Social Impact Bonds, no substitute for long-term public funds

Social financing gives governments a risk-free way to move to cheaper solutions
By Les Wittington, Toronto Star, November 9, 2012
Ever since Conservative British Prime Minister David Cameron’s government tapped private investors for a project to keep ex-convicts out of jail, tight-fisted governments around the world have been eyeing so-called social financing as way to pick up the cost of their own programs.
In the British project, the most advanced experiment anywhere using “social impact bonds (SIBs),” non-profit groups funded by private investors are working with former inmates from Peterborough Prison.
The success of the two-year-old project will be measured over the next six years to see if the social workers can bring about a drop in the dismaying rate at which ex-convicts reoffend. If that happens — and only if that happens — the private sector backers of the bond will be repaid their original investment, plus a profit.
It’s a model that has spawned imitators in Australia, the United States and other countries, now including Canada.
“With SIBs, all the financial risk involved in scaling up a social program rests with the investors who will be paid only if performance targets are achieved,” McKinsey & Co., the U.S. management consulting firm, says in a study.
“SIBs can give government a risk-free way to transition from existing remedial efforts to higher-impact, less costly preventive solutions,” the company said.
Stephen Harper’s government, which has often expressed a preference for having the private sector — as opposed to public institutions — deal with society’s problems, has jumped on the social finance bandwagon enthusiastically.
Social finance is an attractive option for governments juggling huge debts or seeking to use private-sector cash and market discipline to run social programs more cheaply and, it is hoped, more effectively. Besides working with ex-convicts, proponents envisage increased financial support for such programs as finding shelter for the homeless and working with at-risk youth.
But the whole idea is surrounded with question marks.
NDP House leader Nathan Cullen said it reflects the Harper government’s conviction “that the private sector is the answer in all cases.”
Sherri Torjman, vice-president of the Caledon Institute of Social Policy, said, “We’ve always supported strong government investment in income security programs and social support, so that’s why I’m looking at this new development with some red flags.
“For some groups, it may bring in new sources of financing. But on the other hand, it could destabilize the voluntary sector if you’re not providing a sufficient source of support to make sure the groups can do their basic work,” she said.
One potential shortcoming with social bonds is that if paybacks to investors are based on measured changes in the welfare of vulnerable people during a certain time frame, social groups might be inclined to favour helping those with less pronounced problems than more difficult cases where people really need support, Torjman said.
“If there are unrealistic expectations placed on short-term outcomes alone — without either giving enough time or ensuring enough support for the people who need it — then we could be creating significant problems.”
To accomplish the goal of reducing government costs, programs will have to achieve specific aims such as reducing the number of ex-convicts who are returned to jail, keeping youths at risk out of the courts, or reducing the health costs associated with babies born with low birth weight.
And it’s not clear if social financing can reach these cost-saving objectives. “Multiple funding streams, limited data systems, and lack of cross-agency coordination may inhibit government’s ability to fully recognize the financial savings from a SIB,” according to the McKinsey study.
“While some stakeholders describe this as more an accounting problem than a savings problem, in our view, SIBs are primarily a vehicle for scaling up a preventive program that delivers significant social impact rather than a reliable source of cost savings.”
Even repeat offenders are not Pavlov's dogs
Behaviourism, through classic conditioning, funded by private investors, in order to accomplish what is defined as a finite social problem, like testing to demonstrate the effectiveness of schools, is another reduction of human issues to a cost-benefit resolution, driving those engaged to "teach to the test" and to "incentivize to the reform"...leaving the human being, the whole human being off the table of consideration.
Who would expect a symphony orchestra, funded on a return-on-investment (social impact bond) basis to do anything except "what the investors require to be reimbursed" that is, play only what the public will buy tickets for, and only in a musical style that "sells" or fits the current public fashion. It is true that a symphony orchestra is not providing a "social impact" analogous to preventing recidivism among repeat offenders. But why should government not be just as interested in those people and problems that so far have escaped resolution as they are in pipelines for crude, or new high-tech research in disease prevention and cure and remediation, that if based solely on SIB's would not happen.
We just witnessed the pouring of hundreds of millions of dollars (totalling $2 billion) into the U.S. presidential election, in an unleashing of cheques from corporate magnates, mostly anonymous, much of it co-ordinated by Karl Rove, and the effort was roundly rebuffed by the voters. "Our votes cannot be bought," seems to be one of the messages from the ballot boxes.
During the nineties, governments like the Harris neo-cons in Ontario shuffled many of the povincial responsibilities off to the municipalities, in an unveiled attempt to "improve the public image of provincial governments" by balancing the books, and now we all drive on roads not fit for even ATV's let alone passenger automobiles. Provincial governments, sadly, have resorted to casino funding for many of their essential programs, and in the process ghettoized some First Nations reserves on both sides of the 49th parallel.
The application of the return on investment principle to high-risk social programs, as if the goal were the "sale of X number of widgets demanded by a business plan," is another method of commodifying the relationships between the people (as represented by their government) and the problems those governments are expected to both research and to seek to resolve.
Locking up recalcitrant prisoners in electrified cages would achieve the desired goal of preventing repeat criminality in finite terms, and degrade those in the cages to nothing more than wild animals. Yet it would produce a desired return on investment for those investors interested solely in profit.
This marriage of investors seeking a return (profit) and what appear to be intransigent social problems will necessarily involve the prescription of  such tight definitions and dimensions to the problem, in order to satisfy the investor, that the impact on the "problem" will be so severe in the short run its long-term impact will undoubtedly be reversed, unless the program actually invests in 'social engineering' of the type that the military has used to brainwash enemy captives....effective from an investment perspective and degrading and demeaning from an ethical and humane perspective.
The business sector needs to find ways to philanthropize its available funds, into projects that require attention, beyond the bland "fundraising drives" of service clubs for specific social beneficiaries. And governments, through tax policy, can and should continue to incentivise these individal and corporate contributions. However, to collapse the process into social impact bonds, lasered at micro-social-gordion-knots will inevitably result in the investors' need for profit trumping the legitimate needs of the "human guinea-pigs" who are the subjects of the projects.
There is an implied "social contract" between the citizens and their democratically elected governments and that contract does not include or imply the out-sourcing of that contract to the private sector, whose sole interest is ROI, and whose sole interest is and will be in the achievment of specific targets, many of which reduce or eliminate the consideration of the conditions which generated the problems in the first place. For example, poor students without adequate food or home support for their studies, generally do poorly in school. And no matter what is done within the classroom to improve grades, little impact will result unless and until those conditions of poverty have been ameliorated or eliminated.
Similarly, much of the recidivism among recalcitrant repeat offenders undoubtedly stems from conditions which no experiment in social engineering will be able to afford to take into consideration. Governments with their "public good" perspective (not their personal aggrandizement) can and must allocate public funds for publicly supported projects, and in that process they have to convince the public that they are spending the public purse wisely, with some potential failures, in an attempt to sustain and even enhance the trust that must sustain the social contract.
This issue needs wide public debate, including extensive scholarly research, and political sensitivity that has not characterized too many government decisions in the last two or three decades.