Why SIBs?

The typical SIB entails a complex set of transactions involving government, a nonprofit intermediary organization, private investors, and front-line service providers. It begins with some unit of government defining a preventive policy “intervention” with a measurable outcome, a timeline for its achievement, and a level of payment to private investors if the objectives are met.

It subsequently seeks out and contracts with a nonprofit intermediary organization charged with two tasks: finding private investors to fund the project, and finding front-line service providers to work with target populations and implement program objectives.

The investors provide the upfront working capital to finance the service providers while the intermediary manages their activities. If the targets are met at the end of the project, the government entity pays the investors at the agreed-upon level of return; if not, the investors (at least in theory) do not receive payment. All the while, a neutral third-party evaluator is retained to monitor the project and certify the validity and integrity of its results.

The complexity of SIB financing and implementation raises an obvious question: why adopt this model when governments could simply use tax revenues to fund and deliver social services directly? SIB boosters offer a number of justifications for their project, but three are particularly relevant.

First, because payments to investors are performance-based, SIBs can save taxpayer money and shift risk from the public to the private sector. Tellingly, SIB advocates often seize on the persistence of austerity at all levels of government as reinforcement for this argument.

Second, unlike traditional government social programs, SIBs support innovation and risk-taking. Politicians and bureaucrats, so the argument goes, have no incentive to experiment in the face of electorates, opposition parties, and media establishments on the lookout for high-profile policy failures. Private-sector money is therefore needed to break through public-sector inertia and fund needed social policy initiatives.

Finally, because they are data-driven and reliant on rigorous empirical analysis, SIBs increase the rationality and effectiveness of policy-making. Instead of throwing taxpayer money at programs that have political constituencies but little demonstrable impact, policymakers should direct scarce public dollars toward “what works.”

In many ways, SIBs are the latest phase in the so-called “special relationship” between the US and Britain — an expression not only of mingled economic interests but of ideas and people with a common grounding in behavioral economics and psychology. As the leading behavioral economist Richard Thaler put it, “It makes sense for social scientists to become more involved in policy, because many of society’s most challenging problems are, in essence, behavioral.”

In this view, social problems do not arise primarily from structural relationships of power and interest but rather from a congeries of bad individual choices or habits. Much of this discourse revolves around the concept of the research-based intervention and its ability to alter the choices that ostensibly lead to expensive social problems like criminal recidivism or ill health. SIB projects tend to involve interventions like cognitive behavioral therapy and other programs intended to modify individual patterns of behavior.

Both the Obama administration in the US and the Cameron government in the UK have displayed a marked enthusiasm for policy approaches that adopt the methods and concerns of these fields. One of the most prominent SIB boosters in the US is the Center for American Progress, a liberal research organization that has served as a talent pool and policy shop for the Obama administration.

In Britain, the Conservative government has established a department called the Behavioral Insights Team to pursue projects relating to everything from job training and tax collection to organ donation. Popularly known as the “Nudge Unit,” it takes its nickname from an influential work on behavioral economics co-authored by Richard Thaler and the American legal scholar Cass Sunstein, who served in the Obama administration as the former head of the Office of Information and Regulatory Affairs.

Last summer, the Nudge Unit, in turn, inspired the creation of the Social and Behavioral Science Team within the White House Office of Science and Technology Policy. The proposed $300 million Treasury Department SIB fund is directly modeled on the British government’s Social Outcomes Fund, and nonprofit organizations like Social Finance are actively involved in SIB projects on both sides of the Atlantic.

Originally conceived and implemented in the UK, SIBs have quickly become one of the hottest trends in the world of nonprofit philanthropy, a sector notoriously susceptible to faddish enthusiasms and progressive-sounding rhetoric. They’ve generated a lot of buzz for a reason: they offer policymakers a way of funding social programs that accepts the apparent permanence of austerity while offering profitable investment opportunities for financial institutions and wealthy individuals.

SIB advocates — many of whom are Democrats and liberals, including the Obama administration — are quick to argue that their application should be limited to relatively narrow policy areas and not large-scale collective goods. One may recall, however, that similar arguments were once applied to charter schools, which were not intended to compete with and displace public schools. Such projects have a funny way of going big.

Private Interest, Public Harm

The explosion of top incomes documented by Thomas Piketty and others has driven the growth of those networks and their growing influence over politics and public policy. There are vast oceans of money washing around at the top of the income distribution, and the titans of high finance and technology can’t spend it all on pieds à terre or superyachts.

Unfortunately for the rest of us, a large portion of it goes toward funding social policy experiments that often do more harm than good. Because the foundations of the super rich are not subject to any meaningful form of democratic accountability, their money and connections exercise outsized influence over policy formation and discourse.

In her essential work on the forces behind the school privatization movement, Joanne Barkan identified the mantras of big philanthropy: “strategic giving, return on investment, grantee accountability, numerical data to verify results, social entrepreneurship, and public-private partnership.”

In the case of public education, wealthy investors have acted on these mantras by funding pet projects and hiring researchers and organizations that will ratify and promote their policy views. By any measure, the results have been disastrous, for students as well as the public. When experiments in school privatization fail, their backers are never held to account for the damage left in their wake.

The obsession with data, measurement, and testing has created perverse incentives for teachers and school administrators, resulting in an unprecedented epidemic of cheating on standardized tests. The same pressures will apply to the measurement and evaluation of SIB programs, not least because there’s money on the line.

Like school privatization, SIBs also pose a potential threat to unionized public-sector employment. New York State’s SIB deal seeks to reduce recidivism by providing 2,000 formerly incarcerated individuals with transitional jobs in New York City and Rochester through a nonprofit called the Center for Employment Opportunity. Under the terms of the deal, these jobs will include maintenance, janitorial, and groundskeeping work for public institutions such as parks and universities.

In a state like New York, these sorts of jobs are typically unionized and pay higher wages and benefits than the transitional jobholders are likely to receive. Similar employment arrangements can be found in other types of public-private partnerships like Business Improvement Districts, where street-level sanitation and security jobs that should be done by public employees are given instead to vulnerable low-wage workers, many of them in transitional job programs.

Public-sector unions are increasingly aware of the threat SIBs pose and have begun to rally against state-level legislation that would expand their use. AFSCME Council 94 in Rhode Island has been outspoken in its opposition to a bill that would allow the state to implement a $25 million SIB program.

In his testimony against the bill, the union’s legislative coordinator argued that “this could be a back-door way to privatize the delivery of social service programs … and to most likely reward wealthy investors while you’re at it.” Still, unions have not yet succeeded in blocking SIB-friendly legislation or organizing many of the workers in transitional job programs.

Early Reviews

With the Peterborough prison SIB scheduled to expire by the end of this year, we will soon be able to definitively assess whether these projects can live up to the claims of their boosters. The early reviews, however, are not good.

In recent testimony before a hearing of the Senate Budget Committee, budget analyst Kyle McKay identified a number of severe flaws in the model. Despite claims to the contrary, SIBs are more likely to increase costs for governments than reduce them. As McKay notes in his testimony, in Massachusetts the state is liable for up to $27 million in SIB payments while investors are only providing $12 million in funding.

In an analysis of the proposed New Jersey Social Innovation Act, the state legislature’s budget office concedes that “it is possible that the departments may not accurately quantify the value of avoided future costs or attribute savings to these interventions when other factors may be responsible for the savings, resulting in actual increased costs rather than savings.”

A RAND Europe study of the Peterborough SIB and McKay’s own research on prisoner reentry programs found that even under the most optimistic set of assumptions, the potential savings generated would be very small. Investors receive payment when success is achieved, and even, depending on the circumstances, when it is not. The complexity of the model requires a small army of administrators, evaluators, consultants, and lawyers to run it — and they all want to be paid.

Similarly, claims that SIBs shift risk from the public to the private sector are not supported by the evidence on hand. The New Jersey Social Innovation Act, for example, contains loan guarantees for private investors even if anticipated savings are not achieved. Also, the complexity of SIB contracts can make it difficult to determine exactly which party will be on the hook if the desired outcomes are not achieved.

As McKay observes, “Attempting to manage social services through contract attorneys, consultants, financial intermediaries, and an all-or-nothing payment model based on an evaluation will inevitably produce a contract that is complex and subject to unforeseen contingencies and weaknesses.” Armed with the capacity to absorb billable hours and superior knowledge about the projects they’ve created, private interests have a way of sticking the public with the bill when deals go bad.

Finally, it is far from clear that SIBs will encourage innovation or creativity in the design and implementation of social policy. As McKay notes, investors have a strong incentive to choose interventions that already have a track record, skim service providers, and select target populations with a greater ability to meet program goals.

Our ill-fated experiments with charter schools and education reform should serve as cautionary lessons for those willing to experiment with SIBs. Like charters, they cannot possibly live up to the overblown claims of their supporters. They do, however, reinforce the logic of austerity and tax avoidance, strengthen the influence of the rich and the capital markets over policy-making, and offer private interests yet another opportunity to enrich themselves at public expense. There’s always a market for that.

A Booming Market

The SIB market is still rather small in terms of dollars, but its promoters are intent on achieving rapid growth. The current total value of SIB transactions in the US is estimated at approximately $100 million; sixteen states and Washington, DC either have an active SIB underway or are considering implementing one.

The Obama administration, through its Office of Social Innovation and Civic Participation, has played a leading role in promoting the expansion of the SIB market. In 2013, it proposed a total investment of $500 million in “social innovation” programs, including the establishment of a $300 million Incentive Fund at the Treasury Department to provide state and local governments with federal matching funds for SIBs and similar initiatives.

These expenditures would complement the $24 million the federal Department of Labor has already spent on state-level workforce development projects to increase employment prospects for formerly incarcerated individuals.

As mentioned, the SIB model is imported from the UK, where the Conservative government has promoted them with an evangelical fervor. In 2010, the UK Ministry of Justice (MOJ) signed the world’s first SIB contract: a four-year deal with a private Sodexo-operated prison in Peterborough to reduce recidivism rates among 3,000 males serving jail sentences of less than 12 months. The intermediary Social Finance UK (an early SIB booster with financial support from big philanthropies like the Rockefeller Foundation and the Omidyar Network) raised £5 million from a range of private investors and hired two nonprofits to provide services to the prisoners.

If recidivism rates among the experimental group fall by at least 7.5 percent relative to the rest of the prison’s population, the MOJ and a charitable arm of the British lottery will pay investors a return of up to 13 percent.

In 2012, New York City became the first US jurisdiction to launch a SIB when it signed a four-year, $9.6 million deal with Goldman Sachs, Bloomberg Philanthropies, and the nonprofit MDRC to fund a cognitive behavioral therapy program to reduce youth recidivism at Rikers Island. The deal is backstopped by a $7.2 million grant from Michael Bloomberg’s personal foundation, ensuring that Goldman can only lose $2.4 million if program targets are not met.

If the program reduces recidivism by 10 percent, Goldman will recoup the full $9.6 million; the bank stands to reap $2.1 million in profit if the target is exceeded. The Mayor’s Fund to Advance New York City, a nonprofit entity that exists solely to fund public-private partnerships, will pay for third-party evaluation to certify the results and authorize payment.

Additional SIB projects are underway in New York State, Utah, and Massachusetts. In late 2013, New York governor Andrew Cuomo, a Democrat, announced a five-and-half-year SIB contract with $13.5 million in private funding from financial institutions like Bank of America Merrill Lynch and wealthy, politically connected individuals like former Treasury Secretary Larry Summers.

Like the Rikers Island SIB, it is backstopped with a $1.3 million grant from the Rockefeller Foundation and $300,000 from the Robin Hood Foundation, a feel-good front group for bankers and hedge funders. The philanthropist J. B. Pritzker is partnering with Goldman Sachs to fund an early childhood education SIB in Salt Lake City.

Meanwhile, another Goldman tentacle reaches into Massachusetts to fund yet another youth recidivism program. Massachusetts governor Deval Patrick, also a Democrat, has been an enthusiastic supporter of SIB. In 2012, his state became the first in the nation to establish a competitive bidding process for pay-for-success initiatives. It is currently in the process of negotiating a second SIB for a project addressing chronic homelessness managed by the same nonprofit that oversees the recidivism program.

Transpartisan and Transatlantic

At the Congressional level, SIBs appear to be one of the few domestic policy options that unites Democrats and Republicans, even in the romper-room atmosphere that currently prevails in the House of Representatives. In June, a group of House members from both parties introduced the Social Impact Bonds Act, which would implement the $300 million Treasury Department fund the Obama administration has sought to establish in recent budget cycles.

According to the bill, state and local governments would be required to submit a feasibility study to the Treasury, which would work with a newly created Federal Interagency Council on Social Impact Bonds as well as potentially affected federal agencies, to determine whether to allot funding to specific projects. It would also provide a substantial boon to the financial industry by allowing banks to use their investments in SIB projects to help meet their requirements under the Community Reinvestment Act.

The bipartisan appeal of SIBs is not difficult to understand. Democrats and liberals have latched on to them as a way of attracting support for discretionary social spending in an austere budget climate. Republicans and conservatives are lured by the possibility of cutting spending in the long term while offering financial interests the opportunity to generate profits and PR.

The emerging SIB industry reveals a complex of political and financial interests that straddles both sides of the Atlantic, unites parties and political figures of the center-right and center-left, and highlights the growing role of an increasingly financialized philanthropic sector.

Like reality television and the war in Iraq, SIBs and their milieu possess a distinctly Anglo-American flavor. Michael Bloomberg plays a central role in this transatlantic nexus. As mayor of New York City, he implemented the country’s first SIB and backstopped it with money from his personal foundation. His company is currently building a massive European headquarters in the heart of London, whose Tory mayor Boris Johnson counts Bloomberg as a close personal friend.

The same goes for Prime Minister David Cameron himself, who has invited Bloomberg to address Conservative Party conferences on more than one occasion and shares his penchant for libertarian paternalism and technocratic governance.

SIBs accord perfectly with Cameron’s promotion of “Big Society” as an alternative to the bogey of big government, as well as American notions of communitarianism that have given Democrats cover to abandon residual commitments to a redistributive welfare state. Popular among advocates of Third Way politics like Bill Clinton and Tony Blair, these projects stress the superiority of “civil society” over government in the delivery of public goods and the creation of social solidarity.

While the phrase may conjure benevolent visions of democratic community-controlled institutions, in practice it tends to be synonymous with well-heeled and unaccountable philanthropic and nonprofit networks.