government | Emma Tomkinson

Both the G8 Social Impact Investment Taskforce report and Impact Investing Australia’s report to the G8 have called for publication of unit costs of government services, in order to encourage social innovation and social investment. The assumption behind this seems to be that:

If people know the cost of delivering something, then
They might develop a preventative social program that allows these costs to be avoided, which
Saves the government money, and
Delivers better social outcomes for the population.

Well this may be true for things like employment services, where the government saves cash by not paying unemployment benefits. But you might not get a lot of enthusiasm from some other parts of government. And that’s because a reduction in demand for government services doesn’t necessarily mean that government saves money. In order for this to happen, costs must be able to be recouped i.e. they must be marginal, reflecting the additional cost to the system of more people requiring more services. Marginal costs represent what can be saved if this government service isn’t required. So it all depends on how government spending currently occurs.

Let’s take a look at types of unit costs and how they are calculated. And then see what this means using the reoffending unit cost examples from the NSW Government’s Office of Social Impact Investment:

Unit cost	How is it calculated	NSW example	What does it mean?	What’s it useful for?
Average operating cost	Divide entire budget, (including the cost of things like the head of the department and their staff) by service units e.g. total nights spent in custody in one year	It costs Corrective Services NSW $189 per day to keep an inmate in custody.	Savings may result in response to reduced demand if a prison or wing of a prison closes, but only if staff are sacked and the prison is not maintained.	Useful for governments to benchmark their costs against other governments or identify trends in their expenditure over time.
Cost of time and other items	Work out how much time is spent on something and the salaries of the people spending that time. Add in any incidentals like photocopying, petrol, travel.	It costs NSW Police $2,696 to finalise an offending event in court.	This represents time that could be spent on other tasks- If the number of crimes drops, Police are more likely to reallocate their time, than be sacked. Time, rather than money, is saved.	Useful for governments to analyse ways to better allocate human resources.
Capital expenditure	Look at budget for new buildings in response to increasing demand.	This was not a cost given by NSW Government, but new prisons can cost several hundred million.	If demand can be reduced by a certain proportion and maintained for a certain period of time, a new prison may be avoided and the amount budgeted for it maybe saved.	Useful for looking at long-term government budget allocations and thinking about the best ways to spend a given amount of money.
Marginal cost (sometimes referred to as cashable savings)	The cost of things purchased specifically for one more unit of service i.e. new trainers, toothbrush, appointments with psychologists, water for washing clothes, food for one more person.	It costs Corrective Services NSW $19 per day for every additional inmate in custody	Every time a unit of service is avoided, the government can avoid spending this much money.	Useful for people outside government to understand their potential impact on government expenditure.

If we assumed that cash recovered from NSW marginal costs were used to fund preventative services, we would:

take the $19 per day marginal cost
multiply it by the 49% of unsupervised parolees that reoffend within 12 months^[1]
multiply it by the average 1.8 proven offences they commit in within 12 months^[2]
multiply it by the 31% of those proven offences that are sentenced to prison^[3]
and multiply it by the 8 out of 12 months we expect these people to spend in prison from those sentencing (average sentence is 486 days^[4] and average time of entry during 12 months post-release is around four months after release^[5]).

Then we’d have $3.48 per person per day to spend on our services over the first 12 months. Not a lot.

This doesn’t mean that it’s not worth spending money on preventative services for people who are released from prison. It just means that we need to realise that this isn’t a ‘no brainer’ for government and that it’s a serious spending decision that has to be weighed up against other uses for the cash. It’s certainly not the hugely misleading ^[6] calculation put forward in the G8 Social Impact Investment Taskforce report:

“Say, for example, that a £10 million, five-year SIB for reducing recidivism delivers an 8% financial return and significant social impact by succeeding in rehabilitating 1,000 youth offenders, each of whom would have cost the UK government £21,268 a year. Using the Unit Cost Database gives a value for the social outcome in just the first year of £21 million, and an associated social return per annum of about 15% (internal rate of return) for the SIB” (p.16).

In order for unit costs to be useful, we need to be informative and realistic about what they represent. Marginal costs will reduce as demand falls. But people quoting average operating costs back to government as if they represent savings? Not so helpful.

[1] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0003/168339/Statement_of_Opportunities_2015_WEB.pdf p8

[2] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0003/168339/Statement_of_Opportunities_2015_WEB.pdf p8

[3] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0003/168339/Statement_of_Opportunities_2015_WEB.pdf p8

[4] http://www.bocsar.nsw.gov.au/agdbasev7wr/_assets/bocsar/m716854l11/nswcustodystatisticsdec2014.pdf p22

[5] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0006/168873/Market_Sounding_-_Reducing_reoffending_and_return_to_custody.pdf p12

[6] Six fallacies of this calculation can be read here http://www.themandarin.com.au/5274-will-publishing-unit-costs-lead-social-investment/

The social impact bonds (SIBs) so far agreed have displayed striking similarities in how they have been resourced. They have, at a minimum, featured two key roles: (1) the worker and (2) the senior champion. After speaking to most of the people responsible for SIBs agreed across the globe, it appears to me that these two roles are essential to driving SIB development all the way to signing a contract. These two roles are by no means sufficient to achieve a SIB contract, but they are necessary.

The worker

Somebody needs to take responsibility for doing the bulk of the work within the commissioning body. This involves briefing and negotiating with internal stakeholders, acting as secretariat for decision-making committees, collecting and analysing data analysis and liaising with external stakeholders. Imagine this person researching, writing and then physically chasing up decision documents and moving them from one desk to the next. They need the flexibility to work in this way, requiring different processes and a broader scope than those in established roles, and they need to be enough of a risk-taker to keep fighting the barriers to change. They need to enjoy the exploration of something unknown and be naturally inclined to include both internal and external stakeholders on the journey. They cannot do this work on top of their normal day job. People who have performed this role say:

“I almost created my own job”

“I was never part of the wider set-up – I was never a civil servant within the hierarchy.”

“I’m a bit of a square peg in a round hole”

The focus of developing a SIB is to get everyone to agree. Working towards an agreement necessarily involves a range of stakeholders as the project progresses in an iterative manner. Sometimes external service delivery providers, data custodians, other government agencies and investors have been involved in discussions before a government decision has been sought to work on development. Sometimes the government decision is made first and then work with stakeholders sets the direction of the development process. A SIB won’t happen because one person worked very hard, alone at their desk for a long time, they need to be saying, “I’m a networker – I connect with people and get things done”.

All successful SIBs have been driven by people who are passionate about the project, who won’t give up on finding solutions to new problems on a daily basis “it was about keeping the energy going – you can’t recreate that in someone that is not interested”. Several SIB development projects have stalled within public agencies due to the nominated SIB producer rationally declaring this mountain too high to climb.

The senior champion

Doing the legwork on a project that breaks new ground every day is too hard a task if the ‘worker’ also has to justify why they are creating work for everyone by pushing through change. A senior champion is crucial to validate the project and its resourcing, as well as compelling the necessary people at all levels across government to participate in discussions. Interviewees said things like, “My boss allowing me to have time to work on it was absolutely key” or “Having them state this was their pet project opened doors.” The senior champion is also responsible for political negotiation and positioning.

Informal connections may lead to successful formal ones

Vital SIB partnerships have been started in unlikely places. These include parties, running groups and corridors. This reflects the cross-sectoral nature of SIBs and that at the moment, they are built by alliances between first-movers, rather than through established communication channels.

Why are SIBs so difficult for government agencies to develop?

SIBs are difficult because they involve change. Public service agencies aren’t set up to change often – they are structured to maintain huge, vital service systems and every public servant is a dedicated cog in this machinery. SIBs ask for a whole lot of changes at once. The first is the measurement of outcomes and the valuation of those outcomes, such that payment may be made on the basis of measurement. That’s pretty new for most public agencies delivering services. SIBs also involve procurement practices that don’t specify ‘how’ services should be delivered, which can be contrary to traditional risk and quality management practices. Social impact bonds require new ways of thinking and decisions from public service units responsible for legal, finance, procurement, service design and data. And then all the external stakeholders are required to change the way they’ve been thinking and operating too!

The Harvard SIB Lab

The Harvard SIB Lab is a clever model because it recognises the difficulty public agencies have with resourcing SIB development. The Lab rewards successful applicants with someone dedicated to working on the project. This person may or may not take on the role of owner of the work, depending on the person and situation.

Department of Work and Pensions Innovation Fund

This suite of programs, which includes several SIBs, was developed differently to other SIBs so far. An allocation of £30m was made for an innovation fund to explore early intervention programs with young people. The next step was to think about how to distribute this funding and a decision made to tender for ten programs financed by social investment, some of which are SIBs. Public servants involved in this project seem to have been able to do so within their existing roles.