The pie isn’t getting bigger, it just tastes better
When it comes to Social Impact Bonds (SIBs), the claim is often made that introducing this innovative approach to financing will increase the amount of funding available for the social sector. We do not share this view.
For the foreseeable future, private investors, who could actually bring additional funding to the social sector, will play a minor role as upfront financiers of SIBs. There are two reasons for this. On the one hand, SIBs will hardly be able to offer an interest rate that would be appropriate for private investors given their risk of default. On the other hand, there are political reasons that make it a bad idea to open up SIBs to private investors too hastily. After all, this would invite the misguided, yet still popular criticism that money is being made at the expense of the less fortunate.
Instead, as we see it, most of the funding for future SIBs will continue to come from charitable organizations such as foundations. And their financing does not represent more funding since those funds were designated for the charitable sector from the very beginning. Instead of “more funding” it is really “concentrated funding”; instead of talking about a “better investment,” it is better to talk about a “better donation.”
After all, we believe that the primary task of SIBs is not to acquire more funding for the social sector, but rather to use the existing public funding in a more targeted and effective way. Given the tendency towards shrinking public budgets in the future, this could be of growing significance.
Social Impact Bonds can thus help to reach as many people in need as best as possible with the existing, yet always limited public funding available. By linking the use of public funds to clearly formulated objectives and making sure that those funds are only paid if pre-defined goals are achieved, the public sector has the opportunity to tackle existing social tasks more efficiently or close gaps in the existing landscape of offerings.
Regardless of whether the objectives agreed upon with the public sector are achieved, in any case SIBs give the public sector – and thus us, the citizens who finance the public sector – transparency and information about what is actually being accomplished in the social sector and what is not.
SIBs are not making the social sector’s financial pie any bigger. However, the ingredients and recipes are visible for every piece made up of an SIB. SIBs thus allow us to see, for the first time, what the pie is made of, how it is made, and what it can accomplish. And that alone makes it taste better. A lot better.