Are social impact bonds a feasible option for Brazil?

In this article, MPP students Carolina Douek and Mayra Gramani explore why Brazil has not (yet) launched a SIB. After presenting two projects that were structured in São Paulo, they examine the barriers to SIB development in Brazil – based on their own experience of developing SIBs in Brazil, as well as interviews with key stakeholders - and explore potential solutions.

SIBs in Brazil – a historical perspective

Attempts to launch SIBs in Brazil started in 2016. The Inter-American Development Bank (IDB) spearheaded the effort, as it sought to increase the use of SIBs in Latin America and the Caribbean. In parallel to the efforts carried out in Brazil, it helped to successfully launch SIBs in countries like Colombia, Argentina and Chile.

The Education SIB

In 2016, IDB partnered with São Paulo’s State Government to develop a pilot. São Paulo had been struggling with high-school dropouts, and the first attempt at a SIB aimed to address this issue.

The effort was carried out by a large coalition of participants, including:

1. Multilateral organisations, such as IDB and the World Bank's International Finance Corporation
2. Social Finance UK, who had global technical expertise in the subject
3. Two Secretariats at São Paulo’s State Government (Government Secretariat, represented by the Subsecretary of Partnerships, and the Education Secretariat);
4. Insper Metricis, a research centre focused on organisational strategies and management practices for social impact projects
5. Sundfeld Advogados, a law firm specialising in public sector issues

Bringing all these stakeholders together was already a significant achievement. To foster buy-in from all involved, regular meetings were held during the intervention’s design phase. The group decided that the project would focus on decreasing drop-out rates and improving academic performance of high school students in vulnerable regions of the metropolitan region of São Paulo. The primary payable outcome was to keep a cohort of students engaged through three years of high school, with intermediate payments if certain outcomes were achieved after each of the first two years.

After an extensive period of data exploration, legal analysis and policy design, the project's public consultation was launched (report available here in Portuguese). At this point, significant resistance to the project could be seen and, with upcoming elections the following year, political support for the project faded, leading to its subsequent cancellation.

Although this specific project did not advance, a seed was planted in a group of civil servants, NGO workers and academics, who still believe that SIBs might be a useful policy tool in Brazil – including us.

The Fundação CASA SIB

The next attempt to structure a SIB started in 2018. São Paulo’s State Government decided to take advantage of the experience they had gained with the Education SIB to develop a new project in a different area. The Subsecretary of Partnerships started to work with Fundação CASA (Centre of Socio-Educational Assistance for Adolescents), the institution responsible for applying socio-educational measures in the state of São Paulo.

This time, a smaller coalition was formed, including:

1. Government Secretariat, represented by the Subsecretary of Partnerships;
2. Management Secretariat, which provided two public policy specialists to support the project,
3. Fundacão CASA, an institution linked to the Secretariat for Justice and Defence of Citizenship;
4. Insper Metricis.

The SIB was designed with two main outcome indicators for service users following their release from the Fundação CASA: reduced reoffending amongst adolescents younger than 17.5 years old, and increased school attendance of adolescents older than 17.5 years old. The latter indicator accounts for the fact that those over the age of 18 would enter the adult prison system rather than returning to the Fundação CASA, making it more difficult to measure the reoffending rate.

In March 2020, the public consultation for the project was launched, and received 16 responses. In May 2020, a market sounding was held as a way of talking to the organisations that were interested in the project, with 13 organisations participating in meetings with representatives of the Fundação CASA and the Subsecretary of Partnerships (report available here - in Portuguese).

Unfortunately, at this point, the launch of the project was postponed due to the Covid-19 pandemic. Following the postponement, in October 2020, the Fundação CASA launched a public procurement for the project (available here - in Portuguese). However, this call for tenders, and subsequent calls in November 2020 and April 2021, received no responses.

Specific challenges and recommendations on how to move forward

Many of the challenges associated with the development of social impact bonds are not unique to the instrument. Discussions that begin with SIB-specific challenges often end up reflecting more complex underlying issues with public policy innovation and the overall maturity of the social sector ecosystem.

Given these broader challenges to SIB development, two approaches are possible: either use SIBs as a tool to drive improvements in the policy landscape, through small scale pilots, or abandon the idea of using SIBs altogether, until these structural issues are addressed. However, we suggest an intermediate approach, in which broader initiatives to address these structural issues are implemented alongside space for SIB experimentation.

To understand how this approach might work, we conducted interviews with figures from a range of sectors who were involved in the projects discussed above. Based on these insights, and our own understanding of the issues, we explore three of the main challenges to SIB development, and how they might be addressed.

1. A culture of punishing innovation

When talking to people who work or have worked inside governments in Brazil, you quickly encounter an overall feeling of a culture of distrust. Procuring innovation, by definition, carries some level of uncertainty. However, there is a view that oversight bodies have taken their efforts to curb potential wrongdoing too far, and will punish civil servants if they do not provide sufficient evidence to justify innovation.

This fear of innovation was noticeable in both SIB attempts in Brazil, the Education and the Fundação CASA. Working inside the projects, we could see it was a part of the general culture of the government agencies involved, and provides a real challenge to any attempts at innovation in public procurement.

The issue is addressed by a recently-published study (in Portuguese) of public procurement of innovation, conducted by the IDB, the Tribunal de Contas da União (TCU - an oversight body in Brazil) and Tellus Institute. Their diagnosis of the challenges of procuring innovation in Brazil include what they call the “blackout of pens”, fear from public servants of being misinterpreted and penalised for innovative initiatives.

From our perspective, IDB’s initiative is very important and a meaningful step towards developing the Brazilian public innovation ecosystem. It is a promising solution, in which the government works closely with oversight bodies, creating a collaborative working environment that will benefit all parties involved. In this case, the study aims at creating a model for oversight bodies to support procurement of innovation in the public administration, and to make it available for other oversight bodies in Brazil. While this alone will not solve a deep-rooted problem, it represents a good start towards more cooperation between governments and oversight bodies.

Recommendation 1: Foster collaboration between different stakeholders – such as governments and oversight bodies – with the aim of creating an innovation-inducing ecosystem

2. Lack of outcomes-based culture and knowledge

Outcomes-based contracts are becoming more common in the context of public sector procurement in Brazil. For example, sectors such as water and sanitation hire private service providers on results-based contracts to decrease water losses. Nevertheless, these contracts are still relatively uncommon.

This is particularly true of the social sector. Although several NGOs have been leading the supply of outstanding products and services to vulnerable communities across the country, the concept of being formally evaluated and only being paid if certain results are achieved is viewed with distrust. More concretely, there is no room in provider budgets to incur the risk of not being paid for service delivery, no practice of making partnerships with investors to shift the financial risk, and no knowledge about how to facilitate dialogue between these stakeholders.

As a result, finding service providers in Brazil to deliver SIBs requires a broader societal dialogue between people with financial expertise and those at the forefront of social services delivery. It is by promoting further collaboration between the private and social sector that these practices will become more widely used and that implementing SIBs will become more feasible and common practice.

Furthermore, another major challenge in both SIB attempts was the overall lack of knowledge about the tool. It took months and even years to engage the involved institutions in the projects in a way that the concepts were clear. This lack of knowledge also makes it harder for SIBs to be considered a politically viable option.

Unless a broader set of local literature is created, any engagement around SIBs will start from scratch. Fostering local debate about SIBs, in Portuguese, will be essential to more broadly inform local stakeholders, who sometimes have very low capacity to start with.

Adding to these difficulties, SIBs are inherently more complex than other public procurement arrangements, demanding additional knowledge and cooperation between different stakeholders. Building on initiatives such as “Aliança Pelo Impacto” (Impact Alliance) or “Coalizão Brasil Clima, Floresta e Agricultura” (Brazilian Coalition for Climate, Forests and Agriculture) would be a good start. The idea is to begin by gathering interest groups and joining forces, as well as expertise, to get a first project off the ground.

A final challenge to building an outcome-based culture in Brazil is the lack of continuity amongst policymakers. Although every public system faces changes due to elections, this has become particularly dramatic in Brazil given the extreme shifts in public administration. Cross-sector fertilization is essential to enabling the use of SIBs more broadly, but it is also important to guarantee continuity and ensure knowledge from hands-on experience is retained. This could be done through the creation of a network of practitioners, both at the Brazilian national level but also through international organizations working with outcome-based contracts globally.

This aspect was particularly clear in the Fundação CASA SIB. Over the course of development, the project team changed a lot due to the lack of continuity inside the government. Every time people left the project and new people joined, it was a huge challenge to keep all the information flowing and to get everyone on board. To those involved in the project, it appeared information was lost during staff changes, and that fewer (or better handled) transitions could have saved considerable time. Even more shocking is to notice that nobody from the public sector side actually participated in both SIB´s launch attempts.

Recommendation 2: Promote collaboration and knowledge sharing between the private and social sector to advance more sophisticated financial practices

Recommendation 3: Foster local debate about SIBs, in Portuguese, and improve the handling of knowledge transfer inside and outside the government, to improve access to evidence and expertise

Recommendation 4: Create a network of practitioners (with national and international organisations) to exchange expertise and best practices

3. Legal and financial structuring challenges

The final structuring challenge we wish to address here is the unclear legal framework for the launch of SIBs in Brazil. Now, in itself, the lack of specific regulations is not an insurmountable impediment for the development of a SIB. While it creates difficulties, there are ways, within the existing Brazilian legal framework, to develop SIBs – but only if there is political will to do so. However, given concerns around the behaviour of oversight bodies described earlier, we believe that additional legal certainty could give civil servants the needed incentives to innovate.

We believe there are two ways in which this could be done: One option is to create a specific regulation for SIBs. There is currently a federal bill on the subject (PLS 338/2018), but there is little consensus about the feasibility of it being approved in the short term. Another alternative, as described above, would be to foster greater cooperation between oversight bodies and governments in order to facilitate policy innovation within current legal frameworks. For example, if a legal opinion were issued by the oversight bodies stating that existing legal frameworks could be applied to SIBs, this would address the issue.

This recommendation comes from observing the developments of both the Education and Fundação CASA SIBs. In both cases, there was reticence from the public legal teams, who had never used existing procurement processes on a pay-for-performance basis. Legal opinions from private law firms were required to equip public servants with the tools to advance the policy. Following that, public servants had to convince the legal teams from their government units that it was worth pursuing SIBs. Although it took a lot of time and effort, eventually, the legal teams for both SIBs managed to overcome this hesitancy, and find ways to use existing laws to advance the projects.

Another challenge to structuring a SIB is the high implementation costs, particularly those associated with the use of a sophisticated evaluation mechanism. In the Brazilian context, this is exacerbated by the time-consuming effect of re-starting the discussion about SIBs from almost zero, as noted above. The lack of a local repository of innovative practices, with detailed discussions about previous implementation challenges and potential ways to overcome legal challenges makes it even harder and more expensive to advance with SIBs projects.

For example, when starting the Fundação CASA SIB project, public officials looked to the SIB experience from abroad, as there was very little information available about the Education SIB. Creating a repository of best practices and lessons learned will be essential to addressing the additional costs involved in the Brazilian context.

Recommendation 5: Develop bespoke regulations, build awareness and have legal opinions issued by local oversight bodies about the appropriate legal framework for launching SIBs

Recommendation 6: Create local repository of innovative practices, with detailed discussions about previous implementation challenges and potential ways to overcome legal challenges

Conclusion

The challenges of experimenting with SIBs in Brazil remain large. If changing culture and behaviour is a challenge anywhere, it is even more so in a country of continental proportions with a high level of policy decentralisation. The main challenges we have described – a culture of punishing innovation, a lack of a pay-for-results culture and knowledge, and legal and financial issues – will not be easy to address.

After talking to people who have worked in one or both SIBs attempts in Brazil, there are mixed feelings about whether the model can be developed locally. Most of the interviewees believe that SIBs can help the Brazilian public system and increase innovation in public contracting more broadly, but significant milestones must be overcome for this to be possible. This opinion is also shared by the authors of this article – we believe that SIBs are a feasible option for many of Brazil’s social dilemmas, although it is a challenging endeavour.

A new generation of policy innovators is being nurtured in Brazil, and the desire to foster more evidence-based policies and transparency in policy design is growing. Launching a SIB might not happen in the short-term, but the growth in Brazil's local ecosystem is a positive sign that more innovative times are coming.