Social Impact Bonds: Paradoxes and Potentials

Social Impact Bonds (SIBs) are often considered as one of the most promising ways for financing social enterprises and entrepreneurial nonprofits. However, while many papers have been produced by practitioner and supporters of... [ view full abstract ]

Social Impact Bonds (SIBs) are often considered as one of the most promising ways for financing social enterprises and entrepreneurial nonprofits. However, while many papers have been produced by practitioner and supporters of SIBs, there is still a scarcity of scientific research on the advantages and disadvantages of these financial tools. This is understandable because the number of SIBs already implemented is small, and empirical evidence on their impact is only just emerging. We contribute filling this research gap, adopting a discourse analytic approach. We analyze a comprehensive sample of 48 publications dealing with SIBs, published between January 2008 and May 2014. By applying a discourse analytical methodology to these texts, we identify five paradoxes of SIBs. Those paradoxes center on statements that can hardly be true at the same time for the very same SIB. They point to inconsistent literature on SIBs, and to issues where further empirical research is therefore needed. They can shortly be characterized as follows:
(1) Overall costs and benefits of complexity: On the one hand, the complex arrangements surrounding SIBs are argued to result in increased overall efficiency and effectiveness. On the other hand, several potentially high costs of this complexity have been named: loss of government control, transparency and know-how; danger of collusion; higher interest rates (compared to conventional sovereign debt); hiding of sovereign debt; and inadequate control of emerging new financial market segments.
(2) Rearrangement of opportunities and risks: Building on the first paradox, a second one emerges: Are SIBs a win-win construct, or do they also involve losses for particular stakeholders? For example it has been argued that SIBs may lead to a focus on easily measurable rather than important social problems, and to “parking” and “creaming” of clients.
(3) Impact orientation: SIBs are portrayed as contributing to a more impact oriented and therefore more rational form of social policy. However, impacts have been shown to be hard to measure in many cases, especially because a counterfactual approach has to be adopted and outcome indicators must be valid, simple and precise at the same time.
(4) Degree of novelty: The novelty of measures to be financed by SIBs is often portrayed in paradoxical ways, as they are said to be socially innovative (as a condition to produce more effective public policies) and yet at the same time proven concepts (as a condition to attract investors who seek financial returns).
(5) Scaling potential: SIBs are frequently described as a way of tapping into large new funding pools. At the same time, the requirements for SIBs suggest that the spectrum of measures that are amenable to the SIB approach and attractive to investors, who at least seek some kind of financial return, is rather limited.
Building on this analysis, we conclude that further theoretical investigations of the advantages and disadvantages of SIBs is needed, and that the SIBs currently under way should be subjected to a number of empirical investigations to prove their merits.