Politicians often explain the public finances by using personal finance analogies, saying “imagine for every £4 you earned, £1 went to pay off your credit card bill”. It’s not a bad idea. So let’s have a crack at it with Social Impact Bonds.

Imagine you’re managing your household budget. By the time you’ve paid the bills, your credit card, bought Rose a new school uniform, a new toy for Olly, paid the dentist and done your weekly shop, there’s not much left over.

Meanwhile, since Spot got in that fight with the mongrel from the estate, he’s been no end of trouble – not to mention cost! You had to take him to the vet three times, missed a morning’s work when he escaped AND you have to pay Lucy from next door to take him out - he’d destroy the sofa again if you didn’t.

But just imagine a “no win no fee” offer from a dog trainer. If they sort Spot out then you pay them – but only if it works! And you will be better off as you’ll save so much in vet’s fees, no new sofas, not paying Lucy and not missing work. Sounds too good to be true! Where do I sign?

Does this tell us anything about the challenges and risks for Social Impact Bonds?

  • It might work with dogs. But it probably won’t work with cats. (So the hype should be commensurate to the replicability)
  • It certainly won’t work with moths, the weather or the common cold (Not all target groups are identifiable)
  • Won’t Spot still have to go to the vets sometimes anyway if he catches some other illness? How do we work out who pays for that? (Measurement and monitoring, inspection and attribution can be disproportionately complex and costly)
  • What if Steve thinks “no win no fee” schemes are a big scam? (Those to whom the benefits accrue need to join up budgets to make it work)

  • “No win no fee” models have been around for ages (Social Impact Bonds are really just payment by results)
  • It turns out the “no win no fee” folk are a bunch of ex-City boys. I know what I think about their sort. (Reputational risks are as important as substantive ones)
  • Why do the Council keep banging on about this scheme? (Government patronage can be a mixed blessing)
  • How come they make so much money out of me? It’s not fair. (No limits to the upside for investors can undermine reputation)

  • Spot hasn’t improved at all, I really had my hopes up and I still have a problem. (Some services fail and you can’t transfer all the risk) 
  • Spot improved but the company went bust (The numbers may just not stack up)

Waste and unintended consequences
  • It turns out Spot just had a Lego man in his belly that was making him grumpy. But the dog trainer did all that complicated stuff to justify his role (Targets and contracts can lead to perverse incentives and wasteful ‘gaming’)  
  • Do they really expect me to sign up for 7 years? What if Spot dies after 5 years or I want to give him to Ethel? (Long-term contractual arrangements create their own risks and waste)
  • Why are they still making money out of me 5 years later when that cheaper dog training regime was invented a few years ago? (Without flexibility, outcome financing schemes can be wasteful in the long term)
  • Lucy really misses Spot and is struggling financially. (There are always externalities)
  • What have they done to my Spot? He just sleeps all the time. (Targets can create perverse incentives)
  • It doesn’t feel like my dog any more. I don’t care about it and I resent it. (Outsourcing responsibility brings unintended consequences)

  • Why not just borrow the money and get a normal dog trainer? Much cheaper! (No-one can raise finance cheaper than the Treasury)
  • I can’t even look after a dog. I feel like a failure. I can’t look that dog in the eye anymore. (Commodification of social outcomes can undermine and erode reciprocal trust-based relationships)
  • I should really admit I can’t afford to keep up this lifestyle. (Endless financial wheezes won’t get us out of this economic mess)