07/02/2012 | 3 mins |

Testimony from a Believer in Social Impact Bonds

07/02/2012 | 3 mins |

Thanks to everyone who commented, blogged, and tweeted about my confession that I was a social impact bond skeptic, primarily because I doubt most federal, state, and local government agencies will be able to make these instruments work. It generated a lot of reactions—on both sides of the Atlantic. There was ample confirmation and some challenges put forward in response. With respect to the latter, I wanted to share a comment from Tracy Palandjian, the CEO of Social Finance US. Tracy and I will need to agree to disagree on a few points, especially about whether or not social impact bonds will worsen government’s principal-agent problem, but in the spirit of dialog and to honor her thoughtful response I wanted to share it with you here in full:

"As the CEO of a financial intermediary working to build a market for social impact bonds in the US, one of our goals is to work with governments to explore new procurement and contracting that will foster innovative social financing that shifts risk away from the taxpayers to investors. We would agree that the burden of this new procurement process on already capacity-strained governments cannot be overlooked or diminished. That said, as tempting as it is to label bureaucracy as the "weak link" in the social impact bond model, yesterday's passage of the Social Innovation Financing Trust Fund in the Massachusetts legislature reminds us just how resilient governments can be when it comes to embracing innovation in the face of dire fiscal circumstances—even if at their own pace. Yesterday's vote, which put the Commonwealth's "full faith a credit" behind a $50M social innovation payout fund required a 2/3 vote of the legislature and provided a critical piece of the puzzle in mitigating appropriations risk for investors, not to mention an important milestone for the development of the SIB market overall.

As an intermediary, we do face a challenge, as this piece cogently illustrates, to "stand between government and the work it might ultimately be on the hook to pay for." But I am not sure I agree that our role exacerbates a "principal-agent" problem. Principal-agent dilemmas already manifest in existing social service programs, particularly between legislatures and the executive, and between states and the federal government. For example, in areas like foster care where states are often incentivized under the current rules of Title IV-E funding to keep children out of the home (rather than to promote preventative programs that keep families intact) in order to shift costs from state budgets towards federal dollars. Our goal as an intermediary—and, indeed, one of the goals of the social impact bond as an instrument—is to realign these incentives to drive fiscal savings and improve social outcomes.

None of this is to discredit the core argument this piece eloquently puts forth. Social impact bonds are hard. If they weren't, the market would create itself and our job at Social Finance would be a whole lot easier! I'm convinced, however, with advances like the one we saw this week in the Massachusetts legislature, we'll work steadily toward creating a scalable prototype to provide states with a new instrument to expand proven solutions to more vulnerable individuals and communities."

I will come back in my next post or two with some closing (for now) thoughts on where and how social impact bonds could potentially gain a foothold in the United States. In the meantime, please keep the comments and feedback coming.

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