A Smart Financing Instrument to Improve Government Effectiveness
Concepts such as ‘profit chasing' and ‘economism’ are becoming commonplace in present political discussions. Often they are used in protest against the focus on public spending cuts, where social issues are reduced to cold hard numbers. However, a new financing instrument has emerged in recent years: the Social Impact Bond. SIBs, as they are often known, mean more funds instead of less for social challenges. Essentially, SIBs are not only sustainable, but effective as well.
I moved to ABN AMRO in 2009, while the financial recession was raging. Since that time, the chief topic of discussion has been what banks should not do in order to prevent a repeat of the economic slump or to avoid harming nature. Yet a question that is at least as important is what investors and banks should in fact do to help improve the world. I firmly believe that we can give society a tremendous boost by financing sustainable progress – for example by developing Social Impact Bonds (SIBs).
An SIB is a contract under which private investors pay for a social intervention, for example action to remedy youth unemployment. The degree to which the predefined goals have been achieved is measured at the end of the project. Based on the outcome, the government then pays back the investors, and possibly gives them a return on their investment. If the intervention fails, the investors are not paid anything: no cure, no pay. The risk of the intervention lies with the investors, not with the government.
Helped off social assistance by the Buzinezzclub
At present the Netherlands has three active SIBs, all of them in the field of jobs and employment. The first bond was issued in Rotterdam, where ABN AMRO and Start Foundation joined forces to invest in the Buzinezzclub: a project aimed at helping Rotterdam’s youth off social assistance and into a job, education or business opportunity. Helped by this SIB, the Buzinezzclub is now assisting some 160 people. The bond is reducing the amount of time people are on social assistance, and the savings that this yields are then shared by the investors and the local government.
Advantages of Social Impact Bonds
SIBs offer various advantages compared with subsidies::
SIBs offer governments new ways to tackle social problems without bearing the risk: they only pay after the fact, and then only if the experiment is successful. This allows local governments to realise their social targets without impacting their budgets.
Focus on social results
SIBs are co-creations between investors and the government. Their partnership makes it important to determine ahead of time what social performances will and will not be taken as the basis for payout, and how they will be measured. Interventions are analysed more in terms of their positive impact and concrete results than for image and appearance.
More possibilities for innovation
An SIB offers a less strict contract with the local authorities. The social entrepreneur or foundation carrying out the intervention has more flexibility for deciding what resources to use to achieve the final goal. If matters are not proceeding as planned, improvements can be made along the way. This means more possibilities for innovation in the public sector.
Three tips for Social Impact Bonds in the Netherlands
ABN AMRO recently published a study into SIBs, comparing developments abroad with the Dutch market. Other countries have already used SIBs in a variety of sectors, including development cooperation, welfare (specifically youth welfare) and reoffending prevention. For each sector, the report gives a description of a foreign example and then translates that example into an SIB that could work in the Netherlands. Based on those foreign experiences, the study puts forward three recommendations for the Dutch market:
1.From cost-cutting to value creation
Firstly, we need to shift our focus from cost-cutting to the wellbeing of the demographic targeted. The mission of Dutch youth welfare organisation Jeugdzorg, for example, is to ensure that every child has a carefree and safe childhood. If Jeugdzorg achieves this policy objective, it is only right that the government pays for it. Among other benefits, with proper family counselling fewer children will be removed from their parental care. Obviously this saves the government money, yet savings are not in fact the principal goal of the intervention. The emphasis for SIB constructions in youth welfare should be on the child’s wellbeing.
2.More knowhow for governments and investors
Secondly, governments should study investment propositions in more detail, and investors in turn should familiarise themselves more closely with social issues. This cross-pollination represents a great opportunity for the separate sides to learn from each other. They can also call on a substantial group of intermediaries to share their understanding of SIBs. Greater transparency in SIB deals means that the knowhow can be shared even faster, enabling us to realise even more bonds.
3.Special funds for repayment
Lastly, SIB development will benefit from the availability of government innovation funds, which the authorities can use to repay investors. In the United Kingdom various such funds have been set up, which is why the market there is growing at a rapid pace. With an SIB innovation fund, investors seeking repayment will not be forced to claim back their money from multiple different government bodies that all benefit from the intervention. An added benefit is that the funds’ managers can use their expertise in support of local governments and ministries seeking to set up SIBs.
A wealth of opportunities awaiting Dutch SIBs
I see a great deal of potential for setting up effective SIBs in the Netherlands. SIBs offer a promising instrument for using private funding to achieve social progress and to realise policy objectives more effectively, without reducing social and political issues to cold hard numbers.
If you are a social entrepreneur or an investor or you work in government, and if you share my vision of using Social Impact Bonds to make society better, behalf of ABN AMRO I invite you to share your thoughts by mailing us at email@example.com