenue side with a direct exposure to income tax, and a secondary exposure to 25% of all additional economic activity.

So while our Prime Minister explores the scope for ‘value capture’ from physical infrastructure, there’s a case for the Commonwealth to help out the States in their tackling of social dysfunction. And thanks to Malcolm’s pioneering efforts, we even have a bit of terminology to help make the point. “Social Value Capture”. It would be nice to say that this would cost a Federal political party nothing in campaigning for the election because it’s only recirculating money that would come into the Commonwealth’s coffers. But the bean-counters would rightly say that the money would be parted with before the government reaped the resulting fiscal dividend. So there’s some upfront fiscal cost. But a program of partnering with the states in a mutual attempt at harvesting the dividends of social value capture should probably start small in any event. If I were a party heading to the election I’d plonk $50 or $100 million down in the first full year of action – which would be the second financial year of the next Parliament. I’d commit to the same figure in the succeeding years of the forward estimates as a minimum but with an eye to spending more than that if the evidence began mounting that the net present Commonwealth/State fiscal value of the outcomes exceeded their current Commonwealth/State fiscal cost.

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7 years ago

I don’t see why the Commonwealth wouldn’t simply argue that it already does help the states and that this is incorporated into the GST revenue as well as the medical budget (mental health services etc.) — and thus it is up to the states to spend the money as they see fit. Also, when you are looking at family dysfunction, you will never have enough money even for immediate concerns so that is where most will get spent (child protection, family violence etc.).

Of course, there may well be arguments for particular programs that save you money in the long term (the Victorian government is currently trying to get at this), but I don’t see why you wouldn’t simply have a funding agency that distributes this versus giving the money to the states and telling them they must spend a certain amount, especially because many of the organisations you are talking about operate in multiple states.

7 years ago

Pretty much everyone except engineers (who like to build things irrespective of their worth), bankers (who like fees) and politicians (who believe in free money) has viewed PPP’s as a dubious idea for a while now. And the string of PPP investment failures (particularly tunnels) has made it really hard to get sensible investors to commit to these PPP projects.

So what now for the rent seekers?

Enter social impact bonds, city deals and value capture. The new financing approaches pushed by engineers, bankers and politicians to ensure rent seeking continues and projects are undertaken irrespective of their actual worth. Sound familiar? What could possibly go wrong?

The financial equivalent of illusory card tricks continues……only the financial consequences for taxpayers are very expensive and can’t be avoided.

7 years ago

A couple of years ago I noted
“NSW has now actually put a smallish amount of its money where its mouth is, signing a $7m Social Benefit Bond contract with Social Ventures Australia.
The bond will raise private capital to fund the expansion of a successful [UnitingCare] program which works intensively with families to either safely return children in care to their families or prevent them from entering care in the first place.
This is, it’s fair to say, a proof-of-concept prototype rather than a working template. The NSW Government wants this to work, and is prepared to pay way over the odds to see that it does.
If the government just gave the money to UnitingCare rather than going through SVA, it would cost just $7 million. If the government borrowed that $7 million on its own account and gave it to UnitingCare, that would cost it less than $2 million dollars in interest over five years and make a total of $9 million. Going the SBB route, it’ll cost more than $4 million, a total of $11 million, a 30% increase over the base rate.
The theoretical advantage of SBBs is that the investors will take on any risk – but, again, the NSW Government very much wants the SVA bond to work, and it’s set the criteria so that there’s very little risk. The efficiency of the UnitingCare system would have to go down 20% from its current KPIs before the investors fail to get their 12%, and it has to drop by a third before they lose any of their principal. Those are not venture capital rates.
None of us would begrudge UnitingCare its $7 million, but it’s hard to see that this represents a viable new paradigm for not-for-profit financing. It’s a model social investment in the same sense that an Airfix kit is a model aeroplane.
Advocates of SBBs stress the good things that the projects do, and how much better procedures will save. David Hutchinson, CEO of Social Finance UK, was recently in Australia, where he said
It’s been a very exciting experience launching and operating the pilot in Peterborough over the last couple of years. At a most fundamental level, we have seen how collaboration between organisations can deliver a much better result for the prisoner. …. we have seen systemic change. We’ve seen the prison rearrange how they actually deal with rehabilitation. We’ve seen them introduce similar practices in the women’s prison, and then at a higher level we’ve seen the progress of Peterborough put this type of contracting on the table as a legitimate policy tool of government. We’ve seen investors change their perspective on social investment.
Surely, though, the merits of the form of financing should be considered independently of the merits of the actual project. The client work could have been improved, and the subsequent savings logged, whether the project was funded by SFU or by the government directly – indeed, Hutchinson says that in the women’s prisons similar programs were funded by the government directly, bringing the same benefits and the same savings without the 30% cost penalty.
The basic assumption of the SBB push is that governments will not fund valuable projects (that is, governments will not do things that will probably save them money) unless investment finance can be obtained from private investors (that is, the government can pay a larger amount at the end of the project rather than a smaller amount at the beginning).
If this is true, it demonstrates a serious flaw in the way we run our governments. If it’s not true, then the downside risk is that governments will cut back on their social spending on the grounds that projects like this show not-for-profits ought to be able to raise capital on the open market.”
I thought the NSW project was so criminally favourable that I tried to invest in it myself, but you had to have a quarter mill to be eligible.
The latest (2015) report of the NSW project says
“We are pleased to report that the Newpin SBB has had a second successful year in both a social and an investment sense. The program has now successfully restored a total of 66 children to their families and delivered an 8.9% pa financial return to investors, based upon a cumulative Restoration Rate for the first two years of the SBB of 61.6%. The program has also supported an additional 35 at-risk families in preventing their children entering into out-of-home care.”