The government hopes private investors will fund social services – the evidence isn't so optimistic

It was scarcely mentioned during the election campaign, but we will undoubtedly be hearing more about “social investment”.

As the National Party’s election platform stated^[1], it will be the “organising framework” for funding and delivering social services. The finance minister, Nicola Willis – who is also public service minister and minister for social investment^[2] – will be central to delivering on the policy.

At its core, social investment is about the “productive” potential of public spending on social programmes – spending that yields gains in the future, rather than simply supporting consumption or remedying problems in the present.

But it’s also a policy from the past, with National promising to “bring the social investment approach back to life”. It is resuscitating work started under the previous National government led by the then prime minister John Key and finance minister Bill English.

Their embrace of social investment marked a change in National’s typically sceptical view of social spending and some of its recipients, particularly welfare beneficiaries.

Yet it was still resolutely focused^[3] on the budget bottom line. It prioritised funding that would achieve positive social outcomes while reducing future public spending, or “forward fiscal liabilities”. As Bill English put it, “What works for communities works for the government’s books.”

Read more: Nicola Willis warns of fiscal ‘snakes and snails’ – her first mini-budget will be a test of NZ’s no-surprises finance rules^[4]

There was criticism at the time of the policy’s unreliable forecasts of fiscal liability. And it was questioned whether long-term fiscal savings were even compatible with achieving positive social outcomes.

Political opponents wondered whether the kinder face of social investment was simply a cover for cutting back social services.

It remains to be seen whether the new government has adapted its social investment approach to address those doubts. The small amount of detail available suggests there may be a stronger emphasis on attracting private investors – with two initiatives deserving close scrutiny.

The social investment fund

According to National’s campaign promises, a social investment fund will support social services that “intervene earlier and more effectively”. The government will provide initial funding and will reallocate money from services that receive “disappointing social impact evaluations”.

But the most radical idea is to open the fund to private investors: “If private capital can be better deployed to help change the lives of more New Zealanders, we will not be afraid to use it.”

Read more: Three parties, two deals, one government: the stress points within New Zealand's 'coalition of many colours'^[5]

Without more detail, it is hard to know how private investors might be motivated to contribute, beyond simply wanting to make a philanthropic donation. The non-profit Share My Super^[6] scheme already does exactly this.

But why would the government pay investors – even socially minded ones willing to accept below-market rates – a return on money it could borrow more cheaply itself?

In Canada, for example, the Social Finance Fund^[7] does not fund services directly. It pools government and private investor money, which is then lent to non-profits and other “social purpose organisations” on favourable terms. This is fundamentally different to National’s proposal.

Social impact bonds

National is also pledging to revive social impact bonds (SIBs), last implemented by the Key-English government. The bonds will be used to fund and deliver social services, beginning with transitioning families from emergency housing^[8].

SIBs are financial instruments involving investors, service providers and the government. Investors provide upfront funding. If the service provider achieves specified outcomes, the government repays the investors, plus a profit margin.

Since the first SIB-funded service began in 2010, over 230 have been established worldwide^[9]. But the international evidence is lukewarm on their effectiveness.

A recent meta-analysis^[10] of 32 SIBs found that, for all the talk of being innovative, there is “little evidence that outcomes from SIB-funded programs are significantly different compared to more traditional programs”.

After 13 years of intense global policy experimentation and evaluation, this should be a serious concern for those advocating for new SIBs in New Zealand.

Read more: NZ election 2023: Labour out, National in – either way, neoliberalism wins again^[11]

Complicated and hard to scale

In the early stages of SIB development, I spoke with around a hundred professionals implementing them across the English-speaking world, including those involved in the previous National government’s SIB pilot programme^[12].

The first local SIB pilot needed to be restarted after its launch, then lasted only 18 months out of a planned six-year term.

The second pilot, which recently completed its six-year term, reportedly achieved positive outcomes^[13] for its clients. It enrolled 607 of the 1,000 clients it was projected to serve, and the development process started in December 2013.

By any measure, this is a huge amount of time and effort for relatively few clientele.

Internationally, this experience is more the norm than the exception. What was clear from my interviews several years ago is now increasingly public knowledge^[14]: SIBs are a tremendously complicated way to procure social services and they are difficult to scale up.

Those involved, including investors, regularly conclude there are easier ways to achieve their respective goals.

Read more: Super funds should use their substantial holdings for public good^[15]

Back to basics

There is a lot to recommend National’s focus on social investment: attention to preventive social services that deliver tangible outcomes could do much good.

But there is a risk the new government may not heed the lessons of its predecessor.

Focusing its social investment agenda on narrow fiscal outcomes, and courting private investors, could undermine National’s stated goal^[16] of “doing what works” to “change the lives of New Zealanders with the greatest needs”.

Given Christopher Luxon’s preference for leading a “back to basics” government, there may be a simpler solution: a properly resourced public sector to fund, monitor and evaluate the delivery of social services. That just might do the trick.

References

1. ^{^} election platform stated (www.national.org.nz)
2. ^{^} minister for social investment (www.rnz.co.nz)
3. ^{^} resolutely focused (journals.sagepub.com)
4. ^{^} Nicola Willis warns of fiscal ‘snakes and snails’ – her first mini-budget will be a test of NZ’s no-surprises finance rules (theconversation.com)
5. ^{^} Three parties, two deals, one government: the stress points within New Zealand's 'coalition of many colours' (theconversation.com)
6. ^{^} Share My Super (sharemysuper.org.nz)
7. ^{^} Social Finance Fund (www.canada.ca)
8. ^{^} transitioning families from emergency housing (www.nzherald.co.nz)
9. ^{^} over 230 have been established worldwide (www.brookings.edu)
10. ^{^} recent meta-analysis (www.frontiersin.org)
11. ^{^} NZ election 2023: Labour out, National in – either way, neoliberalism wins again (theconversation.com)
12. ^{^} SIB pilot programme (journals.sagepub.com)
13. ^{^} reportedly achieved positive outcomes (newsroom.co.nz)
14. ^{^} increasingly public knowledge (www.dia.govt.nz)
15. ^{^} Super funds should use their substantial holdings for public good (theconversation.com)
16. ^{^} stated goal (www.national.org.nz)