The federal government is introducing a controversial new approach to funding social services called “social impact bonds” that can turn a profit for private investors. Prime Minister Stephen Harper’s Conservatives, who have often been accused of short-changing social programs, view the bonds as a valuable source of fresh funding for Canadian communities.*NYT - Giving Back More Than A Warm Feeling: Investors profit by giving through social impact bonds
...Under Finley’s proposal, the government would contract with a non-profit organization or a private, for-profit business to supply a service, such as building affordable housing, counselling ex-convicts to keep them from reoffending, or working with at-risk youth. Funds would be raised from investors or charities to finance the project and, if the goals of the project were reached, the investors would be repaid their original investment plus a profitable return by Ottawa. If the project’s goals weren’t met, the federal government wouldn’t pay. The bonds, which have caught on in a big way in Britain and the United States, are a source of widespread debate. Many praise the idea as an innovative strategy to tap private capital and market discipline to address underfunded social goals.
But critics say the bonds privatize social objectives in a way that gets governments and the public off the hook for paying for needed programs. “It’s a commercialization of social values,” said David Macdonald, a senior economist at the Ottawa-based Canadian Centre for Policy Alternatives. One of the foremost questions about this funding model concerns how the outcomes are measured to decide whether it’s a success that leads to a payout for investors. Macdonald said private-sector investors will learn how to arrange the project and the eventual performance assessment in a way that ensures they don’t end up holding the bag.
“What will probably end up happening is that the government will pay dramatically more for programs that 10 years ago would have been funded because they were good ideas,” he remarked. “Now they’ll run them through this bond system, whereby some private financier makes 10 per or 20 per cent on their investment rather than the government evaluating a good idea and saying, ‘Yeah, that’s a good idea, let’s fund that.’ Critics have also questioned whether the bond program will lead to reduced funding for non-profit organizations supplying valuable but hard-to-measure services.
The seven teenagers sit with their feet tucked under tan desks in a classroom in New York City’s Rikers Island jail... The adolescents are part of a new program aimed at building personal responsibility and life skills, with the goal that fewer of them will re-offend. The program is financed by an innovative mechanism called a social impact bond, one of a handful of ways that philanthropy is trying to tap new pools of funding to produce measurable social results. If the program succeeds in significantly reducing recidivism, the “investors” paying its upfront costs — in this case, Goldman Sachs, with backing from Bloomberg Philanthropies — will be repaid by the city with a modest return. If the program falls short, the investors lose their money, sparing taxpayers the costs of the program.*wikipedia - social impact bond
The “social impact bond,” also known as a “pay for success” bond, is the latest — and most discussed — tool in a broader playbook philanthropists are using to blend business and charity to make a bigger difference. Sometimes known as impact investing, these approaches include providing low-interest loans to nonprofits, making equity investments in companies that tackle social problems and investing a portion of a foundation’s endowment in enterprises that produce measurable benefits to society and a financial return...
HOST: Well, blending business and charity in the hope of making a bigger societal difference may sound promising, but my next guest is skeptical. David MacDonald is an economist with the Canadian Centre for Policy Alternatives, and as a policy, he doesn't think social bonds are much of an alternative. David MacDonald joins me from Ottawa. Hello to you.I hope the bold arrows stand out enough! It's repetitive because it's radio and you have to make your points over and over in the short time you have to get people to remember them, but I think he got across some smart rebuttals to the whole idea there.
MACDONALD: Hi, thanks for having me.
HOST: You're welcome. You just heard Minster Diane Finley [Canada's Minister of Human Resources and Skills Development] talk about bringing social impact bonds to Canada, or at least considering it. What are your concerns about that?
MACDONALD: I-- I don't think there's any surprise that non-profits are open to this idea, like Mr. Eccles in the UK. The backdrop of this is that we've seen, uh, cutbacks in terms of social-service spending. These agencies require money to run programs that they know are going to work, they've been tested elsewhere, uh, and the problem is that they need money, and so it's not surprising that they're open to this idea.
---->>> But this is really a significant change in terms of how we provide social services. It used to be that governments would fund good ideas, and everyone would benefit: the people who were receiving the services, the social, uh, social-service agencies and so on. But now essentially we're putting in a middleman. The government is still paying, we need to remember, but the middleman is being put in with a middleman mark-up. Uh, in programs in the-- in NY, for instance, we're seeing folks like Goldman Sachs and other bankers becoming involved, and these folks are there because they smell an opportunity to make profit, government-guaranteed profit. Uh, and remember, these are-- these are the types of firms that took down the world economy not-- not four years ago.
Uh, and so I think what these types of bonds do is they change who's at the front of the line and who we're serving. Uh, it used to be that we would fund good ideas, to, y'know, to provide service to people who'd run afoul of the law and were trying to get a second chance, uh. But the problem here is that now we need to pay a middleman mark-up to shareholders, and they are the people at the front of the lines. Uh, and so I think that's my real concern here. <<<----
HOST: We heard the Minister say this would not be instead of government delivering services, Diane Finley says it's in addition to government spending; does that give you any reassurance?
MACDONALD: Well, the backdrop here is that governments have been cutting back on this type of social-service expenditures, so it's no surprise that these non-profits are looking for another source. Uhhh, so that-- that the real challenge here is how do we get these folks more money? We pay a middleman, like Goldman Sachs and other bankers, a seven-, 10-, 15-percent markup? Or do we borrow at historically low rates to fund the types of programs that are designed in such a way, um, that they return a benefit to the government, in terms of lower expenditures on prisons, for instance, uh, as well as, uh-- an obvious benefit to the people that are trying to get a second chance?
HOST: Aside from the money going to the quote-unquote "middleman", I mean, is there evidence that the program, the actual public-private partnership, is not a good idea?
---->>>MACDONALD: Well, what we've seen in other places, uh, is that-- is that the investor demands to be paid. So they will require to be paid, uh, and you can't really-- I mean there is no big risk being transferred here, it's not that bad programs won't be paid for and good programs will be paid for. Uh, the fact is, is that if you, uh, said to Goldman Sachs, "Sorry, you didn't hit your 10-percent goal of reducing recidivism, it's only 9-percent, we're not going to pay you a dime," and Goldman Sachs takes a bath for five million dollars, they're not coming back next year to fund your program.
So, in-- in essence, shareholders are at the front of the line, uh, and there is a real alternative here, it's not that this is, that there isn't an alternative. The alternative is-- is, we could create a commission that funds good ideas, ideas that have been proven in other places, on smaller scales, in other jurisdictions, and so on; borrow at historically low rates, 1% is what big Canadian bonds are going for right now, so historically low rates; uh, and provide the benefits to more people, uh, by-- by providing bigger programs instead of providing the benefits to Goldman Sachs and shareholders. <<<----
HOST: One of the other, um, y'know, reasons that proponents of social impact bonds, um, say they're a good idea is that-- y'know, they really reward innovation. Diane Finley said as much, she said, y'know, homelessness is an example of an issue where programs haven't really made a significant dent in the past decade, so, could social, um, uh, bonds attract some new approach, do you think, that's more effective than what we've seen out there already?
---->>>MACDONALD: The people who are experimenting are the social-service agencies with their own money and usually with government money. Investors don't want to lose money. They want to make money. And so they're not gonna bet on something that's maybe a 50-50 chance of working. They want to bet on something that has worked elsewhere, uh, that's worked in other jurisdictions, that's worked on a smaller scale, and they're just scaling it up.
'Cause the fact is, it's not a mystery as to why people stay homeless, it's not a mystery as to why people go back to jail. Social-service agencies will tell you what the answers are. These people need skills, they need a job, they need a place to live, they need social supports. And those things cost money.
Now the government's been cutting back on that money, but simply putting a middleman into the equation and giving them a mark-up doesn't make the programs any more viable, or any more likely to succeed. <<<---- And so I think in the end, what we need to do is, let's pick these good ideas, let's fund them so that taxpayer dollars are not going towards the profit margins of Goldman Sachs, but they're actually going to give, uh, y'know, someone who's run afoul with the law a second chance, or they're going to give, uh, someone who's living on the street, a chance to live in-- in a house and live with a bit of dignity.
---->>>HOST: Do you see any role for the private sector in-- in funding social programs going forward?
MACDONALD: Well, there's a big role for the private sector in terms of funding social programs, it's to pay their taxes. Just like everyone else. Uh, it's not to shirk their taxes by hiding money in a tax haven, or-- or playing with loopholes in the tax system, it's to pay their fair share so that we can provide these types of programs at low cost and provide them to the most amount of people that we can. So it's really the people receiving these social services, the people in need that are at the front of the line, and not the profit margins of the bank.
HOST: Well, how is-- are these kinds of bonds different than the millions of dollars donated each year by the private sector to organizations already addressing social issues in Canada? Where do you see the difference?
MACDONALD: Well, in-- in the case of donations, those donations are not being paid back with a profit from the federal government, which is the case for social bonds. Social bonds are a way, uh-- for-- uh, for companies to get paid back with a profit. If you donate to a charity, you get a-- you get a bit of a break on your taxes, but you don't get all of that money back and then some. And that's what social bonds are. These-- these companies are going to get all the money back they put in, and then some; probably something like 7% in the case of the UK, or 13% or 15% in the case of other projects. <<<----
HOST: David MacDonald, when you hear that the government is considering social, um, impact bonds, what does that say to you about the direction we're heading, when it comes to social programs in our country, in Canada?
MACDONALD: Yeah, I-- I think it's concerning, as we're seeing this trend of cutting back on social programs in any event, um, but what's happening is you're seeing, uh, actual social program funding being crowded out, uh, by middleman mark-ups, by the profits of Goldman Sachs. Uh, the government's going to pay either way, uh, and they're going to pay with a profit, uh, and so what we're going to end up seeing is, we're going to see social costs for social services, through types of programs like these social impact bonds, will actually go up, while we serve a fewer, uhhh, a declining number of people because we have to pay the middleman in the middle.
HOST: David MacDonald, we appreciate your time this morning.
MACDONALD: Thanks for having me.
HOST: David MacDonald is an economist with the Canadian Centre for Policy Alternatives. He's in Ottawa this morning.
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