Social Impact Bonds – Evidence-based policy or Ideology?

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Social Impact Bonds – Evidence-based policy or Ideology?
Michael J. Roy1,2,*, Neil McHugh1 and Stephen Sinclair1,2
1Yunus Centre for Social Business and Health,
Glasgow Caledonian University, UK
2Glasgow School for Business and Society,
Glasgow Caledonian University, UK
*Corresponding Author: michael.roy@gcu.ac.uk
Authors Accepted Manuscript version
Cite as:
Roy, M.J., McHugh, N., Sinclair, S. (2017) Social Impact Bonds – Evidence-
Based Policy or Ideology?, in: Greve, B. (Ed.), Handbook of Social Policy
Evaluation. Edward Elgar Pub, Northampton, MA.

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Introduction
In this chapter we investigate the Social Impact Bond (SIB), a financial instrument that has
attracted considerable interest from both policymakers and financiers, and which, from its
beginnings in the UK, has spread across the globe in a very short time against a backdrop of
austerity measures and the encroachment of market incentives and business principles into
social welfare provision. We argue that such proliferation has occurred despite sufficient
consideration of the implications of this instrument, nor sufficient acknowledgement of the
potential ethical issues that it raises.
The first part of this chapter redresses this lack of critique. It also makes a more general point
about the limitations of purportedly ‘evidence based policy making’ within the neo-liberal
welfare paradigm, which ignores evidence and reframes essentially moral questions as
technocratic issues. We argue that this lack of engagement with ethical issues is a mirage:
that all public policy instruments and welfare decisions ultimately rest on some normative
understanding of the ‘common good’. Consequently, society should not only be concerned
about what works best from a narrowly economic standpoint, but about for whom policy
instruments such as SIBs are supposed to work, and in what way.
The rapid rise of the Social Impact Bond
Our first engagement with the phenomenon of Social Impact Bonds (SIBs) (McHugh et al.
2013; Sinclair et al. 2014) was characterised by our surprise at the seemingly uncritical
enthusiasm of both policymakers and proponents for the SIB model. To our mind, the SIB
was the archetypal ‘solution looking for a problem’. That is, until ‘the problem’ became
manifest in the form of the global financial crisis and Great Recession. Within the dominant
austerity paradigm that has since proliferated across the world we have witnessed the
emergence of a ‘social investment market’ as one of a range of measures intended to spur
economic growth and employment. This attempts to incentivise private investment in social
service provision to plug some of the gaps caused by welfare state retrenchment. Some
policies ostensibly aimed at resolving or mitigating the worst effects of the crisis “foster
further financialisation and a deepening of capitalist disciplinary logics into the social fabric”
(Dowling and Harvie 2014, p. 869). Part of the cause of the global financial crisis was a
toxic combination of hubris by a banking and financial services sector enabled to engage in
reckless gambling by the moral hazard of being considered ‘too big to fail’, coupled with a
systemic failure of oversight by the authorities of labyrinthine financial products (Lanchester

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2010). Our critique of SIBs was based on the need to open up the debate by questioning the
logic of enthusiastically adopting an untested, complex financial instrument (developed by
those in, and with links to, the financial sector) proffered as a potential solution to societal
problems. Unfortunately, our cautious position appears to be a minority viewpoint, with SIBs
advocated in gushing terms by enthusiasts:
“Social impact bonds (SIBs) are among the newest and most promising innovations
within the impact investing space. As financial instruments that mobilize investment
capital to tackle social challenges, they have the potential to create shared value—
financial returns for investors, social benefits for underserved communities and
individuals, and enhanced efficiency for governments and social service providers.”
(Palandjian and Hughes 2013, p. 1)
Such hyperbole is widespread despite the unconvincing results of the first SIBs. Before we
explore the reasons for this unfounded enthusiasm we need to clarify what SIBs are.
Social Impact Bonds in Theory
SIBs are a form of ‘social investment’ (Lehner and Nicholls 2014; Nicholls et al. 2015) or
‘impact investment’ (Jackson 2013), where private investors fund the capital requirements of
social interventions and receive market rates of return only if the intervention achieves some
predefined outcome targets. Technically, a SIB is not actually a ‘bond’ as understood in
conventional finance terms, but a form of ‘Payment by Results’ (PbR) policy. PbR was
initially introduced in UK welfare provision by the Labour government in 2009 as part of the
Flexible New Deal employment activation programme, and then expanded and extended over
the course of the Conservative-Liberal Democrat Coalition UK Government, which was in
office from 2010-2015. As SIBs only pay financial returns to investors when specified social
outcomes have been met, the risk investors face is similar to that of an equity investment
(Bolton and Savell 2010). SIBs involve a multi-stakeholder arrangement between the state,
the service provider and investors, facilitated by an intermediary organisation. These
intermediaries broker an arrangement whereby investors recoup their investment in a social
or welfare service provider, along with an additional financial return (paid by the
government), dependent upon the service achieving prescribed and measured outcomes for a
target population. The rate of financial returns to investors can vary depending on the
outcomes attained, with an agreed performance level below which investors forsake their
investment and receive no returns. The theory behind the arrangement is to provide benefits
for all parties involved, with the investor’s recapitalisation and additional financial returns
funded from savings that accrue from improved service outcomes. Government therefore
shifts the costs of providing services to private investors while the service continues. Service

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providers are spared having to ‘front’ the costs of service delivery (as is the case with other
PbR schemes) as it is ‘forward funded’ by the investors (Disley et al. 2011; Tan et al. 2015).
SIBs thus monetize social interventions by tying pay to performance while simultaneously
limiting government control of service delivery, as this is organised on the basis of public-
private partnerships (Eames et al. 2014; Warner 2013).
Social Impact Bonds in Practice
Although the world’s first SIB at Peterborough Prison in the UK was developed under the
UK Labour government, it was officially launched by the then (Conservative) Secretary of
State for Justice, Kenneth Clarke MP in 2010. The SIB was designed to fund innovative
measures to reduce re-offending and reconviction. Although initially scheduled to run for
seven years, the Peterborough SIB was terminated by the UK Government after three years
(Benson 2014). Reoffending was initially reduced by 8.4 per cent, from 155 reconvictions per
100 prisoners, to 142 reconvictions (Ainsworth 2014). Although this result was lower than
targeted, with a 10 per cent reduction required to trigger a payment to investors, the
intermediary was confident that the overall target of reducing reoffending would have been
reached. However, events seem to overtake the Peterborough Prison SIB; a much wider
programme of policy changes – the introduction of a national approach called Transforming
Rehabilitation – precipitated the termination of the project by the UK Government much
earlier than expected. Nevertheless, while it is difficult to tell with any certainty whether or
not the pilot was successful, it has been portrayed by advocates as a resounding success; a
narrative supported by the UK Government which has since announced several SIBs, much
larger than the Peterborough pilot.
Reflecting upon their term in office as part of the coalition with the Liberal Democrats, the
Conservative Party’s 2015 election manifesto boasted of SIBs as a notable achievement:
“We have launched the world’s first social investment bank, introduced more social
impact bonds than the rest of the world combined and highlighted the great work done
in communities…” (Conservative Party 2015, p. 45)
Thus, rather than being judged on whether they have actually delivered their intended
outcomes (whether determined by the return to investors or the attainment of targets), the
“success” of SIBs is a more malleable construct, seemingly determined by their
innovativeness and high profile. And the model has certainly proliferated: at the last count
there were 44 projects currently underway in such diverse countries as the USA, Australia,
the Netherlands, Germany, Belgium, Canada and Portugal across a wide range of policy

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areas, including criminal justice, tackling homelessness, employability and active labour
market measures, and provision of early years education (Gustaffson-Wright et al. 2015).
There are also moves to adapt the SIB model to create ‘Development Impact Bonds’ funding
social and medical programmes in the developing world (Rosenberg 2013).
This level of interest in SIBs does not match their impact; for example the first SIB in the US,
which aimed to reduce reoffending rates among young adults at Rikers prison was, like the
Peterborough SIB, terminated early, having failed to achieve reduced recidivism targets
(Ward 2015).
SIBs are often described as a ‘win-win’ for both Governments and investors. For the public
sector they are described as a tool “designed to help reform public service delivery. SIBs
improve the social outcomes of publicly funded services by making funding conditional on
achieving results” (Cabinet Office 2013, p. 1). At the same time investors are encouraged to
think of them as “an innovative and emerging financial instrument that leverages private
investment to support high-impact social programs” (Goldman Sachs 2014, p. 1). Moreover,
the level of cross-party support for SIBs would suggest that they appear as an ‘ideological
free’, technical response to a social problem (Sinclair et al. 2014). That SIBs could be
considered in this way illustrates the lack of debate surrounding their principles, implications
and actual achievements so far.
Academic voices offering a more rounded appraisal of SIBs are beginning to be heard, but
remain a minority. Such critiques have focused upon such aspects as the challenges of
implementing SIBs in the criminal justice sector (Fox and Albertson 2011); concerns that
SIBs may accelerate further marketisation and privatisation of social policy (Joy and Shields
2013); and the view that SIBs are a further expression of the choice to promote market
principles and processes in social and welfare policy through New Public Management
reforms (Warner 2013).. It is to these potential issues, and those raised previously in our own
work (McHugh et al. 2013; Sinclair et al. 2014), to which we now turn.

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Risks of SIBs
Does the product fit the market?
Firstly, on a technical level, SIBs require a significant amount of investment to become
operational, let alone effective. Consequently, SIBs are too expensive and risky for most
community-owned organisations. For instance, Social Finance (a not-for-profit funding
intermediary) was required to raise £5 million to finance the Peterborough SIB (Local
Government Association 2013), and it has been estimated that a SIB contract would need to
be worth at least £12 million to cover such overheads as legal fees, evaluation expenses, and
investor’s due diligence costs (Azemati et al. 2013, p. 27). The capital requirements and cash-
flow challenges of SIBs pose far too great a risk for any but the largest social investors, and if
the likelihood of SIBs returning typical market rates of return is not high then their appeal is
considerably narrowed. Not only are SIBs expensive to set up, complexity around their
contracting arrangements means a significant amount of expertise and time is also needed to
operate and monitor them. We know too that the ‘social investment’ market is still a nascent
one, despite significant and sustained energy and resources by the UK Government to create
“one of the world’s most developed social investment markets” (HM Government 2014, p.
7). We do not know if there are enough willing social investors to match the hyperbole
surrounding SIBs. It is therefore unsurprising that SIBs repeat the pattern of other PbR
initiatives, where large private sector corporations (such as Atos, A4E and Serco) have
become the principle contractors in providing welfare services rather than Third Sector
organisations, as they possess sufficient capital to enable them to wait until payments are
triggered (McHugh et al. 2013; Sinclair et al. 2014). This is particularly evident in the UK’s
active labour market policy the Work Programme (Sinclair et al., 2014).
From the view of investors, the most attractive SIBs will be those which appear most likely to
provide secure and substantial returns rather than risky innovative projects (Davison 2013;
Davison and Heap 2013). Indeed, it appears from an analyses of existing SIBs that, rather
than fostering new innovative programmes and interventions, they have been used to expand
existing programmes or fund those previously proven to be successful (Arena et al. 2016).
This raises the question why, if private investors can distinguish between such options, the
public sector simply does not (or cannot) finance the most attractive projects itself? It seems
that a strong motivation for SIBs, in the UK case at least, is not to improve policy outcomes
per se, but an ideological commitment to increase private involvement in the financing and
delivering of public services.

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An ideological shift?
Whether a service is motivated to achieve public benefits or private profit is not merely
incidental, but influences such factors as how it is delivered, its quality as an entitlement and
the experience of those receiving it. This is not to suggest that a service which has the
ostensible purpose of addressing social needs or promoting wellbeing, and which is directly
provided by public servants, is somehow imbued with an intrinsically higher quality (as the
experience of many UK social security claimants will testify, see Walker et al. 2012).
Nevertheless, the market relationship between a customer and a seller is qualitatively
different from that between a public service user and provider even if the service provider is
incentivised, wholly or in part, by targets, league tables, sanctions and other performance
measures. There is evidence that a public service ethos still exists among many officials
employed to provide welfare support to claimants, and this distinguishes their orientation in
some measure from those whose principal motivation is profit (Taylor-Gooby 2008;
Needham et al, 2014). SIBs alter the character of services in this respect, fostering further
financialisation into the fabric of social and public services, presenting a number of risks that
require considerable thought and reflection.
Measurement and attribution of outcomes
Both PbR and SIBs require the ability to determine that outcomes have been achieved and
that results are attributable to the actions of service providers. This poses multiple challenges,
not least in specifying appropriate outcomes, which can be both complex and controversial.
On the face of it, measuring the outcome of reduced reoffending, for example, should be
relatively straightforward. However, the UK Ministry of Justice alone has identified six
different ways to measure re-offending (Fox and Albertson 2012), and there are a number of
complex contextual and environmental factors that can work to confound or support the
achievement of targets, as Ainsworth (2014, p. 1) notes:
“Numbers of convictions actually slosh about quite a lot naturally, it appears. This
could be down to changes in the law or the economy, to changes in regional culture
and demographics, or factors in the local criminal justice system such as the
individual judges and magistrates. Social Finance, the inventors of the SIB and the
people running the Peterborough project, believe that Peterborough prison seems to
have its own kind of reoffending microclimate which they don’t quite understand.”
Thus, there are considerable challenges in attributing the accomplishment of outcomes to
policy inputs and ensuring appropriate recognition and reward to organisations for bringing

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about such outcomes. How far particular organisations can actually deliver outcomes is often
questionable: results may depend upon conditions and the responses of users to the services
and opportunities offered to them, which may occur irrespective of the actions of those
providing services; for example, due to wider economic or other changes. Such challenges
are well known in the policy evaluation literature (for example, see Pawson 2013; Pawson
and Tilley 2009) but there is no evidence that SIBs can successfully resolve them.
Furthermore, establishing systems to collect the robust evidence necessary to assess the type
of outcomes required can be a resource intensive and time-consuming task. The ‘black box’
approach of PbR - which disavows prescribing how outcomes should be achieved - is in part
a reaction to the perceived heavy-handed performance monitoring, accountability and control
systems associated with New Public Management. However, there is no evidence to suggest
that SIBs reduce performance monitoring and reporting requirements. On the contrary,
reporting requirements have been found to be far more intense for PbR contracts, as one
evaluation discovered (Department for Communities and Local Government 2014, p. 29):
“Although commissioners and providers are unable to quantify the cost of
establishing and running Payment by Results services, all agree that the costs are
higher than for non-Payment by Results contracts. This reflects the more intense
monitoring requirements under Payment by Results contracts. As an example, one
provider estimated that monitoring the contract took an additional two days per
quarter compared to similar non-Payment by Results services.”
Similarly, problems arise when trying to attribute savings to the respective contributions of
different service providers. Not only can a perverse incentive be created – providers claiming
credit for results attributable to others in order to receive payment – the consequences of
outcomes is unlikely to be shared equally. A positive result for one service need not result in
similarly positive impacts for other related services. Indeed reducing demand for one service
might increase demand and costs elsewhere, e.g. reducing reoffending may increase demand
for social housing, education and employment training of social security. Attributing
outcomes to the contribution of a particular intervention or programme is never
straightforward and becomes less so when the underlying reasons for changes is unclear, or
not fully understood. An additional perverse problem which stems from the existence of a
robust evidence base and understanding of causality is that such familiarity and experience
may discourage innovation, which is a supposed justification for SIBs.

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Manipulation of service provision
There are numerous perverse incentives produced by PbR systems, and many are shared with,
and in some cases exacerbated by SIBs. Performance measurement systems encourage
providers to focus their activity on meeting whichever indicators are measured, at the
potential expense of other, perhaps more important, issues, not included among metrics.
Attaching payment to results reinforces this tendency. Simply selecting different targets and
associated performance indicators does not address this problem but merely swaps one set of
mistaken aims for another to which providers tactically manoeuvre. The essential limitation
with a centrally-driven target setting approach is that it is often unresponsive to service-users’
demands and changing circumstances. This is unsurprising, as users are rarely involved in
defining what issues services should address and how they should operate, as indeed they are
excluded from designing SIBs. What is required instead of targets is more user-led,
responsive and flexible services.
Assessing performance in relation to outcomes rather than narrower indicators does not
resolve this problem, nor does it address the incentive to game playing, where focus is placed
upon meeting formal performance targets rather than substantive issues, and shaping services
to meet the terms of a contract rather than the needs of clients. In the UK we have seen how
‘creaming and parking’ become rife in active labour market initiatives: where the most easily
supported clients are picked off, leaving the most disadvantaged and expensive to help left
behind (Johnson 2013; Rees et al. 2014). Investors can pressurize service providers to
prioritise outcomes which are more readily measured at the expense of those most in need. As
Starr (2012, p. 1) explains, in the context of ‘impact investment’:
“All talk of double- and triple-bottom lines aside, there really is only one bottom line.
It’s either impact or profit—and the demands of investors can pull an organization
away from the target population toward those able to pay more.”
Such a course inevitably widens inequalities. More fundamentally, there are profound moral
consequences of treating people in need of support as commodities and numbers to be ticked
off to achieve targets and trigger payments.
Commodification of individuals and social processes
Ainsworth (2014, p. 1) describes one of the potential consequences of SIBs in the following
manner:

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“…like it or not, it marketises disadvantaged people. I suspect if I was a
disadvantaged person, I might put up with being marketised in exchange for some
help, but I also find it pretty easy to understand why some people find it distasteful.”
But such an outcome goes beyond mere “distaste”: treating people as if they are what Karl
Polanyi (1944) called ‘fictitious’ commodities – since they were not created for the purpose
of buying and selling in the market - can tear at the fabric of social cohesion (Block and
Somers 2014; Polanyi Levitt 2013). The potential deleterious consequences of such
disruption to social unity are literally incalculable: the risks are simply far too high. SIBs are
also symptomatic of a broader process to ‘de-moralize’ social policies, and of reifying
markets; treating them as if they are separate and ‘disembedded’ from society (to borrow
another concept from Polanyi). Markets supposedly function in accordance with
considerations of exchange, and the incentives of profit and reward; they enable the
distribution of resources. But public welfare policy is more than just about (re-) distribution
of resources; it is a principle means whereby the vision of a ‘common good’ is articulated, as
legitimated by public debate and democratic processes. As we have argued previously
(Sinclair et al. 2014), the process of how this common good vision is realized is more than a
mere technical matter. Social policies are (or are supposed to be) guided and encouraged by
values and beliefs about right and wrong; such principles as entitlement, desert, need, dignity
and fairness should inform delivery, not simply a narrow focus on the accomplishment of
technical (let alone financial) outcomes. SIBs imply, however, that the rehabilitation of
offenders is no longer prompted by moral motivations but incentivised by the prospect of
profit, a profound shift which changes its normative nature. One implication of such a way of
thinking is that there would be no principled objection from a SIB perspective to meet a
target to reduce re-offending by simply paying people not to commit offences. We agree with
Sandel (2012) and others that there should remain a sphere of social policy and services that
are beyond the reach of markets. Concerns about moral hazard and public preoccupations
with the normative principles which underpin welfare services (such as reciprocity,
responsibility and desert) demonstrate the importance of moral considerations in social
policy. Debate about the pros and cons of SIBs should be informed by such considerations.
We argue that SIBs blur the distinction between a ‘public’ or ‘private’ welfare service, but
also ask whether this distinction is anything other than a technicality? Reflecting upon the
implications of SIBs for service users suggests that this distinction is important, particularly
in relation to who pays for the service, who delivers it and how it operates. However a further
dimension which should be considered is what is the service run for, what purpose it fulfils,

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and what are the defining values that it promotes? Drawing on Bolderson (1982, pp. 290–
291) SIBs can be characterised as a form of ‘boundary shift’: a reform which fundamentally
alters the character of a service in a qualitative manner beyond a simple quantitative or
incremental adjustment. The nature of such a shift can be illustrated by comparing SIBs to the
PbR funding of the Flexible New Deal and Work Programme, both of which maintained
direct public funding of provision and control over services even though these were delivered
by private or third sector agents. In contrast, SIBs entail private finance, provision and
control over delivery (perhaps with a third sector partner). While a conventional probation
and offender rehabilitation service is publicly provided and financed, and allocated and
delivered by public officials, in contrast the corresponding service funded by the SIB in
Peterborough was privately financed, privately provided, allocated and delivered by public
agencies, but profit oriented.
Conclusion
Social and public policies are currently undergoing profound change. The dominance of the
austerity paradigm, coupled with increasing demand for welfare services has provoked a need
to consider new operating and funding models. The stubborn persistence, and indeed
widening of, inequalities, deprivation, poverty and exclusion demonstrate that the state is
unlikely to hold a monopoly of the answers to these challenges. There are undoubted lessons
to be learned from both the private and the third sectors. In the context of the challenges and
demands of austerity, SIBs can be seen as an innovative development, and as such it is
perhaps understandable that advocates portray SIBs as a ‘win-win’ for all involved. This is
why SIBs are being introduced into policy areas that perhaps would have been unthinkable
even a few years ago (such as in the English healthcare system: the Ways to Wellness Social
Impact Bond in the north of England, see ATQ Consultants and ECORYS 2015) and while it
is not entirely unexpected that the idea plays well in liberal welfare regimes, such as seen in
the US, SIBs are also spreading from the UK to countries that combine different welfare
traditions, such as seen in Canada (Joy and Shields, 2013). We argue that support for this
innovation should be proportionate to the supporting evidence and cognisant of the critique of
its (cost-) effectiveness, appropriateness and implications. While there is a paucity of
empirical evidence, existing critiques have identified a number of practical challenges that
are more significant than those who advocate SIBs often acknowledge. SIBs do not resolve
the challenges nor the complexities of attributing outcomes to inputs; they narrow (and can

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certainly change) perceptions of what can be counted as a ‘successful’ policy; and they risk
encouraging service providers to manipulate how their performance is measured and
reported. There is also insufficient evidence that SIBs encourage innovative delivery or
widen the pool of service providers.
However, a more fundamental feature of SIBs is that they alter the moral dimension of
welfare services and profoundly change the nature of the relationship between the state and
the citizen, which does not seem to have occurred to, let alone troubled, their enthusiastic
advocates. It is crucial not to lose sight of the ultimate purpose of welfare services when
pursuing new ways of identifying and applying what works best, and to be particularly
cognisant of the risks and potential deleterious consequences of treating people as
commodities. The distinction between the principles that supposedly underpin markets and
those which ought to guide the provision of support to citizens – particularly those most
vulnerable in our communities – is significant, and should be maintained.

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