Limits to the financialisation of the state: exploring obstructions to social impact bonds as a form of financialised statecraft in the UK, Israel, and Canada

ABSTRACT

Within the financialisation literature, scholars have turned their attention to the state, exploring the adoption of financial activities by state actors, paying less attention to the limits of state financialisation. This paper explores these limits using the case of social impact bonds (SIBs). Pioneered in the UK in 2010 and subsequently trialed in some 35 countries, SIBs use private capital to fund social programs, with governments providing a return based on the degree of success. Despite expectations of dramatic growth, the SIB model has never truly taken hold. Based on the rollout of SIBs in the UK, Israel, and Canada, the paper considers the challenges encountered by the SIB enterprise as a form of financialised statecraft and identifies three barriers: (1) resistance to political agendas of state financialisation; (2) clashes between finance and public sector cultures; (3) financial innovation seen as ‘risk’ and ‘disruption’ to entrenched socio-technical routines. These barriers reveal tensions both within the state itself and between finance and the public sector, and indicate the importance of thinking about the limits and failures of state financialisation.

KEYWORDS:

• State financialisation
• social impact bonds
• social and public services
• limits to financialisation
• financialisation

1. Introduction

A burgeoning literature has convincingly argued that the state plays an important role in advancing various forms of financialisation (Krippner 2011, Streeck 2014, Quinn 2017, 2019), and scholars have started to consider financialisation's obverse effects – the extent to which the state and its essential functions have themselves been financialised (Pacewicz 2013, Wang 2015, Lagna 2016, Fastenrath, Schwan and Trampusch 2017, Karwowski 2019, Løding 2020, Schwan et al. 2021). Scholars are increasingly intrigued by the financialisation of the state, a process defined by the state's expanding interaction with financial markets and actors, growing use of financial instruments and practices, and increasing incorporation of financial logics and activities thus emulating financial market participants (Pacewicz 2013, Wang 2015, Livne and Yonay 2016, Karwowski 2019, Bryan et al. 2020, Schwan et al. 2021).

Yet, the state is a multifaceted entity, a heterogeneous ensemble of actors, institutions, logics, and interests. Thus, the state-finance nexus – i.e. connections and arrangements between state and financial actors and markets – will vary across state domains (Pacewicz 2013, Trampusch 2019, Løding 2020, Trampusch and Fastenrath 2021), and financial innovations’ pathways inside the state will be multiple and potentially contested. While state financialisation scholars acknowledge the state's polymorphous nature, they often overlook the role of intra-state tensions in financialisation's expansion or frustration. This article sheds light on these dynamics through a specific case of state financialisation: the social impact bond (SIB).

A SIB is an investment contract in which private capital is used to fund a social program or service. If the program is successful, the government provides a return based on the cost savings from reduced future demand on public services. If the program is unsuccessful, investors lose (at least in theory) both their principal and any prospective returns. As an investment-based model, a SIB is defined by the use of financial conventions and devices such as return on investment and net present value (Cooper et al. 2016, Berndt and Wirth 2018). SIBs mirror the logic of derivatives, representing a bet on the performance of social sector providers (Bryan and Rafferty 2014, Bryan et al. 2020), and they have been developed by individuals with backgrounds in finance seeking to transmit financial tools and sensibilities to the social sector. As a model of financialised state action, SIBs are envisioned as offering states new ways to fund and deliver social services by soliciting private investment, making them another example of state financialisation (Dowling 2017, Golka 2019, Bryan et al. 2020).

This article explores the development of SIBs in three national contexts: the UK, Israel, and Canada. Eschewing the functional lens often used to explain processes of financialisation (Pitluck et al. 2018), we draw from empirically rich accounts of state actors’ engagement with this model to ask the following questions: How have SIBs been introduced, advanced, and appropriated inside the state? What kinds of constraints and forms of opposition have they encountered? How is the process of financialisation mediated inside the state?

Our exploration of the struggles and limits of the SIB enterprise reveals that this form of financialisation has been undercut by tensions inside the state as well as between finance and the state. Our findings support arguments against the seemingly porous boundaries between finance and the state, allowing state actors to easily emulate financial actors and adopt their instruments and rationales (Lagna 2016, Lemoine 2017, Bryan et al. 2020, Trampusch and Fastenrath 2021). Using the case of SIBs, we show that financialisation is often incomplete and uneven, shaped by strategic considerations and contentious politics, and has trouble rendering the social and public sector ‘financial.’ The article makes three contributions: first, it highlights processes and contexts that hinder financialisation in a polymorphous state; second, it provides a nuanced account of state financialisation as a political, cultural, and socio-technical project; third, it advances the academic literature on SIBs by drawing explicit attention to the model's contested appropriation as a form of financialised statecraft.

The paper is organised as follows. The first section reviews the literature on state financialisation, highlighting the polymorphous nature of the state as a key context and constraint for finance-inspired initiatives, and presenting SIBs as a case for studying the limits of state financialisation. Following a discussion of research design in the second section, the third section traces the distinct trajectories of SIBs in the UK, Israel, and Canada and explores how efforts to develop these projects triggered opposition, ultimately limiting SIBs as a project of state financialisation. The paper concludes with a discussion of the implications of the analysis for future research on the intersections of finance and the state.

2. Financialisation inside the state: beyond the consensual perspective

2.1 Agendas and forms of financialisation in the polymorphous state

Financialisation transpires in a heterogeneous state, a polymorphous field encompassing diverse state actors, organisations

, and change agents with distinct motivations, logics, and goals (Wang 2015, 2020, Karwowski 2019, Trampusch 2019, Trampusch and Fastenrath 2021). For Wang (2020), studying the financialisation of the state requires us to ‘unpack the conception and the organization of the state and ask specifically how state ideas, state organizations and state-making processes dovetailed with the expansive mechanisms of finance’ (192). Acknowledging this heterogeneity calls for ‘a thorough understanding of the multiplicity of ways in which financialisation of the state has occurred’ (Karwowski 2019, p. 1020), and the multiple pathways along which it has travelled (Trampusch 2019).

The growing influence of finance within the state has been documented in various economic domains, including debt management, budgeting, and state-owned enterprises, as well as non-economic domains, such as pensions, housing, higher education, public utilities, and physical infrastructure (Dixon and Ville-Pekka 2009, Pacewicz 2013, Engelen et al. 2014, O’Brien and Pike 2015, Aalbers et al. 2017, Fastenrath et al. 2017, O’Brien et al. 2019, Løding 2020). However, studies also show that financialisation unfolds unevenly across state domains, often involving the creation of homogenous enclaves of financial expertise separated from other bureaucratic units (Pacewicz 2013, Livne and Yonay 2016, Trampusch 2019, Wang 2020).

Scholars argue the spread of financialisation inside the state is not spontaneous. Diverse motivations propel it, often in the context of growing fiscal constraints under neoliberal regimes. For example, seeking to reduce debt servicing costs, senior unelected treasury officials have been instrumental in the introduction of financialised debt management methods in several countries (Livne and Yonay 2016, Trampusch 2019). Moreover, while some state actors are committed to a financialised modus operandi, others may be indifferent or even opposed. While advantageous to some, the introduction of financial innovation may undermine other actors’ autonomy, power, and/or resources (Lagna 2016, Lemoine 2017, Karwowski 2019, Wang 2020). Financial models and instruments may also be used as leverage in power struggles inside the state. Several studies have documented reformist finance ministries’ effective deployment of financial innovation against established opponents inside the state (Lagna 2016, Davis and Walsh 2017, Trampusch 2019). Financialisation may be advanced by state actors as a governance strategy to overhaul existing modes of management and control inside the state (Wang 2015). As such, financialisation may be viewed ‘as a political project for seeking fiscal solvency, bolstering political legitimacy, and defeating political rivals’ (Wang 2020, p. 191).

Although these studies provide a valuable view of state financialisation as transformative of intra-state power relations, they overlook the potential for opposition from those who stand to lose out from the introduction of financial tools or who may resist due to conflicting institutional logics. In fact, few studies explore opposition at all. When studied, the focus is often on state actors’ initial efforts to resist financialisation and maintain alternative, non-financial methods and how these efforts ultimately fail (Lagna 2016, Lemoine 2017), or on decisions by powerful state actors to abandon initiatives revealed to run counter to their interests (O’Brien and Pike 2015, Trampusch and Fastenrath 2021). In a UK case, a financial innovation (municipal swaps) was banned when HM Treasury ‘considered them harmful, as they hindered the central government's ability to steer the money market and fiscal policy’ (Trampusch and Fastenrath 2021, p. 255). Financialisation was thus frustrated when it threatened the interests of a powerful state actor. Trampusch and Fastenrath (2021) argue that the interests, concerns, and motives of the state's fiscal and monetary authorities are important variables that may enable or constrain state financialisation, yet they do not explore these authorities’ unaligned preferences and relations.

As the admittedly sparse literature suggests, financialisation is a transformative and politically contested process, with barriers to financialisation emerging as a result of frictions between vertical levels of government (central versus local) and between horisontal entities (state units with different functions). What we lack at this point is a deeper understanding of intra-state tensions and their influence on financialisation inside the polymorphous state.

Engaging with the limits of state financialisation requires a clear recognition of the complexities of financialisation itself (Christophers 2015, O’Brien et al. 2019, Mader et al. 2020), including its different forms, causes, and trajectories. As noted by Mader et al. (2020), the focus should not be limited to describing the increasingly financial character of non-financial spheres but should also include the question of ‘how and why this happened’ (11) or did not happen. For example, Pitluck et al. (2018), in eschewing a functionalist lens, articulate several alternative explanations, revealing different uses and aspects of finance as a resource in political struggle, as a cultural model reshaping social relations, and as media. Ultimately, there is a need for research to probe the nuances of state financialisation, particularly the various facets of the process and practice of financialisation and the capacity of non-financial actors to frustrate financialisation inside the state. We address this need by analysing SIBs as a form of financialised statecraft.

2.2. Possibilities and limits of state financialisation: the SIB case

SIBs gained traction in the environment of austerity programs and reduced state budgets, positioned as a way for governments to fund social programs while only paying on the condition of success, thus shifting the initial financial burden and risk to private investors. The SIB model originated in the UK and was embraced as part of David Cameron's ‘Big Society’ agenda (Golka 2019). In the aftermath of the 2007-8 Global Financial Crisis (GFC), leading international organissations such as the G8, OECD, and World Economic Forum advanced the SIB cause. Formed by the G8, the Social Impact Investment Global Steering Group is the leading organisation behind the model's international diffusion.¹ To date, SIBs have been implemented in 35 countries (GO Lab Impact Bond Dataset).

On their face, SIBs would appear to represent another clear case of state financialisation, this time in the context of contracting for social services, providing further evidence of the ubiquity of finance and its growing influence within the state (Bryan et al. 2020). Many critiques of SIBs have seised on this theme with the model conceived in terms of the ‘financialization’ of social and public services (Warner 2013, Dowling and Harvie 2014, Dowling 2017, Sinclair et al. 2021). In some accounts, this is conceived through a political economy lens with SIBs framed as a new ‘asset class,’ source of capital accumulation, and means of addressing the crisis tendencies of neoliberalism (Dowling and Harvie 2014, Dowling 2017, Harvie and Ogman 2019), while in others the focus is on the extension of financial interests, logics, and tools into the social sector reconfiguring the missions of social sector organisations (Warner 2013) and instilling financialised forms of valuation (Chiapello 2015, Cooper et al. 2016). Regardless, what unifies these accounts is a conception of SIBs as an expression of the growing, largely uncontested influence of finance over the functions and life of the state, a case of the evolving ‘co-imbrication of the state and the financial sector’ (Dowling 2017, p. 7) and ‘evidence that the techniques of finance … are being increasingly incorporated into the design of state intervention’ (Bryan et al. 2020, p. 274). This echoes other accounts of the financialisation of the state.

However, this view fails to account for how the SIB enterprise has unfolded in practice and the challenges encountered by SIB practitioners in their bid to develop a sustainable market for these investments. The SIB market² has not been nearly as successful as imagined by advocates. Despite the global diffusion and the steady uptick in projects, the rate of growth, particularly in key markets such as the UK and US, has been slower than expected (Arena et al. 2016, Del Giudice and Migliavacca 2019). SIB development programs have also yielded somewhat disappointing results producing fewer projects than expected (Heinrich and Kabourek 2019, Fraser et al. 2021). The market also remains small, especially compared to markets in public services and social investment (Floyd 2017, Jain 2019). Jain (2019) contrasts the $424 million in SIB financing with the $500 billion in green bonds and $228 billion in impact investments over the same period. Only 0.2% of impact investments’ global capital is estimated to be deployed via Pay-for-Performance instruments, including SIBs (GIIN 2017, p. 25). Thus, rather than a success story and a sign of the spread of financialisation within the state, SIBs are better viewed as a form of financial innovation which has struggled to take hold.

But why have SIBs struggled? What does this suggest about the nature and limits of state financialisation more broadly? Existing research has identified various challenges to SIB development including technical and logistical barriers (Heinrich and Kabourek 2019), complexity and high transaction costs (Warner 2013), misaligned interests (Maier and Meyer 2017), difficulties in attracting investors given SIBs’ unconventional nature (Fraser et al. 2018), and clashes around the ethics of investing in social programs (Sinclair et al. 2021). However, these accounts fail to capture the distinct challenges of SIBs as a financial innovation mediated inside the polymorphous state.

3. Method

We use the development of SIBs to explore how intra-state tensions and opposition to the promotion of financial innovation frustrate the spread of financialisation inside the state, selecting SIBs for three reasons. First, SIBs represent a case where a financial innovation, despite extensive advocacy at international and national levels, has struggled to gain traction. Second, as an attempt to financialise social services contracting, SIBs involve state actors with different expertise, functions, and accountabilities. Third, indications of disagreement emerged early in a number of countries.³

We apply a multiple case-study design (Yin 2009), looking at SIB-centred state financialisation processes in the UK, Israel, and Canada. While the UK and Canada are established liberal political economies, Israel is rapidly following route in recent decades, transforming from a state-led and bank-based financial system into a liberalised financial market (Maman 2017). In the UK, often cited as an ideal case of financial deregulation, some changes were introduced following the GFC including more stringent and prescriptive financial regulation (Scott and Quaglia 2020). In contrast, Canada's more conservative regulations helped it to avoid the worst effects of the GFC (Brean, Kryzanowski and Roberts 2011). Similarly, constrained ‘financial innovation’ protected Israel's financial sector throughout the GFC.

The introduction of new, financialised social programs (such as asset-based welfare) is evident in all three countries as is increasing financialisation of existing domains such as pension and housing. These changes include a retreat from public involvement in housing markets which has led to the growing influence of real-estate centred financial activities, as well as to the development of ‘privatized Keynesianism’ with unprecedented levels of household debt (Crouch 2011). The financialisation of national and local debt, and of urban development, is evident in all three countries, although the introduction of municipal bonds in Israel in the early 2000s has failed (mainly due to centralisation and deficient local state capacities).

While exhibiting substantial engagement with the SIB model, each country exhibits a distinct pathway of state financialisation. Following Trampusch and Fastenrath (2021), who argue that the motivations and concerns of central state actors constitute scope conditions that may constrain state financialisation, we strove to maximise pathway variation. Pathways in the UK, Canada, and Israel vary in two important aspects: first, the motivation to adopt the SIB model (different levels and entities inside the state); second, the commitment to carry out a SIB-oriented policy change as evidenced by official policy initiatives and the number of SIB projects launched.

The UK represents a highly motivated, centralised state initiative, with numerous policy measures aimed at forming a comprehensive infrastructure for SIBs, and boasts the largest number of SIB projects to date. SIBs were championed by members of the UK central government who sought to catalyse the SIB market through support for both the demand (policy guidance and coordination through the Centre for Social Impact Bonds; dedicated funds for capacity building and funding outcomes) and supply (capital provided by Big Society Capital, a government-backed, privately managed social investment fund) sides of the market.⁴ In contrast, Israel has no SIB champion or commitment inside the state and, consequently, no formal policy measures and few SIB projects. SIBs have been driven largely by the efforts of a specialised advisory firm, Social Finance Israel, established to develop SIBs in that country. Canada represents a case of reserved and decentralised state commitment to SIBs with the federal government expressing symbolic support for the model but SIB development left to individual actors and units in the Federal and various Provincial governments. As with Israel, there have been no formal policy measures or central budgets devoted to SIBs. Few SIB projects have been launched. The Canadian public sector is also less well-suited to SIBs with less evidence of marketisation and privatisation compared to the UK. By contrasting the UK and Israel, two diametrically opposed financialisation pathways, we adopt a ‘two-tail’ design allowing us to compare the development of state financialisation under different conditions (Yin 2009, p. 59). The case of Canada, a third, moderate pathway, provides external validation and generalisability. This selection allows for theoretical replication, comparing cases with different conditions which, based on state financialisation theory, should lead to different intra-state relations and tensions around processes of state financialisation. Table 1 summarises these differences.

Table 1. Motivation and Commitment to SIBs in the UK, Israel and Canada.

	UK	Israel	Canada
SIB motivation	High, centralised	Low	Moderate, decentralised
SIB commitment	High	Low	Moderate
SIBs implemented	47	4	6
SIB-centred formal policy initiatives	12	0	2

This paper's analysis of SIBs as a new form of financialised state activity draws on two studies led by the authors. While the state financialisation literature generally relies on documentary sources or a small number of interviews (e.g. Pacewicz 2013, Livne and Yonay 2016, Trampusch and Fastenrath 2021), both studies were informed by a larger number of semi-structured interviews with senior state officials,⁵ thus providing a more diversified and exhaustive view of SIBs as a financialisation project. The first study explored SIBs and the funding of social programs in Canada, the US, and UK, and included 196 interviews with public officials, SIB practitioners, investors, and social services providers. The second study focused on Israel, Canada, the US, and Finland and explicitly approached SIBs as a case-study of state financialisation. Thus far, 97 interviews have been conducted, the majority with senior public service officials who shared their first-hand experience with SIB development.

While informed by insights from the totality of interviews from both studies, this paper draws from a specific subset of interviews from each study. These interviews were conducted in Canada, Israel, and the UK, primarily with government officials, but also with SIB specialists and other members of the SIB ecosystem (e.g. social service providers) who spoke directly to the role of intra-state tensions. The breakdown of these 115 respondents by country and sector appears in Table 2. Both studies also analysed textual sources, including government documents and grey literature reports, and the paper draws on these sources as well.

Table 2. Respondents by country and sector.

	Canada	Israel	UK	Total
Government officials	13	41	8	62
SIB practitioners	7	4	13	24
Other partners	4	5	20	29
Total	24	50	41	115

4. Findings

Our findings reveal a market that has struggled to live up to expectations. Despite initial signs of promise, particularly in the UK, SIBs in all three national contexts have struggled to achieve the expected growth and scale. Our findings reveal that the introduction of SIBs as financialised statecraft encountered three specific challenges each of which reflects distinct dimensions of financialisation. The first set of limits we discovered was political and reflected existing power struggles. State actors in all three countries attempted to harness financialisation as an instrument of power to advance intra-state change. Financialisation was propelled not by its inherent merits, but by its strategic or tactical value and was contested on these same grounds by those adversely impacted. These political valences and corresponding struggles were evident in each national context, but their specific shape was informed by distinct SIB agendas framed in terms of longstanding political goals and struggles.

A second set of limits reflected the socio-technical dimensions of financialisation (Muniesa et al. 2017, Chiapello 2020). Even where public officials sought to develop SIBs, these efforts were undermined by difficulties in operationalising the model and making it work in the context of public sector budgeting, contracting, and procurement. Implementation requires that public organisations adopt new practices which contest and sometimes even violate well-established routines and rules of financing and accounting in government. SIBs’ future-oriented nature created additional risks and liabilities for proponents, and senior finance officials struggled to account for SIBs and quantify their benefits. In short, as an avant-garde model of finance, SIBs disrupted conventions, making them a liability and a potential source of conflict.

The third and final set of limits pertains to the cultural dimension of financialisation (Haiven 2020). In all three countries, SIB development was led by SIB practitioners (many of whom had backgrounds in finance) who represented the professional identities and values of finance. The public service ethos of government officials, including a devotion to serve the public good and a professional commitment to the wellbeing of service users, combined with limited familiarity with finance, meant that public officials were wary of finance and skeptical, even distrustful, of financial actors, ideas, and practices.

While present in all three national contexts, these elements varied in their intensity and were combined in slightly different ways, a reflection of distinct agendas, pathways, and motivations underlying SIB development. Seising on SIBs as a political tool, the UK central government encountered opposition from local governments, with the failure to engage local officials representing a main barrier to the expansion of the model. SIBs’ disruptions of, and ongoing tensions with, entrenched socio-technical routines and accountabilities in government represented a main barrier to financialisation in Israel. In Canada, contrasting cultures and identities of the public and financial sectors and consequent concerns about financial interests were a main hurdle to SIB development. To tease out these dynamics and their implications for the SIB enterprise, and for our understanding of state financialisation more generally, we now turn to a focused discussion of the links between SIB agendas and pathways and the specific opposition we found in each national context.

4.1. UK

While the UK was the first into the SIB space, credited with pioneering the SIB model and facilitating its global spread, one of the unique features of the UK SIB enterprise is its deep roots in central government. While initially conceived by the Labour government, much of the impetus for the growth and expansion of the model came from senior elected officials in the Cameron Conservative coalition government, a point noted by a former member of central government:

[Nick Hurd and Oliver Letwin] were both very interested and prepared to … talk to Cabinet colleagues and talk to other ministers, talk publicly, and make the case for social investment and SIBs. That gives you quite a lot of ability to make stuff happen. So there's that element, the interest and willingness to really push it from central government. (UK Respondent #58).

SIBs were also propelled by Ronald Cohen, an elite financial actor with close ties first to Labour and then to the Cameron government. SIBs thus reflected the synergies between political and financial elites in the UK (Davis and Walsh 2017), with backers in central government spearheading the development of the SIB enterprise. The rollout of SIBs was also bolstered by the programs of austerity and social investment, with private finance viewed as a way to rationalise and offset government cuts. This twin strategy also dovetailed with a third pillar of the Conservative coalition government, the localism agenda (O’Brien and Pike 2015), part of a longstanding effort to reduce the sise of central government and shift responsibilities to local authorities, a cause which gained traction in the post-financial crisis landscape. As explained by a private consultant who worked closely with local governments, ‘The drive very much then, which suited the narrative of spending cuts, was actually you trim the centre and you delegate responsibility, you devolve responsibilities to the local’ (UK Respondent #64). However, at the same time, central government actors were eager to retain some control and pushed for a vision of public sector reform tied to the development of cost-effective solutions to entrenched social problems. SIBs represented an opportunity to realise this vision, a way to leverage fiscal pressures on local authorities (SIBs were one of the only new sources of funding) to adopt a contracting approach explicitly tied to payment for outcomes. As noted by a SIB practitioner in close contact with members of central government, SIBs were ultimately about control, ‘I think the main agenda behind the whole SIB thing has been to change the way … government authorities work … .This is central government trying to change the way local governments behave’ (UK Respondent #47). This strategy, and the influences of austerity, social investment, and the localism agenda, was reflected in a significant shift in the UK SIB enterprise. While the first projects were tied to central government departments (Ministry of Justice; Department of Work and Pensions), the focus quickly shifted to developing projects at the level of local government (Dear et al. 2016), with government-backed outcomes funds (e.g. Commissioning Better Outcomes; Life Chances Fund) explicitly tailored to local projects.

This political agenda and pathway of development shaped the barriers to SIBs in the UK. While there was a steady supply of capital for these projects (thanks to Big Society Capital), the challenge for SIB practitioners and members of central government was engaging local authorities, particularly commissioners – the public officials responsible for procuring services from non-state providers. As noted by a respondent who worked at the Cabinet Office during the early days of SIBs noted: ‘Quite quickly it become quite clear that there was a fair bit of money out there in terms of investors willing and able to invest … .What was missing, or what was slowing things down was commissioners. They weren't commissioning’ (UK Respondent #58).

While members of central government and financial intermediaries attributed this unwillingness to engage to a lack of capacity and expertise, a more critical factor was opposition to the political agenda of SIBs and its ties to austerity and social investment. Local officials saw SIBs as a central government program designed to administer cuts and force local authorities into a financialised vision of programming, budgeting, and service delivery. As a consultant with experience in SIB development at the local level explained:

It was very clear that commissioners did not think the process was working for them. They thought that [SIB practitioners] didn't understand what commissioning meant and so they thought that SIBs was just this fancy central government idea. And you just need to jump through all these hoops. And if you do that, we will give you some money at the end of it. And quite a lot of them just wanted to show the finger to government (UK Respondent #64).

There was also a disconnect between SIBs as an investment-based model and the fiscal realities confronting local officials who did not see how repayable finance could help to solve their problems (UK Respondent #1). Thus, like the City Deals initiative⁶ examined by O’Brien and Pike (2015), SIBs unfolded against the backdrop of enduring tensions between central and local government in the UK and the effort to devolve responsibility for social services (in the interests of fiscal savings) while still retaining central government control. They represented a new tool in an older fight, a reflection of the political dimensions of state financialisation and resistance to financialisation as a political strategy inside the state.

Tensions rooted in cultural differences also frustrated the SIB enterprise. Far removed from the world of London-based finance and lacking experience and familiarity with investment-based models, members of local authorities were understandably suspicious. They distrusted the motives of investors and SIB practitioners, viewing them as contrary to the public sector ethos. One member of a UK local authority admitted to ‘a general bit of suspicion of anything to do with investment … because it's quite difficult for me to understand. So it's in the difficult box and I prefer the simple world where everybody in the public sector is really lovely and anybody else who is making money out of things is somehow tainted’ (UK Respondent #9). The language and specialised terminology of finance often triggered further suspicions and had an alienating effect. Those in local government were put off by SIB advocates’ emphasis on the financial features of the SIB model, a fact noted by a SIB practitioner: ‘Even just by calling them social impact bonds, it makes it all about the financing and the financiers … .But … it doesn't mean you always need to talk about it. Because other people aren't so interested in that stuff’ (UK Respondent #55). In particular, several respondents noted the focus on ‘boxes and arrows,’ a reference to the conceptual diagrams used in presentations on the SIB model, ‘The evangelicals who are trying to change [commissioning] come from a finance background mostly. So there is a danger of them intuitively feeling as though multiple boxes and arrows are a good thing by themselves. I come from that background. And I hated it there. And it doesn't work here’ (UK Respondent #47).

The combination of these political and cultural dimensions of financialisation clearly affected the UK SIB enterprise, but socio-technical barriers were also evident at the level of local authorities and within the UK Treasury. A member of a local authority spoke to the tensions between financial conventions and considerations of public sector budgeting:

Institutionally, the way that we do our public financing is very different to the way a hedge fund manager works. So on the one hand these investors are talking about return on investment and net present value, and public financiers are talking about base budget for this year and if we don't spend it now, then it won't be there next year. And so there's a discrepancy between the market that's actually going to finance a SIB, how you access that, versus the way that you actually account for it at a council (UK Respondent #51).

Within the Treasury, the challenge was less how to make the model work and more how to account for its purported economic benefits leading to clashes between SIB advocates and fiscal gatekeepers (Golka 2019). A former member of the Cabinet Office referenced this tension: ‘[Treasury] have a pretty high bar for accounting for savings’ and are looking for that ‘really, really hard economic evidence that an intervention has had this outcome which has had these savings or costs avoided’ (UK Respondent #58). Given the strong support for SIBs in central government, these socio-technical barriers were more easily addressed in the UK than elsewhere.

4.2. Israel

Despite enormous efforts by influential non-state advocates, SIBs never made inroads on the Israeli state agenda. As a result, and unlike the UK, no formal policies have been developed to promote SIBs. The country's four SIBs only came to fruition because of the relentless efforts of Social Finance Israel (SFI), formed in 2013 as the Israeli branch of the International Social Finance Network. SFI staff, many of whom have backgrounds in finance, spent hundreds of hours meeting with politicians and senior bureaucrats from the Prime Minister's Office, Ministry of Finance, Ministry of Law and the social Ministries. Yet all efforts to secure a SIB champion or to establish an Outcome Fund in government failed.⁷

In Israel, socio-technical barriers were prominent in limiting SIB-oriented financialisation. SIBs offer overburdened governments the ability to design new services and reduce future spending, but fiscal authorities within the Israeli government were skeptical about the value of the model and challenged by the structures and routines it required. According to one SFI official, the anxieties of state officials were central to SFI's inability to mobilise the state (Israeli respondent #15). Reflecting on personal experience, another senior SFI official said:

Ultimately you confront mental and bureaucratic difficulties … accountants and legal advisers [in government] can't wrap their heads around it, and there's [un]willingness to take risk and enter a project that is different from everything you have done before … from the government's standpoint, the concept [of SIBs] is stunning, it's a blessing … .The challenge is technical, bureaucratic (Israeli Respondent #58).

The challenges, however, were not merely technical, but reflected opposition to what was viewed as a risky form of institutional change. Such opposition emerged from specific government units, such as the Accountant General (AG), responsible for reviewing the state's outflows and dictating legally binding procedures. A senior SFI official explained how SIBs disrupted these routines and the power relations they sustained:

You practice your work with absolute control … you ask all the questions, you have the ultimate power. And one day these interesting, weird people come and say: ‘Let's do business together, but you must forfeit your control.’ And consider you’re always in full control [of] everything. Everything! And suddenly SFI comes and says: ‘Hold a minute! We provide investors' money, so you have no say. You only gauge my results and if I deliver – you pay!’ Psychologically, if someone's used to work in a certain way and you come over and say: ‘Do that, and surrender some control.’ That's awfully difficult (Israeli respondent #60).

The AG's decision to abolish the SFI exemption from tenders in 2022 – thus making the development of SIBs even more lengthy and cumbersome – provided a practical response to the socio-technical challenges posed by SIBs. For SFI, this meant the state had decided to shut the door to future SIBs (Shachar 2022).

After its failure to mobilise pivotal state actors, SFI tried approaching specific government organisations and public service units and offering SIB-based solutions to their problems. But accountants and budget officers in these organisations had difficulties as well. The following concerns were raised respectively by a senior budget officer and a senior accountant, working for government organisations involved in two different SIBs:

[The model] is complicated … If someone is willing to finance a [social] program and then wants a monetary reward that [will be paid out of what] you allegedly earn in the future, it raises big doubts: are you actually [saving] money if it works? … How confident can we be about it? Because the return should be financed with new [savings] we procure. It shouldn't cost money. But if you’re wrong, you could end up paying public money without justification (Israeli Respondent #21).

Mixing public money with private money worried me … .[Normally] the government collects tax and we receive it in the form of budget … and spend the money. Here, it's not budget money but actually a private market. [It was a challenge] to price a reasonable return on these [private] monies, allowing [SFI] to solicit investors without paying excessive return. I was also worried about our ability as a Ministry to monitor and make sure we get the outcomes we want before paying [investors] back (Israeli Respondent #37).

In short, SIBs disrupted established routines and introduced new missions, such as calculating future savings or deciding which government unit or ‘budget pocket’ would pay for outcomes.

Lacking formal authority, SFI gradually learned to build ad-hoc coalitions with politicians, senior managers, and other powerful allies in government to support the creation of tailored SIBs. However, coalition-building necessarily excludes some stakeholders and may trigger opposition, as evident in one of the first SIBs advanced by SFI in the area of community-based rehabilitation of released offenders. SFI aligned with two powerful state actors: Ministry of Finance (MoF) and Ministry of Public Security (MPS). The Prison Rehabilitation Authority (PRA), a small professional unit responsible for these services, was excluded. The SIB followed a contested history between PRA and MoF. Interviews with public officials revealed the MoF Budgetary Division had intentionally withheld budgets from PRA to enforce a neoliberal reform agenda (cutting costs, outsourcing service delivery) by folding the unit into a bigger Ministry. While PRA withstood numerous reform attempts in the 2000s, the SIB gave MoF and MPS an opportunity to reanimate this agenda. A PRA official commented:

We are an independent state unit. Every year there's a struggle: will we become subordinated? … It's creeping privatization … The MoF tries to scatter and dilute our services … and shut us down to save costs … .We opposed this move, so we were like a thorn in the MoF's side … .We have insufficient resources, and every year we complain, and the response is: why are you blocking the reform? The MoF kept toying with us until this SIB came along and it was like a magic bullet for them (Israel Respondent #16).

The SIB thus offered MPS leverage to integrate PRA, reducing perceived costs and inefficiencies and giving MPS greater control over rehabilitation.

Facing a coalition of powerful state actors, together with SFI, PRA officials felt the SIB was forced on them. The PRA's main priority, channelling more resources to underfunded target groups, was ignored. A senior PRA official said bitterly:

Their plan was to take a chunk of our activity, expropriate it from us and give it to the SIB. And the MPS was rendered as an outcome payer, not the PRA … All the budgetary aspect … was expropriated from us. It's like the MPS agreed to take prisoner rehabilitation on itself, like, ‘I’ll finance that for you’. And that has really awakened our demons, making us think: why? Because we don't belong to this ministry, so why is it willing to pay for the SIB? (Israeli Respondent #1).

Fearing the SIB would curtail its autonomy, PRA viewed financialisation as an imposition, an attempt to subordinate it to alien institutional interests and to end its distinct approach to prisoner rehabilitation. MoF and MPS applied considerable leverage to convince PRA to support the SIB, but after three years of tense negotiations, PRA – backed by the public sector trade union – scuttled the project just before the official launch.

In addition to these socio-technical and political factors, SIBs have been frustrated by tensions between ‘finance culture’ (Haiven 2020) and the culture of the public service. Public officials had limited knowledge of finance and were wary of the sense of privilege exuded by SIB practitioners. An Israeli official involved in an ongoing SIB commented:

I don't know if you visited SFI's offices? So, I was suspicious [chuckling] because it's located in this posh tower in Tel-Aviv, and that's what it communicates, something cold … .OK, let's be clear: it's not low-priced, OK? This stands in contrast with the Ministry, we’re very much ‘of the people’ in my view (Israeli Respondent #32).

Suspicion was heightened by certain norms and customs of the financial world evident during interactions. Practices such as signing confidentiality agreements and protecting investors’ anonymity contributed to the alienation of public officials who saw them as threatening entrenched public sector norms of transparency and disclosure (Israeli Respondents #1, #11).

The public sector ethos, namely a professional commitment to serving the public good, was another factor in public officials’ opposition to SIBs: ‘There is always a tension between private investors’ interests and the public interest and we … I think are the brightest minds of the public sector to guard the public sector's interests and the public interest against private investors’ profit maximization interests’ (Israeli respondent #47). The interviews revealed discomfort with the perceived stature of SIB practitioners and investors relative to public sector officials, a reflection of the elite status of financial professionals explored by Ho (2009). Government officials also experienced status asymmetry and viewed negotiation with SIB practitioners as an ‘unfair match’ given the latter's financial expertise (Israeli Respondent #21).

4.3. Canada

SIB agendas in the UK and Israel had clear champions: the central government in the UK, and a SIB intermediary (SFI) in Israel. However, Canada did not have such a passionate advocate. SIBs received strong symbolic support through public statements from the Federal and several Provincial governments, and senior public servants expressed interest in SIBs’ potential to promote partnerships and innovation inside government (CDN Respondent #19, #20), but these expressions of interest failed to translate into a firm commitment and were not backed by a coherent SIB agenda. To the extent that projects were pursued, they were driven not by political or financial elites, but by policy entrepreneurs scattered across Federal and Provincial departments seeing the SIB model as a way to address specific challenges or to boost their units’ profiles. Loose alliances formed between these policy entrepreneurs and a single intermediary, the Toronto-based MaRS Centre for Impact Investing, which was principally focused on the larger market in impact investing but established a small team devoted to SIBs and advocated for the model outside government.

Canada's failure to develop a coherent SIB agenda may be explained by the absence of the kinds of conditions and pressures evident elsewhere, particularly in the UK. Canada escaped the worst effects of the GFC and was not subject to the same austerity programs. In addition, with a comparatively more robust welfare state, the country lacked the degree of privatisation and marketisation prevalent in other national contexts. Indeed, concern with the potential of SIBs to trigger exactly this kind of transformation inspired opposition to the model in public sector unions (e.g. NUPGE 2014, CUPE 2020) as well as inside government. The former used their considerable power to oppose SIBs, linking them to a privatisation agenda (NUPGE 2014). A SIB practitioner involved in developing several SIB projects spoke directly to this opposition: ‘I think there has also been a lot more organised opposition to the introduction of these vehicles than elsewhere … .Public sector unions have been far more willing to call this bad names, privatisation, wolf in sheep's clothing, and frankly spread from my perspective disingenuous information’ (CDN Respondent #1). The head of a social innovation unit in the Federal government suggested opposition was not limited to public sector unions:

Within government, there are voices who are equally skeptical … .There is this view that it's got something to do with privatizing the provision of social service. And no matter how many times you tried to communicate that it's more about partnerships, and growing the pie … of capital available for tackling complex social challenges, there's still this core belief out there, perception that something about it is not appropriate. Like it's crossing a boundary of some kind [toward] a slippery slope (CDN Respondent #19).

By the same token, in its public hearings, a Steering Group tasked with developing a Canadian Social Innovation and Social Finance Strategy faced opposition from public sector unions and encountered explicit skepticism from those in government; its final report only briefly mentioned SIBs acknowledging the ‘strong opposition among some stakeholders’ (Employment and Social Development Canada 2018, p. 15).

Alongside this opposition to SIBs as an imagined political strategy was a set of cultural influences which frustrated the Canadian SIB enterprise. A clash between the public service ethos and the motives of finance and investors mirrored that in the UK and Israel. A senior official working for the Canadian government viewed SIBs as a threat to public officials’ commitment to the public interest and their sense of professional identity:

There's also a perception threat behind SIBs in general. And that being, if the idea isn't baked, before we bring the investors in, there is the perception risk that we are at the mercy of the private sector, and therefore, it's not about the public interest anymore. … .[If we] make it easier for them to get their return on investment back, well, then we’re gaming the system to benefit the private sector, as opposed to benefiting the Canadian public that I’m supposed to represent. (CDN Respondent #22)

Beyond this direct clash of cultural values and professional norms, SIBs were impacted by the risk-averse nature of the Canadian public sector. As a novel financial innovation, SIBs were viewed as inherently risky and thus a potential threat to the reputations of public officials. Respondents suggested that SIBs appear to breach entrenched norms of public accountability, requiring public officials to tread carefully to avoid transgression (CDN Respondents #21, #22, #23, #24). As in Israel and the UK, fiscal gatekeepers were opposed to SIBs’ disruptive nature. In a reference to the Treasury Board, a Canadian respondent said, ‘They are like a policeman. They are not an enabler. And they should be … .So there's internal barriers in government that are inhibiting some of this stuff’ (CDN Respondent #14).

These cultural norms and heightened political risks exacerbated the socio-technical challenges underlying SIBs. Government officials were less willing to push the limits of established rules or to wade into ambiguous legal territory, as these moves (and thus SIBs themselves) would require significant expenditures of ‘political capital’ (CDN Respondent #4). A senior Canadian official described how these concerns led to the abandonment of what would have been Canada's first federal SIB:

All of a sudden theory became reality, and that's when everything really slowed down and people got really nervous about exactly how the money will be spent and how will you track the money and if you say there's been a rate of return for the government how are you going to measure it? And of course we do accrual accounting in the federal system and the idea that we would invest money now that would see a return on investment in five or seven or 10 years kind of contradicts how we track money in the system. So it became very difficult for people to sign on the dotted line sort of thing (CDN Respondent #13).

Thus, in the Canadian case, SIBs were triply frustrated: by political opposition from within the public sector, by the lack of a coherent agenda, and by a cultural ethos ill-suited to financial innovation and its socio-technical requirements.

5. Conclusion

This paper explored the SIB enterprise as a case of contested state financialisation. While SIBs symbolise the greater financialisation of social services, the analysis reveals a model that has struggled to take hold and fallen short of expectations. Our findings have two main theoretical implications for the state financialisation literature. First, intra-state relations – and not only state-finance relations – form an important yet overlooked variable in state financialisation processes. Vertical and horizontal tensions and conflicts may delay, constrain, and even obstruct the development of financialised statecraft. While some argue that state-finance boundaries are increasingly erased as state policies embrace the ‘logic of the derivative’ (Bryan et al. 2020), our findings indicate the need to attend to political struggles inside the state in order to gauge the limits of financialisation in practice, thus affirming that state financialisation is neither automatic nor predetermined.

Second, we show that barriers to financialisation inside the state form around the political, cultural and socio-technical dimensions of financialisation. Like other intra-state reform attempts, the mobilisation of financial innovation takes place in the context of longstanding struggles over resources, power, and autonomy. When used as a strategic intervention in existing power relationships, a financial innovation attracts political hostility and resistance. Our findings qualify the argument that financial instruments provide state elites with ‘politically light’ solutions (Quinn 2019); rather, financial innovation's ‘hidden’ political costs may be revealed when intra-state relations are recognised.

In regard to the cultural dimension, our findings suggest that the conflicting identities and ethics of financial and public sector actors are likely to breed antagonism. Efforts to align these actors may succeed only when financial innovations are framed in a sensible way for state actors, and according to their particular needs and interests (Golka 2019). However, this almost inevitably means that other state actors will not be pleased (e.g. local government in the UK). Lastly, contrasting socio-technical routines of financing and accounting in the public and financial sectors can frustrate finance-oriented institutional change inside the state. While proactive and engaged political leadership may facilitate such change, counter-motivations (i.e. support for the status quo) by bureaucratic and/or professional groups and units will likely endure if core accountabilities are jeopardised and/or ethical-professional boundaries are breached.

Our findings also contribute to the SIB literature by shifting the focus from the model's animating logics, technical flaws, and broken promises to the more specific challenges encumbering the SIB enterprise as a form of financialised statecraft. In particular, it reveals the limitations of the more functionalist lens (Pitluck et al. 2018) which has informed some accounts of the SIB enterprise, especially those conceiving of SIBs as a response to the needs of finance and/or the state (e.g. Dowling and Harvie 2014). In recognising the motivations and agency of state actors, the influence of competing norms and worldviews, and the impact of devices and conventions ill-suited to the public sector, the implication is not that SIBs have been scuttled simply by stagnant or recalcitrant state actors, or incommensurable bureaucratic cultures. Rather, they reflect distinct barriers both within the state and between finance and the public sector.

Several key questions remain and should inform future work on SIBs and state financialisation. First, some might argue that our analysis overstates the demise of the SIB enterprise. While it is true that SIBs continue to be developed, more recent projects increasingly depart from the original SIB model, often excluding private investors. Instead, SIBs are being used to enable new forms of public service procurement and innovation. This drift away from the financial dimensions of SIBs underlines our main point. At the same time, it calls for research on these recent iterations and the extent to which they may entail more subtle forms of financialisation in the realm of social service contracting.

Second, there is the question of generalisability, or how this account of the limits of financialisation and its political, cultural, and socio-technical valences applies to other state functions. This remains to be seen. The challenge, as we see it, is identifying what makes one state function or domain more or less susceptible to financialisation. Future research should move beyond intra-state struggles to explore other variables underlying this propensity, including the type and scope of mediation between financial and state actors, elected and unelected officials’ professional background and experience, the socio-technical aspects of the interface between state bureaucracies and financial actors and markets, and the capacity to avoid or obfuscate risks associated with financial statecraft or, alternatively, claim credit for their success.

Acknowledgements

The authors wish to thank Philipp Golka, Daniel Mertens, Taylor Spears, Zeev Rosenhek and Natascha van der Zwan for their advice and helpful suggestions.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Additional information

Funding

This work was supported by Israel Science Foundation: [Grant Number 353/19]; Social Sciences and Humanities Research Council of Canada: [Grant Number 435-2016-1039].

Notes

1 Billionaire venture capitalist Sir Ronald Cohen leads the organization (established as a taskforce in 2013).

2 We use the term ‘market’ to refer to the evolving roster of SIB projects and associated market-building efforts, not to indicate market-like properties.

3 In the conclusion, we discuss the limits of SIBs as a case of state financialization.

4 It is difficult to provide precise estimates of government spending on SIBs as financial support comes in various forms including: direct contributions to outcomes funds and payment for outcomes; indirect subsidies for development programs; and the investment of time and effort on the part of government officials which is the most difficult to quantify.

5 Interviewees included civil servants employed by strategic policy-making agencies, senior officials in ministries and other state units, authorities and public organizations, and senior officials in local government (e.g., commissioners).

6 This involved providing local governments with greater autonomy to negotiate deals and to secure private financing for urban infrastructure projects.

7 Such a fund would facilitate paybacks to investors upon SIBs’ success, thereby building confidence among investors and facilitating SIB development.