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SIBs may provide components for outcome-based contracting, but they are not a panacea

6 September 2018
By Stefanie Tan, Alec Fraser & Nicholas Mays

Public service reform can benefit from outcome-focussed approaches to commissioning. However, we should avoid assuming that Social Impact Bonds are likely to have wide application, explain PIRU’s research team.

Social Impact Bonds (SIBs) are likely to become just one part of the search among policy makers, practitioners and researchers for viable approaches to outcomes-based commissioning of public services. That’s what we conclude in our assessment of the SIBs Trailblazers in health and social care in England, set out in our recent report. Here we reflect on a number of issues raised in our own research and by previous blogs in the PIRU series on SIBs.

Testing, as yet unproven, outcome-based models of commissioning is important for public services, which are often clear about their goals but hamstrung by inadequate implementation including unsupportive funding mechanisms. In health policy, for example, there is a goal to develop healthier citizens – not just to treat more sick people. Reaching that goal could reconcile the ambition to provide better health care with the need to control budgets. However, how can health and social care – and the other parts of the public sector – work together to achieve such goals? We lack a tried and trusted mechanism.

Focus on outcomes-based funding

In this light, the focus that SIBs provide on developing outcomes-based approaches to commissioning services is welcome. SIBs in health and social care have the potential to break through institutional inertia and generate innovations in public service delivery. At best, they can free and motivate front-line service provider staff to focus strongly on the needs and desired outcomes of their clients.

One of the issues holding back public service innovation, particularly in the last decade, has been a lack of funding for prevention as the demands of those currently in need of support have become ever more pressing. Amid austerity and lack of time for contract management, commissioners have found it difficult to think strategically. In this context, SIBs have been welcomed by policy-makers, commissioners and providers, drawn by the promise of upfront funds to develop services designed to improve outcomes in the longer term.

Issues with SIB upfront funds

What’s not to like about that promise? We have two caveats. Some Third Sector organisations lack the capacity to monitor user outcomes well and thus to demonstrate accountability for the upfront funding that they receive. Thus, upfront funding needs to be used not just for service delivery, but also for developing capacity at the provider level in areas such as outcomes measurement and data management.

A second - and perhaps more fundamental - concern about SIBs’ provision of upfront funds is whether this is an efficient way to generate extra cash. The injection of more funds can be seen as a good thing per se, but, it brings with it two further problems.

First, investors are often risk-averse, which can get in the way of innovation, a raison d’être for SIBs and for outcomes-based funding in general. There may also be clashes between the values of private investors and those of the ultimate payer for results – the public commissioner on behalf of the public/tax payer. Additionally, there may be adverse impacts on Third Sector staff’s motivation if the pursuit of specific outcomes is prioritised ahead of meeting the specific needs of individual clients.

Second, many SIBs are set up with the help of intermediary organisations which can add to their cost. As a result, these costs have to be set against the value of any client outcome improvements. The activities of such intermediaries may also inhibit capacity building at the provider level if they assume long-term project management and monitoring roles.

Need for experiments to stretch the SIB model

Ultimately, the public purse foots the bill for SIBs, even if this only takes place after the successful delivery of agreed outcome improvements. Yet, there may well be other more efficient approaches to outcomes funding. We may need to have experiments that stretch the already flexible SIB model and compare it with other approaches. So, for example, Big Society Capital, the Big Lottery Fund, or other socially minded investors could experiment with conditional grants, rooted in outcomes-based contracts, to spur innovation in service delivery, and compare these with SIBs. In her contribution to this blog series, Katy Pillai, Investment Director at Big Issue Invest, signalled that investors are keen to support research into what works best in this regard.

In our experience, most up-front SIB finance does not come from business investors. It comes from philanthropic investors, alongside central government sources such as the Life Chances Fund. For example, the eventual outcomes payments made to investors in the Trailblazer SIBs which we studied were mostly paid for by tax-funded public commissioners upon delivery of the service. Upfront philanthropic funds (investors) were useful and the Big Lottery (which provides a quasi-governmental subsidy for outcome payments) helped to fund the additional effort needed for commissioners to consider and experiment with outcomes payments.

Given how SIBs are largely working this way in practice, would it be wise to experiment with a different SIB model that removes the commercial imperative altogether? This SIB model is, in ways, a variant on the experiments suggested above for socially-minded investors such as Big Society Capital and the Big Lottery Fund. It could amount essentially to organising forgivable loans to Third Sector providers from philanthropic agents, alongside dedicated contract and performance management support. Such an approach would remove the financial architecture of ‘investment’ that surrounds SIBs at the moment but could reduce their transaction costs and accelerate the innovation process.

Clarify values of outcome-based contracting

A big issue when discussing SIBs – or any form of outcome-based funding – is to define their purpose. Are they simply about driving efficiency and making savings to the public purse or are they about transforming the social value of services? Are they a tool to create better monitoring and evaluation cultures in non-profit organisations, so improving accountability and value for money? What are the values being prioritised in such contracts? Thinking and practice in the Asia Pacific region, discussed in the blog by Chih Hoong Sin and Ichiro Tsukamoto, focussed, for example, on a further role for SIBs in transforming the relationship between civic society and the State.

What PIRU and other research has found

So far at least, it has not generally been possible to show that SIBs have produced cashable savings to the public purse. Globally, the main demonstrable success of SIB projects has been in helping marginalised groups that had previously been badly neglected by public services. Here, there was often a baseline of little or no provision, so it was highly likely that anything would have helped in such circumstances. In areas with some previous provision, it is less clear that SIB-funded services, for example, for people with chronic health conditions, have led to superior improvements in health.

Next Steps

The general argument, in principle, for developing outcome-based commissioning and contracting is strong, given the difficulties that policy makers have in matching their goals with the limited funding mechanisms currently available to them. However, we are some distance from resolving all the difficulties in making an outcomes-focus work in public service commissioning and in establishing the case for applying these approaches at scale. So, it is wise to experiment widely and to keep learning.

In this light, policy makers should focus on the components within SIBs that show promise in strengthening outcome-based contracting, while avoiding the notion that the whole package offered by a SIB is necessarily the way forward. SIBs, as currently conceived, may have some dedicated roles, but these are likely to be in particular circumstances (for instance, when outcomes are relatively easy to measure and relatively uncontroversial). The greater value of SIBs and related thinking, in the long run, may be in informing the wider development of other models of outcome-based contracting for mainstream service delivery rather than in replacing these approaches.

Stefanie Tan and Alec Fraser are Research Fellows at the London School of Hygiene & Tropical Medicine and part of the Policy Innovation Research Unit (PIRU) at LSHTM.

Nicholas Mays is Professor of Health Policy at LSHTM and Director of PIRU.