Social impact bonds: Profiting from Poverty?

By Dan Silver and Becky Clarke.

Dan Silver and Becky Clarke. This article first appeared in the autumn edition of Outlook magazine.

Social investment is becoming increasingly discussed, but there is a need to reflect critically and ask who it is that really benefits from this new model of funding.

“Goldman Sachs is a pioneer in the creation of the “social impact bond” – an innovative and emerging financial instrument that leverages private investment to support high-impact social programs.”
(Goldman Sachs, Trends in Business)

Goldman Sachs is a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” (Matt Taibbi)

The Secretary of State at the Department for Work and Pensions, Iain Duncan Smith, has said that Social Impact Bonds (SIBs) “will change the way that government and the private sector work together to solve social problems.” JP Morgan, estimate that by 2020, social impact investment will be worth $1 trillion. It is clearly becoming seen as an important model of funding solutions to the social problems that the voluntary and community sector (VCS) exists to try and resolve.

By early 2014 there were fifteen Social Impact Bonds underway in the UK, making the UK world leader in this type of fund. The world’s first SIB was ‘One Service’, established in Peterborough to reduce the reoffending of those leaving HMP Doncaster. Others set up since include the ‘One Project’, a partnership by Social Finance and Action for Children which targets young people in Essex who are at risk of going into care, and the London Homelessness SIB where St Mungo’s and Thames Reach are targeting a cohort of ‘rough sleepers.

As is illustrated here, SIBs are being targeted at complex social challenges experienced by some of the most marginalised members of society. They are often sold as being the solution for both the individuals facing such challenges, and the British tax payer who can no longer foot the welfare bill due to the impacts of austerity. David Cameron has declared that: “The way a social impact bond works is simple. When it succeeds, investors are paid from the savings to the taxpayer, but if it doesn’t work, the taxpayer doesn’t pay a penny.”

Increasingly then, SIBs are painted as a magic solution; as Polly Toynbee has written, “with a wave of a wand, the risk…can be placed with investors instead. Social investment bonds could evaporate poverty and its consequences at no cost to you or me. These people can be monetised to turn a profit for all.”

SIBs function as a financial mechanism in which investors provide resources for an intervention to improve a social outcome that has been identified by a government commissioner; the investors are then repaid for their initial investment, as well as receiving a profit on their original sum. In order to operate, SIBs require a simplistic and quantifiable measure of individual ‘impact’, and one which can be understood to be attributed to the programme of investment. Simple, right?

Although most VCS organisations are too small for SIBs to be relevant to them, some have engaged in this new market based solution to funding, and as local authority budgets have been decimated it is difficult to blame them. In fact Steven Bubb, chief executive of ACEVO (and chair of the Social Investment Business), has called for government to “make social investment even more relevant to the whole of the third sector.”

But there is a critical need to question SIBs, their function and underpinning ideology. Neil McHugh of Glasgow Caledonian University asks whether social impact bonds are ‘a wolf in sheep’s clothing’ and argues that the ‘enthusiasm with which they have been embraced has not always been tempered with a rounded critique.’

Dawn Austwick, Chief Executive of the Big Lottery Fund, speaking recently at the Voluntary Sector North West (VSNW) Conference, said that there is a struggle between the mission-driven and money-driven elements of social investment. The voluntary and community sector may wish to consider whether it should be welcoming with open arms a model of funding social programmes that is so enthusiastically cheered by global financial institutions such as JP Morgan, Goldman Sachs, the City of London, and Deutsche Bank. Let’s not forget, it is the reckless irresponsibility of these institutions that has heavily contributed to the imposition of austerity – an ideology that has seen the erosion of the welfare state and the slashing of the very social programmes many organisations delivered, while wealth has actually been redistributed upwards.

A warning shot was called last year when Richard Caulfield, chief executive of Voluntary Sector North West, made a prediction that “social impact bonds will lead us into the payment-by-results trap and eventually lead to gaming, cheating and lying to ensure the figures come in to trigger the payments required…” This has played out now in the criminal justice context, where the Peterborough ‘One Service’ SIB has been used to argue the case for the government’s ‘transforming rehabilitation’ agenda: payment by results contracting for the lion’s share of criminal justice service delivery.

Our concerns though move beyond this very important criticism. Through the need for simple outcomes measures captured at the level of the individual, SIBs further contribute to an ideology that individualises blame for social problems such as poverty and crime. Over recent years, and fed by a willing group of politicians and sections of the media, we have seen an increase in the individualisation of blame for poverty, which denies the structural and systemic inequalities that are at the root of poverty. This increasing stigmatisation of communities, underpinned by rhetoric of ‘Broken Britain’, serves to deflect attention away from structural inequality and from more equitable solutions to the crisis through, for example, addressing tax avoidance.

Importantly then these approaches not only avoid the need to tackle any of the structural inequalities which lead to a disproportionate group of young being at risk of ‘care’, or particular individuals ending up homeless, they offer a mechanism which further deepens the architecture and logic of the free-market economy. Steve Crossley of Durham University has written that “we are seeing some of the most marginalised and disadvantaged people in our society being ‘re-branded’ as an investment opportunity for ‘high-net individuals’ and ‘venture capitalists’ with the services required to help these people being re-defined as a marketplace where canny investors can make a tidy profit out of other people’s misery.”

This means then that solutions are seen in terms of changing the behaviours of individuals who are socially, culturally and politically marginalised and often living in poverty. This is central to the idea of Social Impact Bonds: change the way that people in poverty behave, but leave the system intact.

Lorenzo Fioramonti, in his excellent book ‘How Numbers Rule the World,’ argues that turning social work into a series of abstract models is ‘particularly insidious’ as it gives the impression of systemic change, when we should really see it as part of stabilising the existing system – the very system that generates and reproduces social inequalities that such programmes exist to mitigate.

Further to this, not only do SIBs leave the system intact, but actually re-enforce it – extending the reach of the market into sectors previously seen as public. The reach of financial capitalism is increasing through the development of SIBs. Marginalised people are converted into commodities and re-packaged into derivatives by investors plying their trade in the new marketplace of inequality. It is becoming what Bryan and Rafferty of the University of Sydney have identified as a ‘new frontier’ for finance. While global financial institutions traded in complex models of sub-prime mortgage securities before the crisis, now they aim to do similar with some of society’s most marginalised people. The financial crisis of 2008, which for many has discredited the dominant model of financial capitalism, has been maintained by those currently in power. It has been reconstituted as a debt crisis caused by government deficits. Through SIBs the logic of the marketplace is extended into areas previously unimagined.

Whether people feel that social investment bonds are a viable way forward or not, what is clear is they must be more robustly examined and publically debated, especially by those in the voluntary and community sector whose work could be increasingly underpinned by such an infrastructure.
Sometimes, things can be too good to be true.

Photo: M.V. Jantzen. License: CC BY 2.0

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