“Government as Charity” – Sam Monk

May 19, 2014

Social benefit bonds are reforming the relationship between the public and non-profit sectors.

Sam Monk (President, Sydney University Branch of 180 Degrees)


In March 2010 the United Kingdom government launched a £5 million social benefit bond scheme to fund offender rehabilitation services in a Cambridgeshire prison. Under the scheme, which is the first of its kind, inmates serving sentences of less than one year receive intensive correction services from established charity providers. To pay for the services, the government issues bonds, promising investors a repayment with interest on the condition that rates of reoffending are reduced by at least seven and a half percent.i City authorities of Manchester and London, along with the British government, have since announced further bond schemes to fund family support services and assistance to the homeless. The feasibility of schemes to fund drug rehabilitation and health services is currently being evaluated.

A social benefit bond is a financial instrument issued by governments for the purpose of funding the services provided by charities, allowing selected non-profit organizations to deliver their programs on a greater scale. Investors who purchase the bond are repaid only if the program delivers a specified improvement in some chosen social outcome.ii The rationale is simple: short-term cost savings to governments, a financial return on investment for philanthropists and scaled-up social impact from proven third sector organizations.

In just a few years, social benefit bonds have grown from an interesting social innovation into an emerging public policy trend, with several schemes operating in the United Kingdom, the United States and Australia. Pilot programs addressing social problems like recidivism and homelessness have been canvassed in New York and Massachusetts. In 2012 the government of New South Wales, Australia, announced several schemes in the areas of recidivism, child protection and juvenile justice.iii Academic and media coverage of the schemes has been largely supportive, highlighting the new capacity for governments to fund spending priorities. But the advent of social benefit bonds is, perhaps, most interesting for the way it is reforming the relationship between governments and charities and revamping the role of the public and not-for-profit sectors in providing social services.

In most developed countries, the provision of assistance to disadvantaged people and groups is, in large part, the joint but separable responsibility of these two sectors. The conventional distinction is reasonably clear. Governments, to varying degrees, fund general social services like unemployment benefits, pensions, Medicare schemes and disability insurance by raising taxes and redistributing resources to those who, by virtue of their circumstances, are less able to provide for themselves. Charities do something similar but in a much more targeted way. They collect donations from generous individual agents and use those donations for a specific cause, be it the provision of relief to disaster-struck regions, support to families struggling with poverty or illness, or the myriad of other initiatives that charities stand to provide in our communities. Both sectors operate as a ‘middle man’, linking resources to areas of need, but governments do so on a societal scale, charities on a comparatively local scale.

Social benefit bonds break through this traditional distinction, eroding the division between charity and the welfare state. They involve governments operating in much the same way as charities: accessing philanthropy to fund quite specific social investments.  But, importantly, the delivery of the services remains in the hands of traditional charity providers. The Cambridgeshire offender rehabilitation scheme is being administered by proven voluntary organizations such as the Ormiston Trust, the YMCA and St Giles Trust. The New South Wales government’s initiatives sees them working in tandem with Uniting Care and The Benevolent Society.

These schemes have the potential to revolutionize the relationship between governments and non-profit organizations, by placing the two sectors in close partnership with one another. McKinsey and Company recognises this potential, commenting in a recent report that ‘public-private partnerships and other multi-stakeholder arrangements have proven to be effective at addressing complex, dynamic problems that exceed the capacity of a single sector’ and that the bonds, ‘if executed well, can spur cross-sector collaboration and cooperation.’ iv

How do these bonds foster partnerships between non-profit organizations and governments? Firstly, they put more money in the pockets of charities, vastly increasing the potential for realized social impact. Simple economics would suppose that it is easier to attract ‘investors’, who are offered a potential return, than ‘donors’, whose motivations must be purely philanthropic. Or, alternatively, the repayment is an added incentive for charitable agents to put their money towards good causes. John Roman of the University of Pennsylvania puts it this way: ‘Philanthropically oriented investors get a chance to leverage their gifts with the potential to receive a profit.’ He adds, ‘If investors do not earn a profit, they still accomplish their initial goal to make a socially beneficial investment.’v The beneficiaries of the investments are the service providers who, with access to new capital, can scale their programs and achieve a more far-reaching impact.

Secondly, the growing use of the bonds represents a concession by governments that charities are often better placed to deliver the types of preventative social services that are the focus of the pilot schemes currently in operation around the world.

Peter Shergold, the chancellor of the University of Western Sydney, believes that charities can provide targeted services both more cost-effectively than governments – because community workers generally have lower salaries than public servants – and with greater quality.vi Indeed, as Jeffrey B. Liebman of the Center for American Progress notes, by creating a market for private investment, social benefit bonds direct money to the most effective charity models (or at least those that the market deems ‘worthy of financing’). vii

Thirdly, the bonds greatly enhance the accountability of non-profit service providers by linking them to the government and tying their performance to stated goals and objective measures. Under the Cambridgeshire prison scheme, the recidivism rates of recipients of the rehabilitation services are measured against a control group of prisoners who do not receive the services. A target reduction rate of seven and a half percent must be met before the government is obliged to return the initial investment to the bondholders. Similar targets govern the operation of the other pilot schemes being introduced in various countries. Michael Belinksy, writing for the Stanford Social Innovation Review, comments, ‘perhaps the largest lesson, and greatest success, of this young innovation has been its ability to anchor the conversation of governments, social entrepreneurs, and impact investors around measurement, metrics and outcomes.’viii

Despite all this, Peter Shergold warns against claiming premature success for social benefit bonds and the new working model for charities and governments. Rather, he argues that the partnership between the two sectors must be liberalized further, such that charities do not become hamstrung by bureaucratic oversight or dependent on governments for their viability. Shergold writes, ‘the transformative potential of public-community partnerships has been held back by governmental risk aversion, bureaucratic managerialism, and lack of vision.’  He calls on governments to engage non-profit organizations with whom they are contracting in the policy discussions that impact their programs, and to allow greater scope for innovative approaches to be implemented.ix

Governments have long supported the not-for-profit sector in a range of ways: by providing direct funding to charities, imposing regulations that improve transparency and public trust, and promoting charitable giving through measures such as tax-deductibility. Social benefit bonds go further, shifting the two sectors from supportive friends to close working partners. It is probably too early to definitively conclude whether the schemes currently in operation are a success. It may be years before the outcomes can be assessed, the cost savings to governments measured and the returns on investment quantified. But if they do prove a success and the bonds graduate from small-scale pilot schemes into widespread capital-raising ventures, they may represent not only an innovative way of funding the biddings of governments but also a new way of doing charity.



i ‘Private Backers Fund Scheme to Cut Prisoner Reoffending’ BBC News UK <http://www.bbc.co.uk/news/uk-11254308>

ii ‘What is Pay for Success?’ Third Sector Capital Partners <http://www.thirdsectorcap.org/what-is-pay-for-success/>

iii ‘Social Benefit Bonds Trial in NSW’ NSW Treasury <http://www.treasury.nsw.gov.au/site_plan/social_benefit_bonds/social_benefit_bonds_trial_in_nsw_FAQs#faq13>

iv  ‘From Potential to Action: Bringing Social Impact Bonds to the US’ McKinsey & Company <http://www.mckinsey.com/client_service/social_sector/latest_thinking/financing_social_change>

v  John K. Roman, Statement on Social Impact Bonds to Committee on Appropriations (Maryland House of Delegates, 26 February 2013).

vi  Peter Shergold, ‘A Social Contract for Government’ McKinsey & Company (October 2012) <http://www.mckinsey.com/features/government_designed_for_new_times/a_social_contract_for_government>

vii  Jeffrey B. Liebman, Social Impact Bonds (Center for American Progress, 2011) 12.

viii Michael Belinsky, ‘Social Impact Bonds: Lessons from the Field’ Stanford Social Innovation Review (23 January 2012) <http://www.ssireview.org/blog/entry/social_impact_bonds_lessons_from_the_field>

ix  Peter Shergold, ‘A Social Contract for Government’ McKinsey & Company (October 2012) <http://www.mckinsey.com/features/government_designed_for_new_times/a_social_contract_for_government>