NPQ Op-Ed: Will Social Impact Bonds Improve Nonprofit Performance?

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Op-Ed: Will Social Impact Bonds ImproveNonprofit Performance?MARCH 08, 2011

JOE KRIESBERG

This article was originally published on the MACDC blog on March 2, 2011.

The Obama Administration has appropriately placed a high priority on driving better

performance in both the public and nonprofit sectors as they seek to tackle serious

social and economic challenges. This includes a heightened emphasis on research,

evaluation and funding “programs that work.” All of this is certainly welcome news.

Unfortunately, as part of this effort, the administration has embraced a new idea that I

fear could take us in the wrong direction.

In the FY 2012 budget, President Obama has proposed $100 million to fund co-called

Social Impact Bonds. The purpose of the Social Impact Bond is to create a new capital

market that will encourage private, profit-motivated investors to fund social programs

that “work.” Essentially, an investor would front the money to pay for a particular

program. If and when the program achieved the designated benchmarks, the

government would pay the investor for the cost of the program plus enough to cover

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their risk and earn a profit. The theory is to create a market where investors can make

money by investing in effective social programs.

Sounds good right? The government only pays if the program works. Taxpayer money

is no longer wasted on ineffective programs. Private sector discipline and oversight is

brought to bear on the nonprofit sector! But wait! Is this really going to work? Is

creating a Wall Street-like investment market the best way to strengthen nonprofit

performance? Judging from the performance of Wall Street in recent years (have you

read The Big Short?), one has to at least ask the question!

While I understand the appeal of this idea – and would welcome new sources of funding

for high performing social programs – we need to carefully examine the implications of

this approach to funding non-profit social service programs. I see many serious

questions that advocates of these bonds need to answer before tax dollars are

invested.

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First, Social Impact Bonds are likely to encourage functional specialization and silo-

thinking. Money will flow to programs that can hit a single key benchmark so programs

will be designed to do just one thing – achieve that benchmark. This will take the idea

of “teaching to the test” to an entirely new level. Programs with multiple positive social

impacts will be undervalued (like housing which provides economic, educational, health,

public safety, and quality of life benefits) while programs with high externalities will be

overvalued just as they are in the private economy (i.e. programs that improve

outcomes in some areas at the expense of others.) What makes this all the more

puzzling is that in other programs, the Obama Administration is promoting

comprehensive, placed based approaches that seek multiple quantitative and

qualitative outcomes through multiple interventions. I don’t understand why they would

support a new funding scheme that drives in the opposite direction.

Second, will these bonds discourage collaboration because this funding approach

places much more emphasis on which nonprofit should “get the credit” for the

“success? If a student’s test scores improve, who should get the credit and therefore

the money? The school? The tutor? The afterschool program? The social worker who

helped the student deal with early life traumas? The parents? The next door neighbor

who helped with math homework? The Little League that gave her an opportunity to

grow and mature and have fun? The library where she did her homework and used a

computer? How much time and money do we want to spend sorting through all the

possible reasons and their relative impact on the child so we can sort out who gets how

much money? Does that create a collaborative culture?

A third potential problem with this approach is that it may over-estimate our ability to

identify the correct metrics and to measure them correctly. Long term data is very

difficult to secure and causal relationships can be very hard to discern. In our quest for

market clarity, we are certain to over simplify and choose metrics that are easy to

collect, count and standardize, even if they don’t tell us the full story or even an

accurate story. This is particularly true when attacking complex, systemic problems

such as educational and health disparities, environmental justice, or land use

development.

A fourth problem is likely to be cream skimming. Organizations will have a powerful



financial incentive to cherry pick the best clients that maximize their chances for hitting

performance benchmarks. Supporters say that they can guard against this, but history

shows that powerful financial incentives work – they will motivate performance but they

will also motivate people to “screen” clients before enrolling them in programs. And

now we will have powerful investors pushing in this direction!

Fifth, advocates say these bonds will promote innovation, but I think it is much more

likely that investment dollars will flow to safe, well-known, programs. New, untested

ideas, will have a very hard time attracting investors – and those who are attracted may

seek returns that taxpayers cannot afford.

I also wonder whether a Bond Market can really think about long term solutions. Will

investors be willing to wait 5, 10 or even 20 years to see transformative impact? Or will

they only be interested in programs that can achieve benchmarks within 1 or 2 years.

And if we are looking at long term impacts, do we have the ability to measure impact

and causation sufficiently well to ensure that the right programs are getting paid? And

how would we control for macro economic impacts that may cloud our ability to see the

impact of individual programs?

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Finally, a Social Impact Bond Market will undoubtedly become a massively complicated

system as investors seek to bundle investments, guard against losses, shift risk to

other parties, scale up, and otherwise replicate traditional investment markets.

Lawyers, accountants, advisors and intermediaries will be needed and they will all need

to be paid (handsomely, no doubt.) A program designed to save taxpayer money could

easily end up costing far more. Remember, this program will leverage private capital,

but at the end of the day, the taxpayer must pay for all the costs plus the profit or

return. There is no free lunch and if investors start to lose money the bond market will

dry up very quickly.

Everyone wants to fund “what works” and no one wants to pay for programs that don’t

achieve real outcomes. But the world is complicated and it does not help to pretend

otherwise. Positive social outcomes are usually the result of multiple interventions,

programs and causes – including some that operate at the macroeconomic level that is

far beyond the scope of a single nonprofit program. And performance metrics can only

capture so much. When a new playground opens it may significantly improve the quality

of life for children and families nearby. But will a new playground translate into

measurable and statistically significant reductions in obesity? Or increases in family

incomes? Or improved educational attainment? Probably not. Does that mean we

should stop “wasting” money on playgrounds because the “don’t work?”

We absolutely need to fund programs that work. But my concern is that program

evaluation is too important for us to dumb it down into numerical measures that Wall

Street investors can understand but don’t tell us the true story of what is happening in

our communities. Instead, we need to build capacity in the nonprofit sector to conduct

robust and meaningful program evaluation and to take advantage of new information

technology that can improve our understanding of program impacts. And we need to

fully fund those activities. I fully support public-private partnerships and programs that

leverage private investment (MACDC has filed its own legislation designed to do just

that) but we have to be very careful how we design these programs less we suffer

serious unintended consequences.



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Joe Kriesberg is the president of the Massachusetts Association of Community

Development Corporations.

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NPQ Op-Ed: Will Social Impact Bonds Improve Nonprofit Performance?

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