Editorial: Uncertainties mar appeal of social bonds

In Britain, much is expected of social impact bonds. Advocates claim they could revolutionise public finances and be a catalyst for innovation, all while delivering returns to investors. That potential has been enough for President Barack Obama to dip the United States' toe in the water with pilot schemes of what are called pay for success bonds. Here, the Key Government has also sensed the whiff of possibility. Last month's Budget allotted $28.8 million for what will be known as social bond programmes. The first will expand a trial that delivered job support in the mental health sector. A scheme focusing on either cutting prisoner reoffending rates or helping people manage long-term health conditions will follow.

The programmes will see the Government contracting out services to non-government bodies with agreed targets and timeframes. The services are provided with funding from investors, who may be individuals, banks or charities. If the targets are reached, the Government pays the investors back, as well as a return on their investment.

The major plus of this approach, especially if it could be widely applied, lies in investment being found for services that a Government facing constraints might otherwise struggle to fund. That, in itself, represents a welcome turnaround from the more usual conversation about areas in which public spending are to be cut.

The theory behind social bonds rests on the obvious incentive for targets to be reached. This, says Health Minister Jonathan Coleman, "will sharpen everyone's minds". The Government has already shown its fondness for just that approach in setting public service goals. It will see the bonds appealing to investors who are keen for their portfolios to do some good as well as return a profit,

The jury, however, is still out on how the theory translates in practice. So far, promising but inconclusive results have emerged from the first British programme, which aims to reduce recidivism at a prison in Peterborough. There have also been concerns about elements of the bonds. Key among these are the need to define outcomes clearly and correctly and price them appropriately. Defining the result might be relatively simple in a matter such as prisoner reoffending, but far more difficult to measure in other social service areas.

Of particular interest have been questions about whether the high cost of establishing the bonds is justified by their potential to transform services. If the results are not outstanding, what is the point? Already, the Labour Party has indicated its opposition by accusing the Government of treating vulnerable people as "guinea pigs". That will do nothing to encourage potential investors, who may be thin on the ground in this country anyway. It is easy to see some being scared off by the bonds' sensitivity to policy change.

In countries rich in sources of investment, social bonds could yet be a substantial success. They may also achieve very little. New Zealand's situation suggests the scales may well tip towards the latter outcome. There is no convincing reason for the Government to proceed when so much is unknown.