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Social impact bonds – what’s the problem? 3 December 2013

Posted by cooperatoby in EU, Social enterprise.
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The European Platform against Poverty and Social Exclusion (EPAP) convened last week for the 3rd time in the Egg (which is a well-converted industrial building, located appropriately on the wrong side of the tracks in a down-at-heel corner of Anderlecht).

Financial stability is not solving poverty

The event was graced by speeches from Presidents Barroso and Van Rompuy, as well as Commissioners Andor and Barnier. These brought out the fact that given that their priority is re-establishing financial stability Meanwhile two of the Europe 2020 targets are going in the wrong direction. Unemployment is up to 26 million, and far from reducing the number of people living in poverty by 20 million by 2020, the number has increased by 7 million.
The Commission has instituted a ‘social scoreboard’ which will report on five indicators: unemployment, youth unemployment, household disposable income, the at-risk-of-poverty rate, and inequality. This elicited the call from Sergio Aires, President of EAPN, for the social impact of austerity measures to be assessed before they are introduced. He viewed the commitment to spend at last 20% of the Structural Funds on social inclusion, but feared this would be ineffective as it does not form part of an integrated anti-poverty strategy. Each country acts alone and there is no common monitoring or evaluation. The EU’s structure is asymmetrical: whilst economic policies are an EU competence, their social consequences are largely left to national governments.
George Soros was the joker in the pack. His primary purpose was to plead for greater effort to be put into Roma education (see his simultaneous Guardian article). But he didn’t waste the opportunity to say that the design flaws in the euro have to be remedied. They have turned the EU from an alliance of equals into a club where the creditor countries are pushing all the costs of readjustment onto the debtor countries. Rising unemployment is fuelling xenophobia. “I’m afraid the euro is going to destroy the European Union,” he said to applause.

Social impact bonds get a grilling

WS6 Ruth Owen SIBs threatsThe main attraction for me was the workshop on “Innovative financial instruments developed with the private sector.” This was chaired by Thomas Fischer of the Bertelsmann Foundation, and focused mainly on social impact bonds.
Simon Rowell of Big Society Capital outlined the financial scale of charities and social enterprises in the UK: the former have an annual income of £36 bn and employ 765,000, the latter a turnover of £24 bn and a workforce of 800,000. Their main financial need is for long-term loans, and it is being addressed through bonds like those issued by Scope and Hastings Pier.
In a very balanced presentation, Ruth Owen of FEANTSA set out the opportunities and threats that SIBs present, and described two cases where they are being used to address homelessness:
• In London, the Department of Communities and local Government and Greater London authority have agreed a £5m scheme linked to the work of two charities – St Mungo’s and Thames Reach – with a named group of 851 homeless people. The bond will pay out if they achieve results measured on dimensions including settled housing and health.
• In Dublin, Focus Ireland is developing an €850,000 bond to help 136 families in temporary accommodation.
The SIB mechanism has a good fit with the issue of homelessness, as there are gaps in provision (local authorities are fire-fighting and unable to invest in prevention), and there is scope to generate savings (for instance through reduced use of health services).
She cautioned against undermining public authorities lest SIBs should be seen as a vehicle for cost-cutting, and suggested that the Commission might like to support a pilot, but one that is carried out in partnership with the stakeholders.

Jane Newman of Social Finance, which invented SIBs, agreed that they should not be used as a substitute for public services, but only to fund additional services – i.e. social innovation. There are now 14 SIBs under way in Britain. The first was created in 2010 with the aim of reducing reoffending at Peterborough Prison, 63% of whose inmates reoffend within a year of release. It will work with 3,000 prisoners, and if the work cuts reoffending by at least 7.5%, the bondholders will be repaid, earning interest of between 6% and 13.5%. The results will start to become known in 2014. One of their attractive features is that they focus on outcomes, and are less concerned with the process of getting there, so they stimulate new approaches. They can also be flexible: as they are not constrained by top-down official policy, they can change tack midway.

But what are SIBs for?

My main doubt is that SIBs are being used as a way to cut the public sector. The main argument in their favour seems to be that they bring in additional money to tackle social problems. But it seems to me that this is a self-fulfilling effect of limits on public-sector spending and borrowing: the government prohibits public authorities from borrowing and thus forces them to outsource. Central government is encouraging local authorities to issue SIBs by supplementing the return to investors – so yes it is paying private funds to do things it has made it impossible for public authorities to do.
If the argument is that investing in prevention is better than ineffective current expenditure on fire-fighting, then surely the answer is to allow public authorities to treat social issues as investment propositions. I don’t see that should be conflated with privatising their delivery.
There may of course be a different argument for that – that involving the third sector brings in new ideas and a closer understanding of the problems and the clients – but rewarding investors seems to be a red herring.
It may be that the ‘problem’ that social impact bonds are tackling isn’t social at all, but neoliberal-macroeconomic – to do with the size of the public sector.

See the EPAP presentations online.

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