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Japan highlights innovative Asia Pacific model for Social Impact Bonds

14 May 2018
By Chih Hoong Sin & Ichiro Tsukamoto

SIBs are emerging as a way to reconfigure relationships between the state and civil society in ways that their Western inventors may not have anticipated but may wish to replicate.

Japan’s experience of Social Impact Bonds (SIBs) offers some important insights. First, it challenges the notion - held by some - that SIBs should be seen chiefly as a way to cut costs: in Japan we see a typically Asia-Pacific framing of SIBs that’s more focussed on developing civic society. It’s an approach that may catch on more widely around the world.

Secondly, the Japanese experience demonstrates the importance of institutional infrastructure and culture – and not only availability of finance - to make SIBs work well. SIBs require a complicated culture in which to thrive: Japan shows how it can take time for the various elements to be established.

Japan expressed an early interest in SIBs, becoming part of the OECD Social Impact Investment Taskforce. A five year nationally-funded research project, based at Meiji University in Tokyo, looking into developing SIBs for Japan is almost complete.

On the face of it, Japan might look to be in the same boat as, for example, the UK. The country’s national debt at the end of the last fiscal year was 254% of GDP, compared with the UK’s 88%. So, one might think, Japan would use SIBs to drive down spending and increase efficiency.

In fact, although Japanese rhetoric initially focussed on fiscal savings, interest swiftly shifted to SIBs steering improvements in societal wellbeing that might require more, rather than less, public spending. Japan has also been much more like other Asia-Pacific countries where SIBs have been seen as a means to reconfigure relationships between the state and civil society and focus on long-term issues of public health.

Past and existing projects have looked at, for example, how to create learning supports in deprived areas for NEET young people – those not in education, employment or training. A nationwide health SIB has just been launched focussing on better managing or preventing long-term conditions such as dementia, diabetes, cancer, cardio vascular disease.

Japan’s government has shown a high level of interest in SIBs. It’s seen its role largely as being to signal interest and legislating to make money available. In December 2016 Japan harnessed dormant bank accounts, like the UK has done, to set up the equivalent of Big Society capital, which is envisaged to go live from 2019. In addition, the Ministry of Economy, Trade and Industry (METI) and the Ministry of Health, Labour and Welfare have provided pilots around the country with funding for operations.

So pilot programmes have tended to suffer not from shortages of capital. Their problems have, rather, concerned lack of measurement or been because service providers are short on thinking or capacity to deliver outcomes-based contracts.

Institutional weaknesses in Japan

Japan has been institutionally handicapped in developing SIBs in a number of ways. The country has a weak public management culture: transparency, a focus on efficiency and on prioritising clients’ views of outcomes are less developed than in the UK.

The country is only slowly creating the building blocks for outcomes-based markets. The UK government has supported the creation of outcome payers: SIB investment funds such as the Innovation Fund, the Fair Chance Fund, Commissioning Better Outcomes Fund, and the Life Chances Fund. Britain has invested in developing an evidence base that can support outcomes-based contracting. There is also legislation that directly or indirectly supports SIBs, including the Public Services Social Value Act and provision of social investment tax relief. Japan has had a much less developed basic infrastructure.

In comparison, the UK’s voluntary – not-for-profit – sector is also more robust, diverse and heterogeneous, including organisations of different sizes. There are strong umbrella bodies such as the National Council for Voluntary Organisations. Japan has a long history of social sector organisations but the flowering of the not-for-profit sector is more recent, encouraged in the past 20 years by legislation liberalising regulation of the sector.

Many Japanese organisations remain small and hyper-local, which raises questions about their capacity to engage with SIBs. The country’s not-for-profit umbrella bodies are also relatively weak in terms of their lobbying capacities and the extent of their networks across the sector.

There are fewer charitable foundations than in the UK. So, social sector organisations in Japan largely rely largely on government funding, whereas UK social sector organisations tend to have more diverse funding. This financial dependence makes it harder for social sector organisations to question government.

Problems measuring impact

These days, the UK social sector is familiar with measuring and demonstrating impact. Japan’s social sector organisations are less experienced in measurement and, where they are, their focus tends largely to be on activities and inputs.

Lack of diversity in markets - in terms of service providers, investors and intermediaries – also hampers the growth of SIBs in Japan. Until 2017, when the Yokohama SIB was developed, all pilots were driven by the Nippon Foundation or its subsidiaries. So a single, large player was trying to nudge the market along.

There are significant differences between the UK and Japan in the maturity of intermediary markets. The UK has moved from a virtual monopoly among a few intermediaries in the early days of SIBs to a growing, diverse market, bringing in many different skills. Intermediaries no longer offer only financial backgrounds. There are people with commissioning support experience as well as good provider engagement experience. The same cannot be said quite of Japan, where the emergent intermediary market remains in its infancy.

From the commissioner side in Japan there remains a poor understanding of SIBs so it is difficult to collaborate with providers about constructing SIB models. As a result, commissioners may not know what to specify. They tend to identify general outcomes which may lack meaning and be unachievable within the timescales.

Building underdeveloped civil society

Nonetheless, Japan’s vision for SIBs is innovative as it tries to use them to place individuals at the heart of public services that have tended to be dominated by centralised bureaucracies. As in China, SIBs offer Japan a model that facilitates an underdeveloped civil society sector to grow and play a more visible role. SIBs allow responsibility to be devolved downwards while retaining central control through outcome-based funding. SIBs help square the circle for centralised governmental structures that wish to devolve responsibility while retaining policy direction.

Western countries such as the UK, where SIBs originated, would be wise to take stock of this evolving emphasis. Just as football played in Brazil and Spain has turned out to be more exciting than the game played by its inventers, SIBs, in their cultural adaptation, may prove to be a more transformative model than originally envisaged in Britain.

Attractions of Asia Pacific model

This adapted model could turn out to be an attractive export even to its inventors. Austerity – the ground into which SIBs were originally planted – will not last forever. SIBs may, in the longer run, offer opportunities for a more ambitious and hopeful agenda of improved well-being that may be politically realistic in more prosperous times. Such reinvention and rebranding of SIBs might also make them more attractive to their Western critics. The Left in Britain and US has tended to dismiss SIBs, suspicious of them as vehicles for commodisation and privatisation of public services. A revisioning of SIBs might suit a more left-wing agenda.

This SIBs model with a different emphasis might also offer an approach to reform in Britain where big providers such as Serco and Capita - focussed on driving down costs rather than on quality delivery to the person – are edging out smaller local players. Since 2010, many small civil society organisations have collapsed in the UK and others have had to merge as size has become the key to survival. Might SIBs eventually offer a way to address this trend and recognise financially the value of local deliverers with smaller caseloads but higher quality?

As the SIBs story unfolds, the purposes and future of this approach to service delivery remain in flux. Analysing the Japanese – and wider Asia Pacific - approach is a reminder that we may not have scratched the surface of SIB’s potential for achieving a wide range of agenda.

Dr Chih Hoong Sin is Director of Innovation at the Office of Public Management, London, UK

Ichiro Tsukamoto is Professor of Public Management at the School of Business Administration, Meiji University, in Tokyo, Japan.

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