/ Juvat / by Niklas Ruf

The opportunities and limitations of Social Impact Bonds

What motivates the public sector to pilot pay-for-success financing approaches such as Social Impact Bonds? Are the reasons always the same as in Great Britain, the country where the idea for Social Impact Bonds originated? Or are there differences depending on where such a project is implemented?

Michael Hagelmüller, who was involved in initiating Austria’s first Social Impact Bond pilot project “PERSPEKTIVE:ARBEIT” (“PERSPECTIVE:WORK”) in his role at the Austrian Federal Ministry of Labor, Social Affairs, and Consumer Protection, addresses these questions in his guest article. At the same time, he clearly differentiates between the approach taken in Austria as opposed to in Anglo-Saxon countries.

The opportunities and limitations of social impact bonds
by Michael Hagelmüller

Social impact bonds (SIBs) are no longer just being implemented in Anglo-Saxon countries. Even Austria is piloting its first SIB developed in the Federal Ministry of Labor, Social Affairs, and Consumer Protection. At the same time, the approach is much more cautious. Whereas in Great Britain SIBs are widely being used for the 2.8 billion pound employment program known as “The Work Programme,” in the pilot program in Upper Austria the Austrian ministry is relying on comprehensive and critical evaluation before considering further SIBs. This is understandable. After all, SIBs were developed as a financial instrument in Great Britain, and Austria at times takes a critical view of the British welfare state model. Earning interest for successfully rendering social services, involving private investors, and measuring social impact might sound like market fundamentalism and could, as some critics point out, end up releasing the state from its responsibility for the common good.[1]

Yet those who dismiss SIBs as a market-based instrument for financing public social services misjudge the potential they have to act as a prototype for cross-sector partnerships and state control. The close collaboration between the public sector, investors, and social service providers also helps to break down the longstanding borders between the worlds of the various participants. Particularly in Austria, “venture philanthropy” or “impact investment” is still an uncommon phenomenon.[2] Private investors who want to invest in social causes are often criticized due to the lack of a public mandate and thus democratic justification. Of course there are various competencies that come into play within the scope of a SIB. Whereas investors have a view for the long-term financial stability, and social service providers contribute their expertise on working with the target group, the public sector knows which social problem areas are most in need of interventions and new approaches or partnerships. In fact, the pilot project by the Austrian ministry is already showing that intense collaboration is breaking through the “silo mentality” by helping the participants to see that while the methods of their counterparts may differ, their objectives are the same.

Yet particularly in Austria, where the public sector still plays a major role in controlling and financing social services, fears that the state will withdraw from the social sector must be taken seriously. New instruments like SIBs must be used such that they bring a greater benefit to Austrian society and are not used as a justification for cutting back on state social structures. In this context, Great Britain serves as a negative example: The British government strengthened the role of civil society through the so-called “Big Society” program while massively downsizing the welfare state at the same time.[3] Today the “Big Society” program can be considered a failure. A study by the British think tank Civil Exchange[4] identified a number of fundamental deficits in the British approach: The British government saw civil society merely as a service provider working on behalf of the state and primarily commissioned large companies rather than regional organizations. It thus lost out on the potential to get the third sector more involved and treat it as an equal partner.

In Austria, the development of involving new partners from civil society such as foundations is still in its infancy. For this reason, it is particularly important to ensure from the outset that SIBs (and other new approaches from civil society) are used to complement Austria’s comprehensive social protection system. Pension insurance, health and accident insurance, unemployment insurance, universal social services (e.g., care allowances, family allowances), and need-based minimum income serve fundamental functions that private engagement can never replace. They safeguard against risks such as illness, disability, old-age, and unemployment and provide support when a person is no longer able to earn an income on their own. Making cuts here would be fatal to the cohesion of Austrian society. Of course it is also possible to relieve the pressure put on public budgets by providing indirect savings opportunities through impact-orientation and prevention. In any case, using engagement by the private sector as a justification for downsizing social services provided by the public sector should be avoided at all costs. When successful, SIBs keep particularly at-risk groups of people from becoming permanently dependent on services from social protection systems and thus lead to savings for the public sector. Yet this does not justify downsizing social protection, much less induce it.

Austria should thus learn the right lessons from the example of Great Britain. There needs to be a critical and active discussion between the various participants and the methods of the third sector need to be considered rather than disregarded. The public sector must redefine how engagement from the private sector can be promoted and controlled without giving up responsibility for the common good. Initial attempts to conceptualize this approach are already being made in the literature. New public governance (NPG) describes state actions that rely on collaboration between administrative units, civil society, and private participants. In this sense, the state continues to perform its most important sovereign duties (social protection, education, the healthcare system, etc.), yet it attempts to involve forces from civil society by controlling and specifying goals that are desirable for society as a whole and are democratically justified in order to mobilize knowledge, ideas, and resources for the common good. In this context, the SIB pilot project can be seen as an initial test for laying the foundation for further partnerships, regardless of whether they materialize as a SIB or in another form. Ultimately, the goal is to use existing resources effectively and efficiently in order to reach more people and to ensure that even in light of tighter public budgets as many people as possible can be given the opportunity for a high quality of life.

[1] zeit.de/2012/38/Geldanlage-Soziale-Bonds-Rendite/seite-2
[2] epub.wu.ac.at/4059 and bertelsmann-stiftung.de/fileadmin//user_upload/Studie_Wirkungsorientiertes_Investieren.pdf
[3] neweconomics.org/publications/entry/surviving-austerity
[4] civilexchange.org.uk/whose-society-the-final-big-society-audit