Social Impact Bonds: A Critical Analysis of the Concept and its Application

Since their launch in 2010, Social Impact Bonds (SIBs) have been increasingly implemented, spanning several advanced countries, representing a substantial monetary value. Often heralded as an efficient way to reduce crisis-based public services by delivering early intervention programmes. Proponents claim SIBs can unlock a range of benefits for government by generating better incentive structures in the delivery of social services, more efficiently allocating welfare expenditure and promoting innovative social service programmes, whilst shifting the financial risk to the private sector. This view has led to SIBs being widely endorsed by both governments and institutions involved in impact investing. This research challenges the notion that SIBs are an efficient instrument for public social policy delivery. SIBs are first considered from the perspective of political economy drawing upon the theoretical framework of financialisation. It is shown that that SIBs are primarily a financial instrument with underlying structural similarities to a derivative. They entail considerable involvement of financial agents seeking new avenues of profitability in the realm of public policy and in fields hitherto funded and delivered by the state. In doing so, SIBs commodify previously public provision, such as child and family welfare or housing and homelessness, and partially transfer the financial responsibility of welfare provision onto private investors. SIBs are subsequently considered analytically from the perspective of agency theory. Conclusions are drawn about the impact on the principal-agent relationship by the differing goals, motivations, and attitude to risk between the state (the principal) and the different constituent elements of the SIB framework. It is shown that SIBs result in complexity and conflicting interests that forestall efficiency. In this light, SIBs are not an efficient instrument for public social policy delivery. Empirical support for the analysis is given through a comparative study of three SIBs in the United States, United Kingdom, and Australia, covering policy areas of child and family welfare, and criminal justice. SIBs have questionable efficacy and analytical coherence. They are a financial instrument deployed to solve some of society’s most enduring problems, and in this respect reflect the financialisation of contemporary capitalism. Their social outcomes are complex and contradictory, and their efficacy as a public social policy instrument is questionable