Podcast: How can social impact bonds help prevent social issues?

By Esade Entrepreneurship Institute

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In this podcast, Guillermo Casasnovas, postdoctoral fellow at the Esade Entrepreneurship Institute, and Miquel de Paladella, partner and CEO at UpSocial, discuss how social impact bonds can help tackle social problems – sometimes before they even happen.

Social impact bonds
Guillermo Casasnovas and Miquel de Paladella during the podcast session at Esade (Photo: Esade)

PODCAST TRANSCRIPT

Guillermo Casasnovas: Hello everyone. Thank you for being with us today, my name is Guillermo Casasnovas. I work here at Esade at the Entrepreneurship Institute. I research and teach on social entrepreneurship and impact investing and one of the topics that I research is social impact bonds. That is what we’re going to discuss today with Miquel de Paladella, who is one of the main experts in Spain on this topic. He has worked on the issue during the last few years and is now directly involved in implementing social impact bonds in Spain. He also has experience abroad. Hello Miquel, thank you very much for being with us today.

Miquel de Paladella: Hello Guillermo, my pleasure.

Guillermo Casasnovas: Before we start I would like to introduce the audience to this idea of social impact bonds as a financial instrument. Social impact bonds are sometimes also called social outcome contracts or payment by results mechanisms. They are essentially a contract, a financial instrument between three parties: public administrations, groups of investors and social sector organisations.

Social impact bonds are a financial instrument between public administrations, groups of investors and social sector organisations

The public administration sets an objective to improve the effectiveness of how it is addressing a social challenge. A group of investors then funds a social sector organisation that can implement an innovative programme to tackle the challenge more effectively. And then the social sector organisation delivers that programme. If everything goes well and its impacts and objectives are achieved, the public administration pays the investors a financial return.

There are also two other actors: one is the independent evaluator who assesses that the impact has been achieved, and also an intermediary organisation such as UpSocial, the organisation of which Miquel is founder and CEO here in Spain, and which brings together and coordinates the whole project. The way I have explained the concept may sound abstract, but what are the benefits of this type of contract?

Miquel de Paladella: The first benefit is that it allows public organisations and institutions to experiment with new innovations and so privatise the risk of failure. There is a lot of a aversion in public administration to experimenting with public money when trying to improve or find a solution or a response to a social problem. This aversion to risk is limiting the capacity of public administrations to innovate and develop public policy based on evidence. So a social impact bond privatises the risk of the experiment going wrong. If it goes wrong, the public administration does not invest or waste money. The money is lost by the investors.

Social impact bonds allow public organisations and institutions to experiment with new innovations and so privatise the risk of failure

If it goes well, the public administration pays for the outcomes and starts developing policy based on evidence. This is the first benefit. The second benefit is aligning every actor around key outcomes, and not just a key activity, and so focusing on activities and doing things. A social impact bond focuses all the actors on achieving specific objectives that are results, so instead of doing a number of courses to help unemployed people get a job, we just pay for every person who gets a job and remains in the job. This is a completely different type of incentive for all the actors who are engaged in social services.

Guillermo Casasnovas: We are moving from the typical financing of outputs from social service providers to financing outcomes. And you are saying that the benefits for the public administration include more flexibility, innovation, lowering the risk for social sector providers. Moreover, the beneficiaries get a better outcome. But for investors, where is the profit? Is it easy to find investors willing to risk their money in this type of project?

Miquel de Paladella: It’s not a problem at all, there are many impact investors doing fine today and bottlenecks are not normally on the investor side.

Guillermo Casasnovas: You mentioned impact investors, and it’s true that during the last few years, impact investing as a field where investors look for financial returns and social impact has been developing in parallel. This can be a very good instrument when they can use their money for these double objectives.

A social impact bond focuses all the actors on achieving specific objectives that are results

The first social impact bond was implemented in the United Kingdom in 2010, where they were trying to reduce the reoffending rate of short-term prisoners. From there, the instrument has expanded a lot and rapidly. We now have 138 social impact bonds through all the world, with a total investment of more than $400 million. And also, with the start in a very particular policy context, which was criminal justice, the tool is now being used in many other contexts, such as health, education and employment. Can you tell us from your experience a couple of examples where we see how social impact bonds work in practice?

Miquel de Paladella: Yes, if you want, we can start here in Spain with a social impact bond addressing long-term unemployment in the Basque Country. This example shows the benefit of a social impact bond because it tries to address a problem before it happens. It has a very preventative kind of approach.

We are looking at the reality of people who are difficult to employ: older than 45, perhaps with few qualifications, who have been out of a job for three months. Before they become long-term unemployed, which is 12 months of unemployment, we are able to deliver a number of intense services that include not just employment services and training, but also health and mental health advice. We also look at tutoring or mentorship during the process. We look at the transition and the type of different skills that are needed to do a different job. If we manage to intervene at that moment, we can prevent long-term unemployment.

The issue here for the Basque Government is that if people lose their jobs for more than 12 months, 80% of them are going to be unemployed for 24 months. So it becomes a chronic situation that we want to stop. That is one social impact bond that we are going to work with in Spain in 2021.

Governments in Europe are spending billions on social services without often knowing what the outcomes are

Guillermo Casasnovas: The Basque Government is trying to tackle a very entrenched problem. It’s difficult to solve and they are trying new solutions. And at the same time saving money in the way they are tackling this problem. Traditional solutions are expensive and not very effective, so they’re trying new things.

Miquel de Paladella: Yes, I think the motivation of the Basque Government is not so much to save money as to get a better return on investment. Governments in Europe are spending billions on social services without often knowing what the outcomes are. Now the Basque Government is interested in exploring different ways of tackling the problem and getting a better return.

An example from an international programme being developed here in Catalonia as we speak, is a social impact bond for preventing children going into care. This happens in Essex, in the UK, where action is taken at the moment when we get some initial signals, alarm signals, that a family is unable to take care of a child. We can intervene, and if we intervene at the beginning, we are able to save money and prevent social and family pain. So, if we intervene early on we can prevent the child from going into care and this saves an amazing amount of money. Because a child in care here in Spain costs 3,500 euros a month – and even more in the UK.

Guillermo Casasnovas: Thank you very much Miquel. We have seen a couple of examples where you have told us the benefits and the good things about social impact bonds. There are also some criticisms – some people highlight the challenges faced when trying to implement this type of financial instrument. Can you tell us how you can minimise or overcome these challenges?

Sometimes social impact bonds can go wrong if they don’t measure the right things

Miquel de Paladella: Sure.

Guillermo Casasnovas: So the first one is around the impact measurement. We know that measuring social impact in complex social problems is not easy, and sometimes social impact bonds can go wrong if they don’t measure the right things. If they don’t create the right incentives for social service providers and for investors, they might focus on only certain problems or only certain populations. How can we overcome that?

Miquel de Paladella: That’s a very big design challenge for social impact bonds. The question as to whether the wrong incentives are being used in the measurement system is a critical element. The key to improving the capacity of the system to produce better outcomes is not just to pay for all those children that go to university or get a job, but also for those children who repeat an academic year once or even twice. Higher payments should be made for particularly difficult cases. If you create incentive measurements that have higher returns, you put incentives on the right groups and you focus your attention on them.

Guillermo Casasnovas: So designing these tools is a very important phase of the social impact bond. Another challenge is the complexity of this type of instrument. As social problems are not just found in the jurisdiction of one public administration, maybe several local, regional, or national administrations are in charge of the problem. And the cost associated with coordinating, intermediating, designing and evaluating is high. What would you say to this?

A social impact bond doesn’t assume anything, it calculates the problem and analyses the situation

Miquel de Paladella: I would say two things: one is regarding the complexity of designing a social impact bond. A social impact bond doesn’t assume anything, it calculates the problem and analyses the situation. And this, in my opinion, should be a standard for all social programmes.

The second element is the complexity in calculating the price of success. And in this case, I think the solution is using a single design for different social impact bonds. So, you say: “I want to solve the issue of long-term unemployment, so why don’t we design three or four social impact bonds instead of one?” By using different locations with different interventions we can see which has better results. This is what we call outcome bonds. And it enables us to obtain more knowledge with less intermediary and transaction cost.

Guillermo Casasnovas: And in a way that you can scale the learnings in these programmes so that they work better throughout the country or region. Another challenge that is sometimes the most difficult to overcome is the cultural challenge, because it is not easy for public administrations to be flexible and innovative and for social sector organisations it is sometimes not easy to change their mindset and start measuring what they do. And for investors, it’s often not easy to go beyond financial returns. How can we overcome these cultural challenges?

For investors, it’s often not easy to go beyond financial returns

Miquel de Paladella: I think it is necessary that we start focusing on aware public investments and watch for more results. And not just coverage. Coverage gives you the feeling that you are doing a lot of things, but it doesn’t give you the certainty of achieving certain things. We have to change the culture of moving from "let’s do a lot of things" to "let’s achieve a few things that actually change the life of our citizens, the beneficiaries and the people who are more vulnerable." So, the moment you see one social impact bond succeeding I think it is inevitable that a second and a third bond will follow. Seeing if the focus is on experimentation and outcomes comes naturally, because it is very intuitive. Changes happen in public administrations when using this sort of instrument. 

Guillermo Casasnovas: Thank you very much Miquel. It’s been a pleasure having you with us today. I hope our audience learnt something about social impact bonds, about how they work, about the potential they have for improving social services, and also about how we can overcome some of the challenges. But maybe one final question, do you think we will see the first social impact bond final in Spain this year?

Miquel de Paladella: For sure, not one, not just one.

Guillermo Casasnovas: More than one?

Miquel de Paladella: Yes. At least two.

Guillermo Casasnovas: So, with that note of optimism thank you very much everyone for listening to us.

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