1. 3/9/2011 The Nonprofit Quarterly | @npquarterly…
Create a Free Account | Subscribe Login SEARCH
Home About Magazine Columns Features Shop NPQ Newswire Support NPQ
FEATURES
Op-Ed: Will Social Impact Bonds Improve
Nonprofit Performance?
MARCH 08, 2011
JOE KRIESBERG
0 0 Share
Like Be the first of your friends to like this.
SUPPORT NPQ
GET SOCIAL WITH NPQ
GET NPQ IN YOUR INBOX
GO
Subscribe to NPQ
NPQ is the Harvard Business
Review for the nonprofit
sector. Subscribe today to
receive our print magazine, highly
anticipated by nonprofit professionals
across the sector.
This article was originally published on the MACDC blog on March 2, 2011. Most Popular Latest Comments
T he Obama Administration has appropriately placed a high priority on driving better
1. Boards of Nonprofit Insurers: High Paid and Well
Connected
performance in both the public and nonprofit sectors as they seek to tackle serious 2. Smile Train and Operation Smile Call off Merger
social and economic challenges. This includes a heightened emphasis on research, 3. Donor to George Washington University Honored,
Ejected
evaluation and funding “programs that work.” All of this is certainly welcome news.
4. A Detroit L3C Aims to Provide Affordable Mortgages
Unfortunately, as part of this effort, the administration has embraced a new idea that I
5. Nevada's Governor Sandoval Asks Nonprofits to Fill
fear could take us in the wrong direction. State Budget Gaps
In the FY 2012 budget, President Obama has proposed $100 million to fund co-called
Social Impact Bonds. The purpose of the Social Impact Bond is to create a new capital
market that will encourage private, profit-motivated investors to fund social programs
that “work.” Essentially, an investor would front the money to pay for a particular
program. If and when the program achieved the designated benchmarks, the
government would pay the investor for the cost of the program plus enough to cover
www.nonprofitquarterly.org/index.php?… 1/4

2. 3/9/2011 The Nonprofit Quarterly | @npquarterly…
their risk and earn a profit. The theory is to create a market where investors can make
money by investing in effective social programs.
Sounds good right? The government only pays if the program works. Taxpayer money
is no longer wasted on ineffective programs. Private sector discipline and oversight is
brought to bear on the nonprofit sector! But wait! Is this really going to work? Is
creating a Wall Street-like investment market the best way to strengthen nonprofit
performance? Judging from the performance of Wall Street in recent years (have you
read The Big Short?), one has to at least ask the question!
While I understand the appeal of this idea – and would welcome new sources of funding
for high performing social programs – we need to carefully examine the implications of
this approach to funding non-profit social service programs. I see many serious
questions that advocates of these bonds need to answer before tax dollars are
invested.
FREE DELIVERY | Click Here to sign up for THE NONPROFIT NEWSWIRE, Delivered
Daily
First, Social Impact Bonds are likely to encourage functional specialization and silo-
thinking. Money will flow to programs that can hit a single key benchmark so programs
will be designed to do just one thing – achieve that benchmark. This will take the idea
of “teaching to the test” to an entirely new level. Programs with multiple positive social
impacts will be undervalued (like housing which provides economic, educational, health,
public safety, and quality of life benefits) while programs with high externalities will be
overvalued just as they are in the private economy (i.e. programs that improve
outcomes in some areas at the expense of others.) What makes this all the more
puzzling is that in other programs, the Obama Administration is promoting
comprehensive, placed based approaches that seek multiple quantitative and
qualitative outcomes through multiple interventions. I don’t understand why they would
support a new funding scheme that drives in the opposite direction.
Second, will these bonds discourage collaboration because this funding approach
places much more emphasis on which nonprofit should “get the credit” for the
“success? If a student’s test scores improve, who should get the credit and therefore
the money? The school? The tutor? The afterschool program? The social worker who
helped the student deal with early life traumas? The parents? The next door neighbor
who helped with math homework? The Little League that gave her an opportunity to
grow and mature and have fun? The library where she did her homework and used a
computer? How much time and money do we want to spend sorting through all the
possible reasons and their relative impact on the child so we can sort out who gets how
much money? Does that create a collaborative culture?
A third potential problem with this approach is that it may over-estimate our ability to
identify the correct metrics and to measure them correctly. Long term data is very
difficult to secure and causal relationships can be very hard to discern. In our quest for
market clarity, we are certain to over simplify and choose metrics that are easy to
collect, count and standardize, even if they don’t tell us the full story or even an
accurate story. This is particularly true when attacking complex, systemic problems
such as educational and health disparities, environmental justice, or land use
development.
A fourth problem is likely to be cream skimming. Organizations will have a powerful
www.nonprofitquarterly.org/index.php?… 2/4

3. 3/9/2011 The Nonprofit Quarterly | @npquarterly…
financial incentive to cherry pick the best clients that maximize their chances for hitting
performance benchmarks. Supporters say that they can guard against this, but history
shows that powerful financial incentives work – they will motivate performance but they
will also motivate people to “screen” clients before enrolling them in programs. And
now we will have powerful investors pushing in this direction!
Fifth, advocates say these bonds will promote innovation, but I think it is much more
likely that investment dollars will flow to safe, well-known, programs. New, untested
ideas, will have a very hard time attracting investors – and those who are attracted may
seek returns that taxpayers cannot afford.
I also wonder whether a Bond Market can really think about long term solutions. Will
investors be willing to wait 5, 10 or even 20 years to see transformative impact? Or will
they only be interested in programs that can achieve benchmarks within 1 or 2 years.
And if we are looking at long term impacts, do we have the ability to measure impact
and causation sufficiently well to ensure that the right programs are getting paid? And
how would we control for macro economic impacts that may cloud our ability to see the
impact of individual programs?
SUBSCRIBE | Click Here to subscribe to THE NONPROFIT QUARTERLY for just $49
Finally, a Social Impact Bond Market will undoubtedly become a massively complicated
system as investors seek to bundle investments, guard against losses, shift risk to
other parties, scale up, and otherwise replicate traditional investment markets.
Lawyers, accountants, advisors and intermediaries will be needed and they will all need
to be paid (handsomely, no doubt.) A program designed to save taxpayer money could
easily end up costing far more. Remember, this program will leverage private capital,
but at the end of the day, the taxpayer must pay for all the costs plus the profit or
return. There is no free lunch and if investors start to lose money the bond market will
dry up very quickly.
Everyone wants to fund “what works” and no one wants to pay for programs that don’t
achieve real outcomes. But the world is complicated and it does not help to pretend
otherwise. Positive social outcomes are usually the result of multiple interventions,
programs and causes – including some that operate at the macroeconomic level that is
far beyond the scope of a single nonprofit program. And performance metrics can only
capture so much. When a new playground opens it may significantly improve the quality
of life for children and families nearby. But will a new playground translate into
measurable and statistically significant reductions in obesity? Or increases in family
incomes? Or improved educational attainment? Probably not. Does that mean we
should stop “wasting” money on playgrounds because the “don’t work?”
We absolutely need to fund programs that work. But my concern is that program
evaluation is too important for us to dumb it down into numerical measures that Wall
Street investors can understand but don’t tell us the true story of what is happening in
our communities. Instead, we need to build capacity in the nonprofit sector to conduct
robust and meaningful program evaluation and to take advantage of new information
technology that can improve our understanding of program impacts. And we need to
fully fund those activities. I fully support public-private partnerships and programs that
leverage private investment (MACDC has filed its own legislation designed to do just
that) but we have to be very careful how we design these programs less we suffer
serious unintended consequences.
www.nonprofitquarterly.org/index.php?… 3/4

4. 3/9/2011 The Nonprofit Quarterly | @npquarterly…
Joe Kriesberg is the president of the Massachusetts Association of Community
Development Corporations.
Add comment
Name (required)
E-mail (required, but will not display)
Website
9999999 sym bols le ft
Notify me of follow-up comments
Refresh
Send
JC omments
The Nonprofit Quarterly | 112 Water Street, Suite 400 | Boston, MA 02109 | T: 617.227.4624 | F: 617.227.5270
A BOUT COLUMN ISTS MA GA ZIN E SUBSCRIBER S
About Us Rick Cohen Current Issue Login
NPQ's Staff Ruth McCambridge Browse by Issue Register
NPQ's Board Simone P. Joyaux, ACFRE Browse by Topic
Editorial Advisory Board The Nonprofit Ethicist Subscribe
Privacy Policy Advertising Rates
Copyright Policy SPECIA L REPORTS Editorial Guidelines
CON TA CT US Age of Obama
Nonprofits and Immigration
Customer Service Newswire
The Cohen Report
www.nonprofitquarterly.org/index.php?… 4/4