Social impact bonds have a downside

Posted on May 12, 2013 in Inclusion Policy Context – opinion/letters_to_the_editors – Re: Human Resources Minister Diane Finley is right to pursue social impact bonds, May 8
May 12, 2013. Andrew McNeill

Your editorial on social impact bonds admitted there is potential for negative consequences, like people with the most serious problems being turned away. But those consequences are inevitable when public services intended to provide a safety net for everyone are turned into for-profit enterprises.

Investors lose their original investment and a chance to make profits if social impact bond projects don’t meet their targets. That means delivery groups relying on social impact bonds for funding will always have to put profits for investors first in order to survive.

Social impact bonds also add new costs to social services. In addition to investor profits, there is the cost of the intermediary group organizing the bond. With millions of dollars at stake, getting agreements on the targets is costly. And if a project fails to meet its targets, with investors facing the loss of their capital, it would be naive not to expect expensive legal battles.

Finally, there’s the impact on our society. When we turn services for the most vulnerable into profit-making ventures, we are saying it is acceptable to profit from the suffering of others. That goes completely against the core Canadian values of fairness, empathy and collective responsibility.

Andrew McNeill, Public Services Foundation of Canada, Ottawa

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Human Resources Minister Diane Finley is right to pursue social impact bonds: Editorial – Opinion/Editorials – Canada’s Conservative government is pursuing social impact bonds with Human Resources Minister Diane Finley short-listing some proposals. Although controversial, the idea is worth pursuing.
May 08 2013.

At first blush, it seems hard to believe. You do a good deed by investing in a charity to address a compelling social need and then the government returns your money, including a tidy profit.

That’s the promise inherent in “social impact bonds,” a funding device hyped as a win-win-win-win: recipients of a social service end up better off; charities receive badly needed support; governments save money as social ills recede; and, of course, investors have more cash in their pocket.

Prime Minister Stephen Harper’s Conservative government seems convinced that such bonds are the way of the future. It issued a call for proposals last year and Minister of Human Resources Diane Finley released a report this week detailing 15 projects deemed promising candidates for social finance. These include worthwhile endeavors such as getting aboriginal youth into skilled trades, providing housing for people with mental disorders, and finding suitable employment for new Canadians.

The federal government is hardly alone in going this route. This spring’s Throne Speech from Nova Scotia’s NDP government signaled support for social impact bonds, and the approach is on the rise in the United States and Britain. It originated in 2010 through a program aimed at cutting recidivism among prison inmates in Peterborough, in the United Kingdom. Investors in that effort are to receive a return of more than 7 per cent on achieving a significant drop in recidivism over a multi-year period. If the program fails to produce results, they get nothing.

The man behind that project, Toby Eccles, has since become a much-sought guru of social finance. And his message resonates for good reason — there’s a case to be made for social impact bonds.

Current government programs aren’t successfully addressing many existing needs; just look at Canada’s crisis in native housing, chronic homelessness, and dire shortage of skilled workers, to name a few areas in desperate need of solutions. Fixing these problems isn’t just a matter of throwing more money at them. And bureaucrats traditionally aren’t the ideal people to spot innovative new ideas likely to produce tangible results.

Outside investors are better at that, and they’re willing to gamble on their insights. Social impact bonds are a way of harnessing that enterprise while also protecting taxpayers. If the program doesn’t achieve specific, iron-clad results, investors lose their money, not the public.

There are caveats — plenty of them. These bonds must not be used as a way simply to cut government spending on social programs. That would be a travesty. Any savings that result should be channeled back into helping more people.

It’s likely only a limited number of initiatives are suited to such bonds, so most government programs should remain unchanged. And it’s absolutely vital to set results that are clearly measurable and will save public money over the long run — finding consistent employment for a significant number of homeless people, for example.

Programs will need to be effectively policed to keep unscrupulous investors from signing up for easy-to-achieve boondoggles and harvesting an effortless dividend. If investors try to game the system, and don’t take on real challenges, this approach should be axed. The goal is to help people, not guarantee profits at public expense.

Social impact bonds are a new phenomenon. Their advantages may prove ephemeral. The government should proceed with caution. But the potential public benefit inherent in this approach makes it worth exploring.

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