Top 10 reasons to be worried about latest way to hide government debt.
by James Clancy
OTTAWA, January 2, 2013 — Social Impact Bonds are the latest magical solution for governments with deficits.
Like other privatization schemes, they are intended to help governments shift costs off their balance sheets. They try to do that by allowing the private sector to run services to make profits for investors. Services being targeted include: developmental services, homelessness, supports for people with developmental disabilities, mental health, justice and corrections and public health.
Here are the top 10 reasons you should be concerned about the latest privatization scheme known as Social Impact Bonds.
10. There's no proof they even work.
In spite of all the hype, there are only two projects up and running around the world. Neither is far enough along to determine whether these risky schemes even work. With that kind of track record, what could possibly go wrong?
Around the world, the governments most enthusiastic about Social Impact Bonds are those whose usual approach to social services involves a chainsaw.
9. They allow governments to hide debt and pass costs onto future generations.
Along with Public Private Partnerships (P3s), Social Impact Bonds are a bit like money laundering because they allow politicians to hide debt.
Social Impact Bonds are just another “buy now, pay later” scheme for governments to borrow money and pretend it isn't debt. Auditors are now exposing the P3 budget shell game. But Social Impact Bonds provide governments with a new way to repeat that shell game and put more debt into the backpacks of future generations.
8. Setting up Social Impact Bonds is complex and costly.
Getting agreement between the private investors and the government for the first Social Impact Bond was described by sources as “a time-consuming and analytically complex process,” even though it was for a relatively simple project. Detailed agreements involving millions of dollars attract expensive corporate lawyers and accountants.
While many amazing things have been achieved in our life times, no one has figured out how to bring a lot of corporate lawyers and accountants together without it becoming complex and costly.
7. Governments end up paying no matter what.
Just like P3s, it's being claimed that Social Impact Bonds transfer the risk from governments to investors. And just like P3s, it's safe to assume governments will be on the hook no matter what happens. Investors are only going to put money into Social Impact Bond projects that guarantee them a profitable return on their investment. And if something does go wrong, while the private sector may not do a good job of delivering public services, they are very good at negotiating contracts that give them plenty of wiggle room.
6. Social Impact Bonds undermine community agencies and charities.
Decisions about how Social Impact Bond projects will be run are made by an intermediary organization whose first priority is to make money for investors. Community agencies and charities that now have some flexibility to innovate or deliver services in ways that best meet the needs of vulnerable families and communities will find their role reduced to that of a sub-contractor with no flexibility.
The reality is the intermediary organizations running Social Impact Bond projects are legally required to put investor profits first. Serving the public cannot be their top priority. That means quality will suffer.
5. They provide a smoke screen for cuts to public services.
Around the world, the governments most enthusiastic about Social Impact Bonds are those whose usual approach to social services involves a chainsaw. Funding from Social Impact Bonds is only a small fraction of what is being cut, but you'd never know it listening to cabinet ministers talking about them. These politicians hope the hype around Social Impact Bonds will hide the fact that cuts to social services are leaving vulnerable people with nowhere to go for help.
4. Investor profits and extra bureaucracy push up costs.
The intermediary organizations setting up and running Social Impact Bonds add a new layer of bureaucracy to delivering public services. Those investing in Social Impact Bonds are being promised a return of up to 12 per cent a year. These are costs we don't have to pay when services are publicly provided.
3. Services are no longer accountable or transparent to the public.
With Social Impact Bonds the public loses the right to find out how services are being run and the ability to hold the funders and deliverers accountable. Decisions are made by intermediary organizations who have a legal obligation to put investors' interests first. If there are problems with how the organization is delivering services, unfortunately there's nothing that clients, workers or the community can do.
2. Quality and continuity of services suffer.
Those pushing Social Impact Bonds expect us to believe that kindly corporations will invest the money needed to provide services and be more concerned about helping those in need than making money.
The reality is the intermediary organizations running Social Impact Bond projects are legally required to put investor profits first. Serving the public cannot be their top priority. That means quality will suffer. Lack of continuity will also be a problem. Social Impact Bonds are usually a 5-year commitment. People will be left high and dry when funding ends.
1. Investor profits are incompatible with universal programs that provide a safety net for all.
Social services are meant to provide a safety net that is there for everyone. They are how we take care of each other. If services are only provided when there is a guarantee investors will make big profits, we will lose that safety net. People who are deemed too difficult and expensive to help (some of the most vulnerable people in our communities) will be excluded from Social Impact Bond projects and will get no help at all.
For more information about Social Impact Bonds, download this research report.
About James Clancy
James Clancy is the National President of the National Union of Public and General Employees (NUPGE), one of Canada's largest labour organizations with over 340,000 members. Our mission is to improve the lives of working families and to build a stronger Canada by ensuring our common wealth is used for the common good.
2 Responses to ““Social Impact Bonds” hold pitfalls”
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James–Thank you for raising your concerns about Social Impact Bonds. I encourage the dialogue to continue so that everyone participates in learning more about the use and implimentation of SIBs. I am part of at team of consultants working to create a social impact bond in the US focused on reducing asthma related emergencies in Fresno, California. I want to offer a few observations to address a couple of the concerns you have highlighted here.
SIBs are not going to replace the role of government in public health services. There are only some interventions that can be designed to meet the requirements of an SIB–they must fund proven interventions and produce validated savings based on an independent evaluation of the work. There are only some public health interventions that can generate results within a 2 – 3 year time frame which would be necessary for most investors.
SIBs will not eliminate nonprofit organizations that excel in serving their community. When we look at traditional programs provided by some of the nations best nonprofits—many spend enormous time and energy raising grant dollars to provide key services. The SIB raises dollars for the long term and reduces that constant need to find more dollars to do what works. This is truly a benefit of having a new level of accountability for interventions. I know we all have seen programs funded that are not meeting the needs of the community and SIBs will encourage greater precision in serving the community for some select interventions.
Last, the structure of an SIB is indeed complex and the agreements do require a clear contract to understand what the intervention will address and how much of a possible return on investment is possible. However, the risk for this investment must be born by the investor. The SIB funding the Peterborough Prison recidivism interventions is structured such that Ministry of Justice will only pay investors IF key outcomes are achieved. Investors bear the risk of an SIB not the public agency.
I believe there is still much to be done to validate that SIBs can be managed to serve community needs. They pose unique options to address long term social needs. I'd like to see SIBs not so much reduce the role of public agencies in our society but to allow resources to be used more effectively. If investors want to engage in supporting proven interventions—then perhaps dollars for programs that are more experimental can continue to be funded through traditional means. My twitter account is @drmghernandez.
Dear Mr. Clancy,
While I appreciate your interest in this fascinating subject, I fear you are missing a crucial component of Social Impact Bonds which undermines many of your arguments: the rate of return given to the private investors in SIBs is, by definition, linked to the outcomes of the project. That is to say, the better the program works, the more money they get. In the construction of Social Impact Bonds implemented so far (of which there are more than two; 10 are operational in the U.K. alone) the payments for specific outcomes have been precisely calibrated to levels that are less than the corrollary savings to government for those same outcomes.
Put more clearly: in the New York social impact bond focusing on reducing recidivism among young offenders at a city jail, the rate paid to the investor for a given reduction in recidivism is less than the savings to the city government for that same reduction (from reduced costs of housing and feeding prisoners.) Thus, by their very construction, Social Impact Bonds cannot saddle subsequent generations with additional debt. This also makes your qualm that "have a legal obligation to put investors' interests first" strange. When the investor's financial interest is in a reduction in recidivism, isn't that what the intermediaries interest should be anyway? The central innovation of Social Impact Bonds, and indeed their namesake, is that they align the interests of private for-profit institutions with those of the broader social good, and you ignore this completely.
It is also tremendously odd that you would equate Social Impact Bonds with cuts to social services – you seem to make this claim merely based on the involvement of the private sector. In reality, SIBs are a financing mechanism, and have no relationship whatsoever to cuts in provision.
Your final point, that profits are incompatible with a social safety net, is similarly unsupported. The private investors themselves, by the construction of all existing SIBs, have NO say whatsoever in the actual operation of the services, which are carried out by non-profit organizations, and kept at arm's length through an intermediary. They only profit, as I have shown, when good results are provided for the vulnerable and troubled citizens at the heart of the various programs financed in this way. When you say "People who are deemed too difficult and expensive to help (some of the most vulnerable people in our communities) will be excluded from Social Impact Bond projects and will get no help at all," you again insinuate that it is private partners, rather than the government and non-profits, who determine the make-up of the cohort aided by each intervention. This is totally untrue. Young chronic reoffenders at Riker's Island or Peterborough Prison in Britain (also the subject of a SIB) are some the most difficult and expensive vulnerable people to help – and this is exactly why they are the subject of a social impact bond! There is no evidence at all that the private partner in either case is attempting to subvert the process by encouraging the non-profit service provider to selectively choose easier targets, and it is irresponsible for you to suggest otherwise.
Perhaps an article so critical of Social Impact Bonds would benefit from a clearer explanation and understanding of what they are and how they operate.
Thanks,
John C.