“What if the government bought social outcomes?” – Economic Value 09/30

By Leonardo Letelier and Rafael Ribeiro

In the midst of a serious economic crisis and the delicate situation of public finances, especially in states and municipalities, governments tend to look for ways to increase tax collection and/or reduce spending to face the situation of budgetary austerity. The crisis led States to drastically reduce their investments this year: 46% in the first four months of the year compared to the previous year.

Today Brazil spends more than R$ 440 billion on the provision of basic social services. In a crisis scenario, governments must respond to the criticism that social rights and benefits are being set aside in the name of fulfilling financial obligations to “foreign investors” or “the banks”. What if it were possible to reduce the cost while investors help to generate social impact?

Today, the government buys social activities. The fear of problems of any kind makes the focus of hiring, payment and control not whether children were educated or whether patients' health improved, but whether prescribed activities were carried out. So goodbye innovation, goodbye focus on results, goodbye continuous improvement and welcome third way stamped on the invoice. The fear of something going wrong practically guarantees that the right thing will not happen.

Budget cuts can be replaced by private investment, with savings for the government

 This is not unique to Brazil, although perhaps the situation here is more extreme. England suffers from the same problem of prescribing activities, but since 2010 an innovation is bringing hope to those looking for real social impact, the Social Impact Bond (SIB), or Social Impact Contract.

Technically speaking, the SIB is not a “bond” (fixed income security) but a structured operation with payment for social performance, backed by a set of contracts between actors from different sectors. Something like an “Intersectoral Partnership for Social Results”.

In practice, a social organization commits to achieving certain targets for reducing school dropout, prison re-entry or other result indicators (not activity) and the government commits to pay a certain amount if the targets are reached. As social problems are complex, interventions end up being long-term and no social organization has the cash resources to survive years of working without pay. Thus, investors come in to finance the operation of the social organization and recover their investment (with a financial return rate) if the goals are reached. An independent verifier is hired to certify progress on indicators.

With that, budget cuts can be replaced by private investments and, if all goes well, with savings for the government and financial returns for investors.

The first SIB was signed in England where criminal recidivism cost the British coffers £15 billion a year. A non-profit intermediary called Social Finance UK proposed this innovative scheme to decrease recidivism by 7.5% per year compared to a control group and connected all the ends. This SIB was in the “all or nothing” modality, that is, if the indicator was 0.001% below the target, the government did not pay anything. As there are several classes, the contract has not yet been finalized, but it seems that it is on the way to achieving the result (the reduction in the 1st class was 8.4%).

The contract was signed with an organization that was already working on this topic, but could now do so without the bureaucracy burden of a traditional agreement based on prescribed activities. The return offered – 6 to 13% per year, depending on the result – attracted individuals and foundations that were aligned with the theme and saw in this instrument an opportunity to make their capital allocated to this cause recycled and have more impact.

Today, there are more than 80 similar experiments around the world, in various stages of development. The interventions that best fit this model are those focused on prevention, complementary to the State's efforts (not replacing them) and with

well-defined success indicators. Examples include diabetes prevention (Israel), early childhood (Utah, USA), youth unemployment (Netherlands), or childhood asthma (Baltimore, USA).

A implementação de um SIB é complexa e, entre a ideia inicial e a assinatura de contratos com governos, investidores, operadores e avaliadores, pode-se passar mais de um ano. Mas, no Brasil, este processo já começou: o Banco Interamericano de Desenvolvimento (BID) através do Fundo de Investimento Multilateral (FUMIN) fechou uma parceria com a Sitawi Finanças do Bem, organização pioneira no âmbito das finanças sociais no país, para desenvolver esta ferramenta. Já existem conversas iniciais com governos estaduais e municipais com foco em testar a viabilidade de um SIB nas áreas de segurança e educação.

Adicionalmente, o BID, a Sitawi e o Social Finance UK lançaram o “SIB Lab BR” para gerar e disseminar conhecimento sobre os Contratos de Impacto Social no país. Essa iniciativa conta com o apoio da Força Tarefa de Finanças Sociais no Brasil. As primeiras apresentações foram feitas em evento do IEA/USP1 e no IPEA, que inclusive escreveu um artigo sobre o tema2. O objetivo é continuar a promover oficinas de forma que todos os interessados possam engajar-se e contribuir com o desenvolvimento do tema no país.

In the long term, the SIB concept may lessen the risk for the state to test hypotheses to solve complex social challenges. This can be a way to integrate more effective interventions into public policies, in addition to allowing more resources to be channeled towards greater social impact and strengthening the participation of the private sector and civil society in solving social challenges. Not to mention the surplus cash for the government…

Maybe one day we'll say 'welcome focus on results' and 'goodbye focus on the stamped third copy of the invoice'?

Leonardo Letelier e Rafael Ribeiro são, respectivamente, CEO e consultor sênior da Sitawi Finanças do Bem

originally posted on: http://www.valor.com.br/opiniao/4248592/e-se-o-governo-comprasse-resultados-sociais

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