Conservatives look to tackle social services with free market ingenuity

Posted on November 14, 2012 in Inclusion Delivery System – FullComment
Nov 13, 2012.    John Ivison

The government is always making “important announcements.” Every press release is labelled as such, even if it’s (as on Tuesday) merely funding for snow-grooming equipment for a quad riding club in Quebec. To be fair, that was probably judged “important” in Victoriaville, Que., if nowhere else.

Yet last Thursday, there was a genuinely important announcement made by Diane Finley, the Human Resources Minister, where she called for ideas to cure such stubborn social problems as recidivism, low literacy rates and homelessness through the use of a relatively new marriage of the public and private sectors known as social financing.

The idea is to leverage taxpayers’ money to incentivize the private sector to deliver better results.

Its advocates suggest success could spark a revolution in the way we pay for social services in this country.

Its detractors say it is another way this government plans to privatize public services.

What everyone can agree on is that the status quo is not working.

The cost of lodging an inmate in a federal prison is $114,000 a year. The re-conviction rate for all released prisoners in the first year is nearly 50%.

Ms. Finley said that when she was first appointed Human Resources Minister in 2006, she was told there were 150,000 homeless people in Canada. When she returned to the department three years later, after a stint at Immigration, she was told that the number was still 150,000.

The Conservatives acknowledge they don’t have all the answers, nor, in times of fiscal restraint, the resources to tackle the problems on their own.

The intransigence of Canada’s social ills has produced some unlikely allies.

Paul Martin, the former prime minister, and Ms. Finley probably don’t agree on much. Yet they are both excited by the potential of social financing.

Mr. Martin has long been an advocate for mobilizing private capital for public good and sat on the task force that made suggestions to the government.

He believes that no bureaucracy can match the obsession of someone with an original idea who is driven to make it happen.

“What government should do is facilitate the rise of the social entrepreneur,” he said in an interview.

Untapping that spirit of social entrepreneurship is becoming possible for the first time because the financial sector is waking up to the prospect of making money from its community social responsibility activities.

To this point, the biggest obstacle to someone with a good idea taking it to the next level was lack of capital.

Access to new sources of finance like social impact bonds, where the yield is funded by governments through the savings it anticipates it is going to make, mean those social entrepreneurs may now be able to grow their businesses.

The catalyst appears to have been a pilot project in Peterborough, England. The four-year project, launched last year, is working with 3,000 short-sentence prisoners and aims to reduce reconvictions by 7.5%.

Investors, mainly charities and foundations, will receive a payout if the number falls by 7.5%, capped at a maximum return of 13% over eight years. If the 7.5% goal is not reached, investors get nothing back.

One of the investors is St. Giles Trust, a charity that specializes in rehabilitating offenders through use of mentors and assistance in finding jobs and housing.

Though the results will not be available for another two years, local police are already reporting a lower incidence of re-offending.

This is hardly the privatization of social services that the NDP is already warning is the end game of the Conservative government.

The concern in Britain is that the budding sector will be dominated by charitable institutions who would look on projects as donations, if they don’t meet their target.

But at a two-day social finance forum at the MaRS Discovery District in Toronto last week, RBC president Gord Nixon said there is a high level of interest on Bay Street. “We may end up having more capital available than we actually do opportunities,” he told the Financial Post. RBC has set up a $20-million fund looking for social financing ventures.

But social impact bonds should not be the only way the government leverages its funding, according to Mr. Martin, who said tax and other incentives are needed to bridge the risk/reward gap.

He said when he was in government, he enhanced tax support for conventional charitable activities, but he didn’t go far enough.

He now believes that social funds should be allowed to give tax deductions similar to charities, which would allow them to compete with the higher returns that venture capital earns in the markets.

“I think impact bonds are a tremendous idea, but they cannot simply be a way of taking government off the hook. They have to be a way of expanding the pie, not simply replacing government,” he said.

These are early days and Ms. Finley said the focus at the moment is to receive enough quality ideas by the end of the year to incorporate any new initiatives in the spring budget. She said changes to the tax code and social impact bonds are all options. “There may be several different ways to structure projects,” she said in an interview.

It will be some years before the results are in, but anyone who believes in the ingenuity that free markets can unleash should welcome social financing as a positive development.

Critics may harp that it’s “the commercialization of social values” but positive results on recidivism and homelessness would ease strains on the correctional and health-care systems.

Where’s the downside in that?

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