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Nuances to the Application of SIBs in Canada
Finance for Good is excited to see the social impact bond (SIB) discussion continue across Canada: in HRSDC, in provincial government ministries, and within the social finance community. A recent post on SocialFinance.ca raises four insightful questions with respect to social impact bonds (SIBs) before concluding that Canada pursue SIBs as one of many tools in our broader social finance tool kit. We agree with this conclusion and are keen to share our insights on the topic.
We discuss the following points in effort to continue the conversation:
- Government transaction costs for SIBs should be minimal
- SIBs scale up proven, innovative interventions
- SIBs will not “crowd out” existing social programs
- SIBs will allow us to prioritize measurement
1. Unlike P3s, SIBs do not have a steady-state transaction cost for the government – only a one-time success payment.
A probable model for SIB implementation transfers all transaction costs from the government to the investors. The public sector simply pays for the outcome they desire; investors cover transaction costs through a front-end fee. Investors have a precedence of accepting a 1-2% front-end management fee on investment products so managing the SIB process in this manner does not introduce a new charge to government.
Before the SIB model is common across Canada, individual government entities may wish to create a task force, commission an opportunity analysis, or create other incentives to better understand the potential for application in a particular region, but this cost is not part of recurring SIB development.
2. The concept of how something can be innovative and proven is interesting.
This topic can be tough to understand, given the newness of the tool, but becomes easier if we draw parallels to other industries. Consider the original iPod (or a similar product). It is innovative and proven at the same time. The reason a product or a social program can be both innovative and proven is because we are making the statement based on different time horizons. When the product is developed it is innovative. Before we distribute it across the country it is proven through small-scale pilots or analyses. We use a network of stores, highways, and online tools to distribute new, innovative products to all those who desire it.
Our current social system, however, lacks this consistent, structured, distribution capability to scale-up good ideas and make them accessible to all Canadians in need. Good ideas can develop in isolation (and many have) but without more robust measurement and financing tools we will be unable to bring these proven innovative programs to help a broader group of people in multiple regions. It’s important to remember that programs proven on a small-scale still contain risk that they will not be broadly effective. The SIB model would allow governments to try these programs out with minimal risk.
3. SIBs are meant to support additive initiatives, rather than replace existing services.
We discussed this point in detail in our previous post and will summarize quickly. The cost savings associated with SIBs are from a decrease in demand for remediation care (e.g., hospital, police, prisons), rather than through scaling back social programs that are providing services similar to those supported with a SIB.
Further more, SIBs are not meant to support all segments of social programs. As SIB development becomes more common over the next two to five years, we must be cautious about drawing boundaries on where a SIB is applicable and where a SIB is not applicable.
4. Measurement is difficult, but up-front SIB financing helps us overcome classic challenges limiting measurement.
None of use would teach out kids, “if something is difficult, just don’t do it”. Still this argument has surfaced in the SIB debate. We understand the difficulties of measurement in social services and see many service providers currently lack data-based measurement systems. However, we also see solutions.
SIB financing can motivate an investment in measurement in a way traditional grant funding has been unable to because measurement is core to administering a SIB in the first place. Measurement is considered from Day 1 and an emphasis on real-time systems is intended to provide service providers with a feedback loop to illustrate their successes to a wider audience.
Again, analogy to another industry can help us see a solution to this challenge. For example, consider forecasting interest rates to manage associated costs and risks of a manufacture. The supply and demand factors would have been difficult to measure many years ago, but today the tools and methods are widely available. Innovation is about finding solutions to complex problem – such as measuring social impact. We are not implying complex social issues can be solved in the same way as interest rates can be forecast, but we are saying that applying new tools and methods may allow us to do something we previously considered impossible.
In conclusion, social impact bonds are one part of a broader solution. The SIB model has a unique way of supporting new (or expanding) servic
es, that otherwise would not operate, and prioritizing data-based measurement. As this discussion demonstrates however, there are still thoughtful questions that need to be considered before implementing SIBs in Canada. Critical questions exist around measurement and valuation, investor return and transaction fees, and operating model design.