05/06/2013 09:26 BST | Updated 04/08/2013 06:12 BST

Can SIBs save the world?

Social Impact Bonds, or SIBs, have been on the radar for several years now especially since the first one was launched by Social Finance back in 2010. They have now caught a lot of people's attention- and imagination- as the innovative, clever, funding mechanism that would somehow produce brilliant social outcomes at much reduced cost. Big Society Capital have recently alluded to the fact that they think much of future demand for social investment will be for SIBs and the Government is even going to be pushing SIBs as a major issue at the forthcoming G8 summit that they are hosting on Thursday 6 June. So given all of this attention, it is important that we take stock about how they are actually getting on. Is all the hype justified?

Broadly speaking SIBs involve a commissioner saying they will only pay for someone to provide an intervention if it actually delivers outcomes and some investors putting in money to fund that intervention in the meantime - getting their money back (with interest) if it all works and losing their money if it fails. But despite all the excitement they are still small beer at present.

We all await - with baited breath in many cases - seeing some hard and analysable data from the first, baby SIB, at Peterborough prison which aims to reduce reoffending rates. We watch with interest to see if the impressive new Essex Council SIB that is trying to reduce the number of children going into care, really works. We note that there is quite a lot going on to try and get SIBs up and running in areas like adoption, problem families and even homelessness. We also admire Goldman Sachs for kicking off a SIB in New York City aimed at reducing the recidivism rate for adolescent offenders. But we also note that so far SIBs have not taken off to the extent that some had hoped and others had feared.

Personally, I like SIBs. They are an interesting and innovative approach to trying to approach social problems, that make us focus much more than we have before on a number of things.

First, because they are based around payment by results (PBR), SIBs bring some similar benefits to that approach to procurement - a real focus on what one really wants as an outcome and so a better likelihood of combining different skills to achieve it. In social policy we know that almost every problem needs a variety of expertise applied to it- those leaving prison need help on training, housing, often mental health and family relations and we also know that too rarely does this all integrate in a sensible way. The financial mechanism of the SIB holds out some possibility of achieving that.

Second, the very act of trying to work out a SIB and what payment schedules should be used and so on give a real focus on costs. In the Essex case for instance the cost of a child in care in Essex emerges as so high that one likes to think that even without a SIB the council would have re-allocated resources to better address this massive drain on their budget.

Third, SIBs are a way to try to ease the cash flow not only for commissioners but also for charities who often find PBR a nightmare. This then means that a wider set of providers can play a part in the new approaches to commissioning that are slowly taking over the UK scene.

So far so good. But often these SIBs are very complicated, take a long time to negotiate and are confusing. We have to believe that they do produce better results and at a decent price, to make it all worthwhile.

So what I find perplexing is how often the emerging SIBs are starting to want to mandate a specific intervention. Surely the ideal for a SIB is a 'black box' contract - ie one that simply asks the provider to meet the outcome target however they want. This allows innovation and even competing ideas on how to solve the social issue in question while putting all the risk on the investors and providers, not the commissioner (usually the tax or council tax payer). If instead an particular intervention is mandated - even if it is a proven one (and if not proven then it really is mad) - then this seems an expensive way of procuring interventions.

Indeed it transpires that in several cases the actual provider is not paid on outcomes at all - only the investors are. The provider is paid just to deliver the intervention well. Incentives therefore are not brilliantly aligned.

In these cases the old 'Treasury' in me - like a stick of rock from two periods working there - says surely this is an expensive way to go (since the public sector can always borrow more cheaply than anyone else).

Hopefully the next year or two will see more information about SIBs emerge and we will understand better what works and what does not, as we try to make our diminishing resources stretch further. At NPC we'll be keeping an eye on SIBs, and in the autumn we will be holding a round table looking at how SIBs are progressing. In the meantime, while wanting to try things and learn more, we should all go a little cautiously.

A version of this blog originally appeared in the Municipal Journal.