PRIVATI / Finanza Sociale
Saving Cost Bonds: when spending review become social investment
A few remarks on the use of a new tool in Italy and EU Countries
30 giugno 2016

An interesting article on ''Saving Cost Bonds'' has been published in the Sole 24 Ore almost one year ago and I believe it's time to take it seriously, despite the time passed with a sort of embarrassed silence. Indeed very few responses came out after its first publication even if the issues addressed in that piece were and still are crucial for both the sustainability and the recalibration of our welfare systems. Thus, in order to answer the article’s provocation – i.e. a call for action to define an instrument capable of surpassing the “balance sheets short-sightedness” that sacrifices a series of important public investments – we will develop a brief consideration which aims at putting the proposed instrument into context and relate it more directly to the topic of impact investing and welfare.

Spending review and austerity: a matter of quality for public debt

It often happens that new expressions which rapidly become buzzwords end up being employed for explaining almost every phenomenon. In this case, I'm referring to the expression ''spending review''. This expression may have been problematic. Indeed, discussing its legitimacy has surely been expensive and laborious in terms of energies as well as resources. Spending review, which in Italian sounds less attractive but still maintains the same meaning, relies on the logic of austerity. Indeed, the majority of experts have for a long time argued that current levels of public debt could not be sustained anymore. However, to have the complete picture we have to take into account also those opinions that proposed exactly the opposite and believed that boosting economy again was possible if public expenses were increased (we are not too far from a more Keynesian approach for this second stream of thought).

While discussing public spending, an aspect that has not been considered enough has been its quality. Besides positions that can be for or against austerity, the important theme surrounding public spending concerns its purpose and use, not only its extent. In fact, spending review has often been directly associated to budget cuts. Spending review is supposed to eliminate wastes that only impoverish government's public finance without any return in terms of benefit for the people. The direct and often assumed link between spending review and cuts of public spending it's not always the case, since there is no equivalence between the verbs ''to review'' and ''to cut''.

In other words, the whole discussion cannot be reduced to a mere division between supporter and detractors of public spending. What is of outmost importance is the quality of the public debt, together with its quantitative aspect. When considering risks and possible returns of an investment, if it appears in line with the investor's preferences, the latter could reasonably take responsibilities for the significant debt. If this should not be the case, it would be safer to reduce exposition and understand the most effective way to cut debts.

The (ambiguous) perspective of social investment

Even if it would be wise to avoid looking at public expenses through too much simplicistic lenses, i.e. as a result of a historical opposition between two different political and economic school of thoughts that are attributable to two important economists of the previous century (J.M Keynes and M. Friedman), nevertheless it is possible to assert that the redefinition of welfare policies opened up for the political and cultural legitimization of pro-welfare state arguments, as a means for social investments especially in human capital (Saraceno, 2013). This approach highlights the role of social policies as being the adequate instrument for "activating" individuals. At the same time, the perspective of social investment is aware of the need to contrast and compensate market failures and has, for this reason, a positive image of the state compared to the neoliberal thought (Saraceno, 2013).

The perspective of social investment implies a shift from protection to promotion, from emergency to prevention, from inside to outside and from static nature to a more dynamic nature (Ferrera, 2015). Moreover, the term "investment" indicates that the horizon is wider than the traditional one and that social policies that stem from the latter have an important inter-temporal component. Changes associated to this perspective are manifold and they rely significantly on crucial aspects of welfare systems (such as governance, social rights and citizenship, welfare producers, etc). It is a new approach which aims at modernizing systems of social protection in order to obtain collective benefits in the future (Ferrera, 2015).

Financing the modernization of welfare systems clearly is the most critique aspect of the whole process. The only two options that seem to show a grade of feasibility, eventually together, are shifting resources from social protection to another function and to increase taxation. In both cases, high political costs would be imposed, creating winners and losers. It is difficult to think other eventual options.

Public expenditure reduction as cash flow from saving cost bonds

Despite the mentioned difficulty in finding out possible alternatives, some might come from the deployment of new complex financial tools. These are indeed contractual arrangements mainly based on a pay-for-results mechanism (or pay-for-success as well explained in Nicolai and Bisio's article). Such a mechanism relies on a significant change in the underpinning logics traditionally used by public administrations: the public commissioner (i.e. the public sector) engages itself to pay only if specific outcomes are achieved, rather than on reached outputs. In other terms, the contractual object is not the provision of a quantity of service, rather it is the actual change brought by the social service provider. This is a quite important change, since it implies an important set of tools and metrics able to assess the ''quantity'' of generated change as well as to reasonably identify the action of the provider as the cause of the achieved change.

A saving cost bond has the same structure of a social impact bond, from which according to Nicolai and Bisio point of view it differs due to the extension of the area of intervention: in the case of saving cost bond it would not be limited only to projects of social value, but extended to all technological, organizational and managerial innovation projects in which savings on the public budget costs might be found. To be consistent with empirical data coming from the main studies on social impact bond, it is worth noting that actually social impact bonds implemented or planned around the world have already crossed over the area of "social" (assuming that its boundaries can be rigidly plotted), as in the case of urban regeneration in Richmond or the new waste cycle management in Naples which we both already discussed some time ago. In any case, what is important to consider from the proposals and remarks by Nicolai and Bisio is the type of argument that in the Italian context as well as in most of the EU Countries can be made for using a saving cost bond (or social impact bond): in fact, saving cost bonds can be matched to the spending review process, qualifying the latter as a valuable process, since without investment able to create more efficiency, it can only assume the face of linear cuts.

Saving cost bonds are a further opportunity to develop the use of public-private partnerships capable of functioning as negotiating patterns that instead of focusing attention on the ability of a project to generate cash inflows, consider its ability to generate cost savings, particularly on public budgets. After all, according to Nicolai and Bisio, whether the liquidity for new investments comes from revenues or savings does not seem to be a great matter.

An opportunity offered by public expenses reduction

Within the generation on savings process, it may happen that part of the savings represents the compensation of investors' capital. In fact, this is the financial mechanism upon which social impact bonds are based. By engaging institutional investors' private resources, the reduction of public expenses becomes an occasion for attracting investments. At the same time, collected investments make other resources available for public administration activities. Thus the political empasse behind the social investment perspective seems to be in some sense solved: an alternative for the financial coverage of such a way to conceptualize social policy exists, and it's related to the very idea of investment.
As a matter of fact, and considering the broad debate around failed attempts to recalibrate the welfare state, what saving cost bonds or social impact bonds show is that recalibration strategies for the modernization of welfare systems are possible if and only if the recalibration process does not rely only on internal (financial) adjustments, rather if it deploys and leverages external financial resources.

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