The Social Impact Bond (SIB), first used in the UK in 2010, was an initiative developed to provide services to improve community welfare, in an agreement between the government and the private sector, where the latter provides the funds. It is not a bond in the generally understood meaning of the term, and it is better understood as a type of contract.
According to this contract, the private investor provides the funds to a service provider, and the government — when the period of the contract has expired — agrees to redeem the original investor with their initial outlay, together with an extra financial compensation or award in line with the success of the project. This is, however, contingent on the provider achieving their specified goal, as determined by an independent assessor. If the objectives have not been achieved, the government has no obligation to make any payments to the investor.
The SIB differs from the more traditional social service provision system in that the funding comes from the private sector — whereas the traditional system relies on public financing — and also that the SIB is an investment in service provision for the improvement of social welfare provision, compared with the more traditional approach that seeks to remedy or find solutions for existing problems. In addition, the SIB is a Pay For Success (PFS) scheme, in which the risk is transferred to the private investor, compared with the traditional model, in which the government is saddled with the risk and cannot evade its obligations.
The SIB concept has started to take off overseas, and it is already being applied in 10 countries. On Taiwan’s doorstep, South Korea passed SIB legislation in 2014, with plans to start a children’s welfare SIB in Seoul, and Japan started a senior citizen long-term care plan last year. Taiwan, however, has yet to get in on the act.
As government debt accumulates, the social welfare budget will be increasingly difficult to pay for. Combined with an aging demographic and a declining birth rate in Taiwan, the social welfare bill is only going to become more of a burden. This will surely place added stress on the already creaking government coffers. According to figures from the Executive Yuan’s Directorate-General of Budget, Accounting and Statistics, Taiwan’s excess savings stand at as much as NT$2.61 trillion (US$83.42 billion), and life insurance companies are sitting on about NT$15.8 trillion that they could put into action.
If the government takes the initiative and establishes a similar SIB system, and mobilizes private-sector funds to make up for the shortfall in government finances, the provision of social services can be expanded, improving social welfare, and economic development will be stimulated.
The government should look into examples of how this has worked overseas, how much it will save in costs, and who it can work with to provide such services. Initiatives could include reducing the rate of recidivism, finding shelter for children in care, improving special-needs education, providing long-term care, offering housing for vulnerable groups and shelters for the homeless, as well as getting people back into work.
The National Development Council should establish an SIB unit charged with developing legislation and creating the structure, standard operating procedures and evaluation systems needed, as well as drafting short, medium and long-term plans.
Yang Chung-hsin is a retired research fellow of Academia Sinica’s Institute of Economics.
Translated by Paul Cooper
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