Investments that Encourage Innovation

February 11, 2013
Victoria Groves, M-RCBG Communications

The Mossavar-Rahmani Center for Business & Government kicked off its spring semester Business & Government Seminar series on Thursday (Feb. 7) with a panel discussion on social impact bonds (SIBs), anchored by Jeffrey Liebman, Malcolm Wiener Professor of Public Policy at HKS and SIB Lab Director.

Not actually bonds at all, these performance-based investments encourage innovation focused on social issues at all levels of government. It is an evolving mechanism for programs that may have potential for success, but often have trouble securing government funding due to a lack of benchmarking or proven results.

“[Governments] fund the same programs [they] funded last year and could go 20 or 30 years without knowing if they’re working,” Liebman said. “We have to create incentives for innovation and speed up the process that determines the value of something new.”

Also called “social innovation financing” or “pay-for-success contracts”, this structure allows a government to partner with service providers and, if necessary, private foundations or other investors willing to cover the upfront costs and assume performance risk to expand promising programs. This assures taxpayers will not pay for the programs unless they demonstrate success in achieving the desired outcomes.

After hearing about SIBs two years ago, Liebman has since established the Harvard Kennedy School’s social impact bond technical assistance lab (SIB Lab) with support from the Rockefeller Foundation. It conducts research on how governments can foster social innovation and improve the results they obtain with their social spending and provides pro bono technical assistance to state and local governments implementing SIBs.

Over the past year, the SIB Lab has helped Massachusetts and New York become the first state governments to develop pay-for-success contracts using social impact bonds tackling the issues of Medicaid usage by the chronically homeless to youth recidivism. They are currently culling applications that will allow them to expand to another four states.

Ryan Gillette MPP 2012 HKS, is currently working in the Massachusetts Executive Office for Administration and Finance as a government innovation fellow, and is the lead on the Commonwealth’s Social Innovation Financing initiatives. He explained that in a 2006 sample, data showed that 67 percent of children aging out of the Department of Youth Services system spent time in jail within five years of aging out. “Jail is really expensive…if we can design a program that keeps kids from going to jail in the first place, we can pay for the intervention programs,” he said.

SIB lab affiliate, Katherine Klem MPP 2013 shared with the audience her current focus on education policy. While outcomes here often take longer than five to seven years traditional to an SIB investment, early intervention may be a related topic that could benefit from the idea.

“We’re looking at children from birth and how you can educate a family to improve health and education outcomes,” Klem said. “We’re hoping to get a procurement out the door this year.”

The federal government, Connecticut, New York State and Cuyahoga County, Ohio, among others, are at various stages of considering using the bonds to harness new funds for human-services programs. Over the summer, New York City Mayor Michael Bloomberg that Goldman Sachs will provide a $9.6 million loan to pay for a new four-year program intended to reduce the rate at which adolescent men incarcerated at Rikers Island reoffend after their release.

In Europe, there are other challenges, according to current SIB lab affiliate Thomas Dermine MPP 2013. “In the U.S., we believe we can solve social problems through market mechanisms—that [feeling is] not so deep in Europe,” he said. “And you can also be perceived as a potential threat to non profit organizations that the government is already funding.” Originally from Belgium, he also found he needed to choose his words carefully when speaking of SIBs. “I began to explain it as an insurance mechanism for social programs funded by the government, instead of ‘social impact bonds’,” Dermine said. “Just by changing the wording, you can change the mindset.”

Aside from the obvious benefits of funding their initiatives, the non-profits involved also see other positives, according to Liebman. First, they get a rigorous assessment of results and also a track record with the government if the program achieves its goals. “You’ve built a relationship with the government…if it works, they’ll want you to do it ten times over,” he said. “It’s a ready mechanism for scaling, and that’s exciting.”

And while a governor’s focus may change or staff turnover might realign priorities in an administration, an SIB guarantees focus on a particular issue. “It’s really hard today to get sustained attention to solving a problem,” Liebman said. “SIBs force people to keep working on something and measuring outcomes…it focuses attention in a sustained way for all parties.”

For additional information about SIB Lab, visit http://hks-siblab.org/.

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panel members

Panelists (From L to R): Yuan Wang MPP 2013; Jeffrey Liebman, Malcolm Wiener Professor of Public Policy; Ryan Gillette MPP 2012; Thomas Dermin MPP 2013; and Katherine Klem MPP 2013

“You’ve built a relationship with the government…if it works, they’ll want you to do it ten times over,” said Professor Jeffrey Liebman.