social impact bonds
November 20, 2012 4:34 PM   Subscribe

Are Social Impact Bonds a good way to invest in public services? "Imagine a contract where private investors are paid by the government if there's a decrease in homelessness or convicts re-offending. It's a an idea that's taking shape in the UK and some US states. And now the Canadian government is considering piloting social impact bonds. Critics say it's a way of governments shirking their responsibilities." CBC's "The Current" reports.

Summary at the main link; show is audio (listen at the main link), 24 min. long.

Also covered on AlJazeera's The Stream program - lots of videos & infographics at the link; direct link to video is Betting on public good? (<--- story begins at this time-adjusted link, lasts about 20 min.; postshow lasts 6 min.)

*Toronto Star - Feds introduce controversial ‘social impact bonds’ to fund social services
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.

...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.
*NYT - Giving Back More Than A Warm Feeling: Investors profit by giving through social impact bonds
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.

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...
*wikipedia - social impact bond
* - social impact bonds
*Gov't of Canada Economic Action Plan - The Government of Canada is Taking Action to Address Local Challenges
*Knowledge@Wharton - Social Impact Bonds: Can a Market Prescription Cure Social Ills?
*NYT Opinionator - The Promise of Social Impact Bonds
*The Economist - Playing with Fire and Being Good Pays
*SSIReview: Social Impact Bonds: Lessons from the field
*Stanford Social Innovation Review - The Trouble With Impact Investing, Part 1: "There's only one bottom line. It ought to be impact." (Part 2 & Part 3)
*RCI (Radio Canada International) - Ottawa’s new social policy will mostly benefit private sector, says economist
posted by flex (28 comments total) 13 users marked this as a favorite
I'd worry about the metrics getting gamed.
posted by adrianhon at 4:43 PM on November 20, 2012 [6 favorites]

"Shuffling externalities around while giving money to the private sector. Great idea or greatest idea?"
posted by DU at 4:48 PM on November 20, 2012 [10 favorites]

Of Human Bond-age
posted by It's Raining Florence Henderson at 4:52 PM on November 20, 2012 [2 favorites]

posted by Ndwright at 4:53 PM on November 20, 2012 [7 favorites]

The bonds, which have caught on in a big way in Britain and the United States, are a source of widespread debate.

It's weird, but when I first read that I subconsciously changed the sentence to "a source of widespread abuse." It just seemed... more accurate.
posted by Orange Pamplemousse at 5:03 PM on November 20, 2012

Are Social Impact Bonds a good way to invest in public services?

posted by crayz at 5:21 PM on November 20, 2012 [1 favorite]

Oh God, not another bright idea from the Harper government. How long is it until the next election?
posted by Kevin Street at 5:36 PM on November 20, 2012 [4 favorites]

Hasn't some of this happened with the NHS? I thought I'd read an article talking about public/private partnerships with health services in the UK (or maybe it was "internal markets"?) that had raised prices and just generally screwed things up.

See, the commies talk about the "falling rate of profit", how there's less profits to go around so the rich have to keep screwing more and more out of the poor to live the lifestyles to which they've become accustomed, opening up new frontiers of exploitation - and I'd argue that this is one more example.
posted by Frowner at 5:36 PM on November 20, 2012

When we finally get rid of this bunch we're going to need a new government that has the courage and political capital to unwind all these stupid changes they're making. A simple placeholder administration with a different name on the party won't be enough.
posted by Kevin Street at 5:40 PM on November 20, 2012 [2 favorites]

This sounds like such, such a bad idea to me. Firstly, as adrianhon said, the metrics will be gamed. This always happens, but at least when you keep things in the public sector the government has an incentive to focus on real outcomes rather than arbitrarily-chosen success metrics. Then, too, public/private contracts always seem to be written in favor of the private sector. I have never heard of a private operator being pushed into bankruptcy because they can't make money from a government contract and they are held to its terms, but I've heard of lots of privatised government programs that seem to pour their money into a bottomless pit. And lastly, private operators always want to keep the problem alive. Look at the consequence of privatising prisons in the USA - the operators lobby for more punitive punishments, and they allegedly have made it harder for prisoners to get parole. This is a bad, bad, bad idea.
posted by Joe in Australia at 5:43 PM on November 20, 2012 [4 favorites]

It's an interesting idea, but I don't think there are many genuine reasons you would use Social Impact Bonds. The only SIBs that will be funded will be those activities highly likely to make a return for investors, i.e. highly likely to achieve real savings in public spending. Why would governments not fund these activities themselves and keep all the savings? Three reasons I can think of:

1) the government is petrified of risks, and so is willing to forgo part of the savings in order to create some room to shift blame should it not work;
2) the government cannot find, nor borrow, the money to pay the upfront costs to achieve the savings, leaving SIBs as the only remaining option; and/or
3) the government is making sweet-heart deals with the private sector.

For 1), if the program fails the government be blamed whether or not SIBs were used, so why not at least get to keep more savings. 2), if you can't find $5m to save $10m then you need to hire new financial managers, and 3), I suppose exciting new developments in corruption and sleaze are only to be expected.
posted by kithrater at 6:05 PM on November 20, 2012

So instead of creating social programs, effectively managing them, actively improving them so that they deliver the best possible services, and taking full responsibility if they don't, we're just going to dangle some money over the free market and hope the invisible Adam Smith fairies will fix everything for us?
posted by RonButNotStupid at 6:16 PM on November 20, 2012 [3 favorites]

I think California has learned the hard way what happens when you fund government services more and more through bonds. Among other problems, it leaves less and less room to vary taxes according to economic cycles. We really don't need more of this.
posted by BrotherCaine at 6:28 PM on November 20, 2012

I think the advantage of SIBs may be that taxpayers can avoid paying for crazy vain ideas dreamed up by local politicians.

For example, in my area a powerful congressman really wanted a commuter rail line through his mostly rural district. Surprise surprise, after spending $400 million on the project the train gets on the order of 2,000 riders per day (over $20 subsidy per trip).

If the government were required to take out "insurance" against that kind of financial catastrophe using SIBs, it could save a lot of pain. A private company would likely have foreseen the problems with the project, and charged a very high interest rate (or refused to lend the money at all).

That said, it is only suitable for projects where the results can be measured, and the metrics can't be easily gamed. I can't think of a whole lot of examples.
posted by miyabo at 7:30 PM on November 20, 2012

If the government were required to take out "insurance" against that kind of financial catastrophe using SIBs, it could save a lot of pain. A private company would likely have foreseen the problems with the project, and charged a very high interest rate (or refused to lend the money at all).

That's not how SIBs work at all. SIBSs are not muni-bonds: they are loans made by the private sector that provide money for reforms that will hopefully achieve positive social outcomes and reduce public sector expenditure, with some of that reduction then being used to repay the private sector loan.
posted by kithrater at 7:39 PM on November 20, 2012

I'd worry about the metrics getting gamed.

Are there statistics on what happens when public services get privatized? For example, do incarceration rates go up where there are contracts for private prisons, etc.? I'd worry about what the market dictates as priorities in this setup.
posted by Blazecock Pileon at 7:40 PM on November 20, 2012

Yes, I am using "insurance" in a very loose sense. Government pays a higher interest rate to a bank, in exchange for not having to pay at all if the project fails.
posted by miyabo at 7:42 PM on November 20, 2012

A Market-Based Solution® to the problems with capitalism.
posted by hamida2242 at 7:57 PM on November 20, 2012 [2 favorites]

If this ends up anything like the social housing quagmire in BC and Vancouver, then no thanks. In Vancouver developers get subsidized for building "affordable housing," which often means condos that have to be rented out by the owners at market rates—and these are market rates in the least affordable city in Canada. This is Vancouver's solution for building affordable housing. Meanwhile, condo tycoon Bob Rennie is appointed to the board of BC Housing, the organization responsible for social housing in BC, as patronage for supporting the BC Liberals in the last election. Yeah, private companies taking over public services is a great idea [HAMBURGER].
posted by Dr. Send at 8:04 PM on November 20, 2012 [5 favorites]

There is a gap between funding choices that are beneficial and funding choices that are popular.

Social bonds transform this problem because they risk investors money to fund an unpopular activity - such as assistance measures for violent sex offenders -
and are only paid for by the public once they are validated by achiving a popular objective - such as a reduction in repeat offences.
posted by compound eye at 8:14 PM on November 20, 2012 [1 favorite]

If social bonds become a tool for dumping social problems onto the private sector they won't be a positive development,
but if the become a tool that allows us to experiment with social interventions that would not be
palatable if they were fully tax payer funded they may be a tool for introducing more innovative social policy.

All of this relies on us being able to measure outcomes accurately,
as we begin to collect more and more data about people and there activities every year,
it may become possible to passively measure things that would have been impossibel a decade ago.
posted by compound eye at 8:29 PM on November 20, 2012

Critics have also questioned whether the bond program will lead to reduced funding for non-profit organizations supplying valuable but hard-to-measure services.

I'd be surprised if it didn't. The organization I work for made a controversial decision to cut a long-running, well-respected adult literacy program because not enough of the participants (who, upon starting the program, could read and write at only a middle school level) were deemed "successful" upon completion. The problem was that the definition of participant success was limited to "going on to enroll in college or university courses."

The number of participants for whom success meant
  • finishing their high school diploma
  • getting a better job with their improved reading/writing skills
  • acquiring the education, resources, and support to leave an abusive relationship
  • learning to read to their kids and improve their kids' literacy/school readiness
  • staying out of jail/not joining a gang because school gave them a purpose and goal
...none of those people were counted as "successes." Verdict? The program cost too much considering the "low success rate" (as defined by the evaluators, of course). FUNDING DENIED.

And I work in the public sector, not the private sector. I have a hard time believing that things would improve by putting these types of decisions in the hands of private investors.
posted by Secret Sockdentity at 9:24 PM on November 20, 2012 [2 favorites]

No, of course it won't work. Either it's implemented in the same way as it is in the pilot schemes now running to the sell the idea, with the investor indeed ponying up the up front costs of e.g. a rehabilitation scheme and being properly audited for success with well defined and agreed upon guidelines as to what this means --stop laughing at the back-- in which case nobody will likely want to invest because doing these things is hard and far from a safe investment. Or, more likely, this will be yet another private finance initiative boondoggle in which the government takes most of the risk and pays private companies to do the work.
posted by MartinWisse at 11:12 PM on November 20, 2012 [1 favorite]

do incarceration rates go up where there are contracts for private prisons, etc.?

That particular issue was (mis)managed a little differently here.

1. Claim that crime is up.
2. Stats show crime is down.
3. Undermine future stat collection.
4. Massively increase prison funding.
5. Funding decried as (largely) unjustified.
6. Funding decision reversed.
7. While Colorado and Washington legalize marijuana, Canada institutes new mandatory minimums.
8. Wait for convict population explosion.
9. "It's too expensive! We must privatize!"

... 10 Profit!
posted by Durn Bronzefist at 11:26 PM on November 20, 2012 [3 favorites]

The problem with this is the same one that resulted in wall street ripping of municipalities with their bond schemes.

Modestly paid and overworked government staffers with no substantial skin in the game will always be outgunned by highly paid clever private lawyers and business people with profit incentives. Essentially you are making a deal with the devil and unless you are completely and accurately confident your contract is airtight you will find you have lost your soul.
posted by srboisvert at 9:08 AM on November 21, 2012

From the main link, the CBC radio audio bit, I've transcribed David MacDonald's interview since I think it'll be of interest here.
I put bold arrows in on the relevant points since this is quite long - they are worth reading if you didn't have a chance to listen to the audio.

This transcription starts at about 16:20 on the audio track and ends at about 23:35 at this pop-up link. Any errors are mine.
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.

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.
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.
posted by flex at 10:57 AM on November 21, 2012 [1 favorite]

Thank you, flex. That really helps! And your transcription will still be in this thread long after the CBC link goes away. Very useful context for anyone who might come across this discussion in the future.

MacDonald's point about putting a middleman into a relationship that doesn't need one is very accurate. That's what happens in so many cases when things are privatized: extra parties are introduced that increase costs without adding any benefit. The Conservatives no doubt believe that the free market will find better solutions to social problems than the government can, so it's searching for ways to create markets where they didn't exist before. But the kind of problems governments solve (in this case creating a better social safety net to help the most marginalized among us) just can't be redefined that way.
posted by Kevin Street at 3:22 PM on November 21, 2012

The Free market can solve all our problems!!!!
posted by delmoi at 4:57 PM on November 21, 2012

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