That's a pass on SIBs

I’ll be honest, I struggled with this week’s readings, mostly because finance makes my eyes glaze over. If Margot Robbie hadn’t been explaining sub plots in The Big Short, I wouldn’t have made it through the movie. Fact.

Back to the blog, however, with the theme being the increasingly vast options of financing available to social enterprises, Social Impact Bonds (SIBs), were clearly the innovation of the hour. These bonds (which fun fact courtesy the Mckinsey report, aren’t actually even bonds) work to help social enterprises through the financial issues faced in scaling up. Think of it this way, you have an enterprise, its proven to work at a small scale, now you want to scale up using the infrastructure of the Government, but the Government isn’t sure whether that would translate to success. Enter, organizations that are willing to take that risk. They invest with the expectation that in the event of success, they will be compensated by the government according to pre-negotiated terms. In the event of a loss however, they get nothing.

This makes me uneasy.

Sure, in theory SIBs sound like the dream. The Government gets to allocate tax payer money to focused initiatives and projects that have proven to be successful. Less waste, more impact, zero risk. With such favorable odds, why aren’t these SIBs more prolific? I would say it’s because of the skewed burden of risk on the investing organization. Since the risk is entirely on the organization, it makes sense for them to invest on those enterprises which are most soundly proven successful and are hence low risk. What about the promising enterprises that haven’t been able to “prove” themselves, because of, say, some teething issues or other development challenges? Are these enterprises just left out to dry in the SIB model?

While the McKinsey report does suggest that social entrepreneurs are getting cleverer in packaging their ventures in the best way that would appeal to investors, I, being my chronic pessimist self, can’t help but think what if they can’t but their idea is still promising. Isn’t it lazy then on the Government’s part to ignore these enterprises entirely.

The second problem of course is that defining the parameters of these bonds is cumbersome. When multiple parties are involved and multiple moving parts, things can get complicated real fast. This[i] article draws a parallel for prison recidivism and asks “What is reoffending: the same offense? A lesser one? Where? For how long? Who decides? Who adjudicates if there’s a disagreement among the parties? What happens when something unanticipated happens? What if the main parties go out of business?

In conclusion, I’ll take the idea of SIBs with a pinch of salt. In an already tedious, often bureaucratic process of government provision of services, is adding the complexity of SIBs, given their tendency to exclude potential promising ventures, really the innovation of the hour?

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[i] http://www.huffingtonpost.com/clara-miller/social-impact-bonds-slipp_b_7170474.html