Overweight? I think you mean underheight...


Recent commentary around social impact bonds argues that they are inordinately more expensive to arrange than grants, and more corrupting. Steve Goldberg responds with an alternative perspective.

At 5 feet, 7 inches tall, and 198.5 pounds (or 1.7 meters and just over 14 stone), I’m quite the physical specimen. According to the fusspots at the National Institutes of Health, I’m overweight by about 45 pounds, but I prefer to think of myself as underheight by about 9 inches.
Skeptics who worry about the expense and complexity of Social Impact Bonds (SIBs) might rethink their perspective, too. In the space of just two days, Martin Brookes of the Paul Hamlyn Foundation (PHF) lamented that SIBs are “incredibly expensive to put together,” and Ted Levinson of RSF Social Finance expressed grave doubt that “transactions costs can drop enough to make [the SIB model] economically viable.”  Meanwhile, Kriss Deiglmeier of Stanford’s Center for Social Innovation asks, “Does the tendency to compensate intermediaries more generously than the people actually doing the work bother you as much as it bothers me?”
I don’t know Ted or Kriss, but my admiration for Martin, whom I’ve had the pleasure of knowing since 2006, knows no bounds. A more ethical and civic-minded individual you will not find. So I was somewhat taken aback when Martin said “there are legitimate questions around the ethics of starting to regard organisations to whom we would normally make grants, as investment opportunities.” To illustrate his misgivings about SIBs, he referenced the cost-effectiveness analysis conducted by Pro Bono Economics (which Martin co-founded in 2009) of the UK children’s charity Barnardo’s hallowed work on child sexual exploitation:
“That analysis showed that the intervention is enormously cost-effective, so theoretically you could construct a social impact bond around that sort of work. But if I start regarding the donations I make to Barnardo’s not as gifts but as investments, then it changes the nature of my relationship with Barnardo’s.  I think that if you change the nature of a gift into a market-based transaction then it kind of corrupts the relationship.”
Martin’s recent and richly-deserved appointment as CEO of PHF is testament to the enormous contributions he’s made to the charitable sector, not the least of which was launching and leading New Philanthropy Capital for many years. Anyone who doubts the esteem in which Martin is rightly held should consider that the Civil Society article in which he’s quoted is entitled, “Brookes admits to unease about social investment” (No Googling is required to confirm the lack of articles entitled, “Goldberg has reservations about ....,” well, anything.)
Martin is correct that treating his donations to Barnardo’s as investments would change his relationship with the charity ... from someone who could never give them enough money to make a dent in human trafficking to someone who can.  That’s the important difference between philanthropy and the best social investments. Philanthropy (especially venture philanthropy) can and does fund innovative solutions to vexing social problems, but it can’t actually solve them. Charity isn’t a means for scaling what works; it never has been, and never will be (see my book). Impact investing just might be, at least when it’s well designed.
Which brings us back to Ted and Kriss (and Martin). SIBs are too costly and complex, they say. And intermediaries and consultants get paid too much, especially in comparison to the nonprofits and social entrepreneurs that actually do the work.
SIBs are complicated and expensive because, unlike grants, they enlist all essential stakeholders in actively collaborating in delivering an integrated set of innovative solutions with fidelity to evidence-based models, which requires dedicated and skilled intermediaries to herd all those cats, collect lots of data and use it to manage performance over many years.  Unlike philanthropy, outcomes-based finance requires accurate cost estimation, continuous quality control and rigorous evaluation. If investors don’t think they’ll get paid back because they’re not convinced their money will accomplish the contractual objectives, they won’t invest.
But if investors do think a SIB can bring everyone to the table in coordinated support of multi-dimensional solutions that have proven effective against multi-dimensional problems, and if government payers agree to pay a fair return if, when and to the extent that those problems are actually solved and commensurate savings are actually realized, then they just might invest enough money to get the job done. Aggregating sufficient funds under vigilant management to make meaningful headway against pervasive social problems doesn’t sound less ethical to me than giving away money that isn’t large enough, disciplined enough or enduring enough to make a dent.
SIBs don’t “corrupt the relationship” unless one of the parties who wouldn’t otherwise be at the table — be they investors, intermediaries, evaluators, lawyers, experts, or consultants — is unjustly enriched. This could be the case if the fees or returns are excessive relative to the value produced.
The “extraneous” costs of SIBs that aren’t incurred for grants are generally fixed, not variable. It doesn’t cost twice as much to draft a contract or conduct an evaluation for a $20 mn SIB than a $10 mn SIB.  SIBs cost “too much” and intermediaries are paid “too much” only when the deals are too small, as virtually all of them are now.  As Jeff Liebman and his colleagues at the Harvard Kennedy School SIB Technical Assistance Lab recently wrote
“the overhead costs of the SIB financing mechanism, including fees for legal counsel, intermediary costs, evaluation expenses, and costs associated with investor due diligence, are primarily fixed costs and will constitute a smaller proportion of the total project as the size of the intervention grows. In most cases, these costs are only worth incurring for a SIB contract worth at least $20 million.” 
Note that we don’t have any SIBs that big yet.
To use Kriss’s fictitious (but, alas, not unrealistic) example, paying a “fancy consultancy” $500,000 to report on a $50,000 grant would indeed be obscene. But it wouldn’t be for a $5 million grant.  
I’m too short for my weight.
SIBs cost too much because the current transactions are too small. And the transactions are too small because, at this early stage of the impact investing market, we invest in less-than-proven innovations in the most inefficient ways possible (subjects I’ll leave for another day.)
The arguments that SIBs are too expensive is reminiscent of the “overhead is bad” foolishness we’re finally starting to put behind us. SIBs cost more because reliably increasing the chances of successful outcomes for large numbers of people suffering severe deprivations is damned hard. If SIB developers don’t have everything in place to convince investors that the promised results will likely be achieved, there won’t be a SIB, full stop. That’s much harder than merely satisfying the elective conditions imposed by conscientious grantmakers.  
Trying to skimp on expenses necessary to achieve difficult outcomes isn’t the answer, it’s an exercise in futility. SIBs won’t justify their extra cost or make economic sense until we have larger transactions. And most interventions aren’t ready for SIBs above the $20 mn threshold (although some most definitely are).  
If the costs of doing a SIB properly are too high relative to the size of the transaction and the results to be achieved, either get someone who cares about the outcomes enough (such as government or foundations) to subsidize those costs, or don’t do the deal.  If and when the first round of SIB pilots achieve better results than philanthropy has done, we’ll be ready for bigger deals to cover the costs that produced those results.
Meanwhile, I'm heading in the wrong direction. My license says I'm 5' 8".