Social impact bonds have the potential to revolutionise public services
1 June, 2015

It is a mighty feat of politics that a government budget delivered well can keep commentators occupied for weeks.

The Budget sets the terms of debate, pulling into sharp focus areas that receive additional funding, have had funding cut, or remain fiscally neglected by government.

Such laser focus misses the big picture.

One of the greatest reforms the Government is expected to make this term was barely mentioned this budget. That is the reform related to social services.

The Government needs to refocus the way the public sector funds and delivers social services. Under the current system, there is little accountability for either achieving outcomes or for ensuring cost effectiveness.

In a speech made earlier this year to the Institute of Public Administration, Finance Minister Bill English described some of the expected reforms, including changes to the budget process. Among these changes is greater purchasing of outcomes rather than inputs, testing for spending effectiveness, and reprioritising funding to the providers that get results.

Such changes are already familiar in the welfare sector. In fact, according to a recent article in Bloomberg, New Zealand has been ahead of the curve in its investment approach. The article claims “New Zealand has moved the furthest toward applying data to a range of social services. Whereas much of the world considers social service reform as simply cutting services, New Zealand is using data to inform how to spend taxpayers’ dollars most effectively."

From the data already gathered, policymakers can tell how much different population groups can cost the state according to certain life outcomes. For instance, data analytics have shown that a child under five who has grown up in certain conditions can be around five times more likely to be on a long term benefit by the age of 35, and seven times more likely to be in prison by age 21.

But gathering evidence and data on populations is only the first step. In order to truly get value for taxpayer money, and ensure effectiveness of services, there must also be greater evidence and accountability of the service providers themselves.

We have seen this recently with the Auditor General’s inquiry into Whanau Ora. The programme of strengthening families and empowering local communities has been commended across the political spectrum as a promising initiative. However, the Auditor General’s report has found that after four years in operation, there is still little clarity about what Whanau Ora aims to achieve, and what outcomes have resulted. This is despite $42.3 million spent in total on administration (including research and evaluation).

This is not a problem confined to Whanau Ora. Few social services – public or private – collect adequate data and feedback on their operations. The Productivity Commission’s draft report on social services found that government agencies generally do not know about the effectiveness of the social services they provide. Nor is there proper evaluation (or evaluation is not given proper weight in decision making).

It is therefore hard to compare different programmes based on effectiveness and cost, and leaves little ground for social service providers to compete. There is no yardstick for what constitutes an effective social service.

In our latest report, Investing for Success: Social Impact Bonds and the future of public services, The New Zealand Initiative has explored one model with potential for increasing public sector accountability, while incentivising the achievement of results.

The model is called Social Impact Bonds (SIBs). SIBs – sometimes called ‘social bonds’ in New Zealand– are a form of performance-based contracting that shifts the financial risk of funding and delivering social services to the private sector. Taxpayers’ money is only spent if programmes are successful and achieve set outcomes.
In other words, the Government only pays for what works.

The Ministry of Health is currently developing a pilot for the concept which has already attracted significant interest from the charities and philanthropic sector.

It works by enabling private investors, private service providers, and an intermediary to partner together to fund and deliver agreed social outcomes. The contract will have funding arrangements that are fully or partially linked with successfully achieving these outcomes. If successful, investors will receive their principal back, as well as a return.

Overseas, early success stories are emerging. For instance, the first SIB to be implemented, known as the Peterborough Prison SIB, focussed on reducing the reoffending rate of released prisoners. The results for the first cohort of prisoners released showed an 8.4 percent reduction in recidivism compared to the national average. In Australia, general government processes have been encouraged to reform, due to the greater emphasis SIBs place on outcomes, transparency and contracting. In other words, SIBs have been a positive example for other government processes to follow.

SIBs address concerns about improving outcomes, as well as spending taxpayers’ money responsibly. Accountability is built into the model, as payments to investors are based on the achievement of outcomes. An independent monitor must verify that service providers are achieving quantifiable results.

Incentives for innovation are also built into the model, due to only being financially rewarded for successful outcomes. There is also often more flexibility and freedom in SIB contracts, compared with other government contractual arrangements.

Performance-based contracts such as SIBs have the potential to revolutionise the way public services are delivered. The emphasis on measuring outcomes can form the evidence base and data-collecting infrastructure to be used more widely in public services.

This will allow decision-makers to compare the cost and effectiveness of competing social services, and may even improve the quality of services overall due to the competition imperative.

Finally, where programmes have been successful, the Government may choose to bring these services to scale, spending taxpayers’ money on innovative and proven models. SIBs shifts financial risk to the private sector, but the potential for spill-over benefits remain.

2015 is the Year of Evaluation: a global initiative to improve government policy and programmes by applying an evidence-based approach. New Zealand’s collection and use of population-based data has already transformed the welfare system, and is internationally acclaimed. If the same information can be gathered on what outcomes these social services achieve (and appropriate choices then made), New Zealand’s social service system could be truly world leading.

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