“Social Impact Bonds – why so slow?” A Response

Toby Eccles from Social Finance UK recently asked an interesting question about social impact bonds on his personal blog. The question is “Could Social Impact Bonds be happening more quickly?” I offer here my own thoughts on this question.

Social impact bonds, or SIBs, certainly take a long time to create. Massachusetts started exploring SIBs in, or before, October 2011, released the RFP in January 2012, entered into negotiations with service providers in August 2012, and has not yet signed a pay-for-success contract. If Massachusetts signs a SIB by end of this year, it would have taken 24 months to create the SIB from RFP to contract, and longer if pre-RFP work is included in the count. The Essex SIB in England also took approximately 24 months. The New York City SIB was probably faster, at 12-18 months. Australia’s New South Wales government started exploring SIBs 12-18 months ago, and announced its first SIB this month. On average, if a government that has already looked at SIBs was to start creating one today, it would take it 9-12 months to deploy.

I think several components of this process are especially lengthy. Whenever a SIB has to go through procurement, its creation will become drastically slower. The government must design an evaluation system, issue a public call for proposals, evaluate the responses, request additional information if necessary, and select its counterparty. The NYC SIB and the Peterborough SIB did not undergo procurement. This reduced one lengthy part of the process for these SIBs, but the general novelty of the program probably erased most of these timing gains.

Toby mentions that governments may be unwilling to pay outside organizations to assist with the creation of a SIB in part because the deal is unclear and unlikely. Lack of funding may constrain outside organizations, such as intermediaries like Social Finance, from acquiring enough resources to develop the SIB faster. It may also signal to mid-level government officials that the government is not seriously invested into creating this program, and therefore they should not devote too much time to it themselves.

I think that SIBs will be created increasingly faster for three reasons. First, NGOs and governments around the world, including the Cabinet Office in the UK, are creating templates for SIB processes. This will enable future governments to copy large chunks of the legal and financial machinery of the SIB. Second, if initial SIBs succeed, investors will have a history of returns and financial arrangements against which to compare new SIBs, which may shorten their time to evaluate an investment.

Finally, as Toby mentions, governments and social enterprises are still learning how to partner with each other to increase social value while maintaining a financial proposition. This process in difficult because the two sectors speak a different language, and because governments worry that profit-seeking behavior will infect the behavior of social enterprises and warp their programs, and that therefore these organizations should be kept at arm’s length. If nothing else, the SIB helps erode these barriers and create a common language among the sector that, ultimately, may increase the speed of the conversation.