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Experimental policy

I had a chat with Bryan Crump at Radio NZ’s Nights last night on Social Impact Bonds and experimental policy.

I’d prepared a few notes prior to the chat; we wound up jumping straight into Social Impact Bonds and so didn’t get as much a chance to talk about policy experimentation more generally. I’ll share those notes below. But do read Bryce and Jenesa’s report.

Most of the time, the government has little clue whether it’s policies achieve the objectives they’re trying to achieve

New spending and new regulatory measures have to be justified with something like a cost-benefit assessment, but they’re often not particularly rigorous. Existing programmes rarely get even that. The Productivity Commission pointed to this in a recent report: there’s funding inertia for the large stock of programmes, and the flow of new initiatives doesn’t affect existing stock – we don’t generally cut existing programmes when new ones prove more successful. Prod Comm identified 162 different services and programmes across 7 agencies targeting children in 2012/13, for example.

Traditionally, the New Zealand Government has funded bureaus to produce outputs, and has sought to then measure whether those outputs have had effects on outcomes. Because they’re contracting for outputs, there’s a lot of rigour around processes: are the Departments or contracted service providers having as many meetings with clients as promised, for example. That has the effect, though, of stultifying innovation: where you’re told to produce X because the government wants Y, it doesn’t matter if you can find some Z that would be even better at making Y. You have to produce X.

The government has been moving towards outcome-based contracting. This would have the government care less about the methods by which desired outcomes are achieved, and more about that the outcomes are achieved. This push has been a while in the making. Back in 2002, then Treasury economist Andrew Kibblewhite (Now DPMC) wrote a chapter for an OECD publication on Outcome-Focused Management in New Zealand where he points to these future potential directions.

He highlights there contracting for outcomes where, for things like employment placement, providers could be paid based on outcomes rather than outputs, looking at both short term and longer term achievement.

“A third lesson that can be drawn from the New Zealand experience is that moving the focus to outcomes forces government to rethink its attitude to risk. The Corrections example shows that agencies need to be open to the possibility of programme failure if they are to improve the effectiveness of government expenditure. Corrections deliberately allocates a portion of its rehabilitation programmes budget to test new interventions to assess their effectiveness. Thus, the department can continually improve the value of its expenditure by taking risks and being open to failure.”

Social services reviews going back through at least 1998 complained of lack of focus on outcomes – as well as a lack of coordination, high transaction costs, and need for better contracting capability.

Now, that kind of initiative is being pushed through the Better Public Services programme that tries to identify outcome targets across a range of agencies. Where responsibility for outcomes cuts across agencies, accountability for them gets harder.

One more successful policy experiment was America’s welfare reform

Welfare Reforms under Bill Clinton in 1996 devolved a lot of responsibility for welfare provision to the individual states. Federal welfare benefits were limited to a 5-year lifetime limit, excepting 20% of the caseload in each state at the start (to cover those who couldn’t move into employment for serious health reasons). States then experimented with different measures to get welfare recipients into work. The different states learned from each others’ successes and failures, taking on what worked elsewhere and dropping things that failed. They found, for example, that “work first” approaches, with very quick moves into job search rather than extensive training programmes, were more successful: strong earnings increases for recipients who took the work-first approach as compared with a control group. A mix of services is good, but strong emphasis on early moves into work was critical. One interesting finding: single mothers encouraged into work by welfare reforms reported better well-being as compared to those who were able to avoid the work requirements. [Readers here might also see Blank’s review.]

The “try things, think hard about evaluating outcomes when designing the programmes, and see what works” approach has a lot to recommend it.

New Zealand and Social Impact Bonds

Social impact bonds are a form of outcome-based contracting with external Non-Governmental Organisation providers where the NGO doesn’t have enough start-up capital to run the programme itself.

If Ministries bought Outputs from the NGOs, there’d be no need for external financing: the NGO gets paid up front for some of the output delivery and can have a performance-payment for the service on completion if the outputs were provided. That’s harder to do with outcomes.

If an NGO were well-resourced, it could independently bid for pay-for-performance outcome contracts without need for external investors – again, no need for a Social Impact Bond.

It’s where an NGO needs the up-front capital to provide a programme that would draw an outcome-based payment that Social Impact Bonds can be attractive. And especially where the external investors can also provide expertise: not just for helping the NGO to meet its targets, but also in their selection of which NGOs will be able to do the job.

As a bit of history from UK and elsewhere, the first Social Impact Bond was at Peterborough Prison. It ended in part because govt found parts of it too successful and rolled it out more broadly. The Bridges Social Impact Bond in Newcastle UK targeted education outcomes for vulnerable youth and was successful; the Newpin Social Benefit Bond in NSW was able to return 28 children to their families who’d been facing child-protection issues. Both paid return to investors, and really helped some at-risk families.

People damn the NZ trial as “experimenting.” But we should celebrate that the government is willing to experiment! How can we know what works if we don’t? The financing model is more innovative for NZ, but outcome-based contracting is better established. New Zealand does have a generalised weakness in programme evaluation. Social Impact Bonds force outcome evaluation at the outset by specifying outcomes and requiring measurement.

New Zealand has a few particularly exciting opportunities where our regulations allow people to raise equity via crowdfunding. Imagine if local NGOs supported by their communities through a crowdfunded equity issue could earn a return for their investors by providing outcomes that the government (or philanthropist) wishes to support – and more effectively than government bureaucracies. The implications could be rather substantial.

For more detail, read Bryce and Jenesa’s report.

About Eric Crampton (87 Articles)
I'm Head of Research with the New Zealand Initiative.

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