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Following innovations in the UK and New Zealand, some of Australia’s more forward looking State governments are looking at two related innovations. The first is ‘social investment’ with social impact bonds leading the vanguard.

Social impact bonds

As Wikipedia tells us, a social impact bond “also known as a Pay for Success Bond or a Social Benefit Bond is a contract with the public sector in which a commitment is made to pay for improved social outcomes that result in public sector savings”. Thus philanthropic knowhow and funding together with some commercial funding might invest in a program that can be expected to achieve some socially beneficial outcome like reducing recidivism of some cohort of prisoners exiting a prison.

The idea is that this can help underwrite innovative social investment. At least as a novice it all looked pretty dodgy to me. And there is plenty to cavil at. For instance:

  • As with PPPs, the announcement of a political intention to proceed with social impact bond financed projects creates political incentives for such deals to be done even if there are lower cost means of achieving the outcome. This circumstance can lead to makeshifts in contracts whereby ultimate risks are underwritten by government, even where the apparent and immediate risk is with the private financier. The experience with PPPs offers many cases in which risk transfer to the private sector was inadequate, producing the worst of all worlds – higher costs to the public sector without the effective transfer of risk.
  • The scope to generate a new political economy of rent seeking, both in the immediate term in delivering the project, and over time as politicians and officials retire to take on lucrative jobs with the financial institutions that benefited from the financial innovations.
  • Also, just as there are many causes of social dysfunction, there are many causes of social healing, but this is all simplified in the accounting for social impact bonds. There will often be problems of attribution. To what extent did the SIB fund the observed benefit, and to what extent was it some other initiative? Not only can this muddy the accountability trail, but it does so in a pointedly invidious way. Most successful social endeavours tap into the good will and actions of many in the community and they may well think twice if they envisage some merchant banker making off with the dividends of their good deeds.

Still, I was more censorious of this before I understood just how poor the situation is at the moment.

I’d like to see us walk before we can run – by paying the NGO deliverers of social programs by results or at least paying bonuses for unusually good results. Alas that’s virtually non-existent, as is properly, objectively measuring results in my experience. Family by Family has been operating for over four years in South Australia and for around two in NSW and we’ve yet to get good data from either jurisdiction on our success or otherwise in preventing the kids in the families in the program from graduating to out of home care. Yet that’s the whole point of the program!

By contrast, once there’s a social impact bond, the money on the table means that Treasury and Finance Departments get involved in tying down evidence of impact as for instance they do in this social impact bond.  Tragically it seems very difficult to get that happening without such hijinks. And social impact bonds also provide nice ‘announceables’ for politicians.

The investment approach to welfare and other social expenditure

Meanwhile in New Zealand they’ve been pursuing what they call an ‘investment approach’ to welfare and attracting plaudits beyond the land of the long white cloud. Breaking out from the usual four year budget round, the aim is to manage welfare in the way insurance companies try to manage long tail liabilities like workers’ compensation. Australia’s NDIS is also set up to manage disability as long tailed liabilities.

Still there are a few things that stick in my craw about the New Zealand arrangements. The single minded goal is to minimise welfare payments. That’s a fairly niggardly view which I’d like to see replaced with something a little more focused around the needs of those on welfare – though obviously the community also has an interest in minimising its welfare liability. The thing is I expect a broader view of welfare might, in addition to improving lives, improve long-term welfare liabilities. Even if one were not thinking of the wellbeing of those on welfare, there are lots of other government liabilities beyond welfare – namely health – physical and mental, education, housing and corrective services. Likewise the impact of some good social programs may not be in lower liabilities but in better outcomes. We have some anecdotal evidence that Family by Family improves educational outcomes. Kids get their motivation back and perform better in school – but the direct effect on educational outlays alone is ambiguous. If they’re in remedial programs and we help kids recover from social dysfunction and deprivation they may exit remedial programs lowering outlays. But they may be playing hookey already so their return to school could increase outlays. The point is that it raises educational outcomes. So even if one disregards wellbeing as experienced by the target group, just minimising government outlays calls for a much wider perspective.

Another bugbear of mine regarding the ‘investment approach’ is the spurious precision and vast cost that come from professional actuarial reporting. This is a classic case of heading to a profession for some kind of respectability, when all the expertise and expense one gets from engaging actuaries is largely beside the point – the point being to move from an arbitrary four year perspective to a much more commonsensical approach which looks at long-term liabilities. You don’t need the theatre of actuaries reports to do the main thing which is look beyond the forward estimates. In all the excitement of following New Zealand’s investment approach, the Commonwealth has spent about twenty million dollars no doubt a good deal of it on actuaries, when the approach is complete commonsense and doesn’t need heavy outlays on actuaries. (Still, in the scheme of the literally trillions of dollars of liabilities, these baubles are not that important.)

Social value capture

Anyway, another commonsensical and important point is this. For New Zealand, a unitary state, the national government bears the liability of welfare and other social programs both on the outlays and the revenue side. Thus getting those in families into work not only reduces outlays on welfare social programs and unemployment, it increases tax revenue. By contrast in Australia, fixing up families that might otherwise be dysfunctional reduces what are predominantly State Government outlays liabilities. But the Commonwealth Government also has a fair bit of exposure on the outlays side – by way of its funding of unemployment benefits. And it has a far larger exposure on the revenue side with a direct exposure to income tax, and a secondary exposure to 25% of all additional economic activity.

So while our Prime Minister explores the scope for ‘value capture’ from physical infrastructure, there’s a case for the Commonwealth to help out the States in their tackling of social dysfunction. And thanks to Malcolm’s pioneering efforts, we even have a bit of terminology to help make the point. “Social Value Capture”. It would be nice to say that this would cost a Federal political party nothing in campaigning for the election because it’s only recirculating money that would come into the Commonwealth’s coffers. But the bean-counters would rightly say that the money would be parted with before the government reaped the resulting fiscal dividend. So there’s some upfront fiscal cost. But a program of partnering with the states in a mutual attempt at harvesting the dividends of social value capture should probably start small in any event. If I were a party heading to the election I’d plonk $50 or $100 million down in the first full year of action – which would be the second financial year of the next Parliament. I’d commit to the same figure in the succeeding years of the forward estimates as a minimum but with an eye to spending more than that if the evidence began mounting that the net present Commonwealth/State fiscal value of the outcomes exceeded their current Commonwealth/State fiscal cost.

Nicholas Gruen is a policy economist, entrepreneur and commentator on our economy, society and innovation. He is founder and CEO of Lateral Economics and founder of Peach Financial. He Chairs The Australian Centre for Social Innovation and The Open Knowledge Foundation. He chaired the Federal Government’s Innovation Australia till 2014 and in 2009 chaired the Government 2.0 Taskforce. You can follow him on Twitter here.

This post was originally published at Club Troppo.