Getting Investors to Pay for Social Programs

Government wallets are a little light these days. 

Deficits are sitting at the highest levels in decades and public officials need to pay the piper. And given the political risks of raising taxes, most governments are instead looking to cut spending. Although most areas of public spending are being trimmed, social programs aren't having the easiest go of it - in particular, those experimental pilot programs.

Harper isn't rolling in it anymore (Image: CityTV)

Experimental social programs are especially susceptible to the austerity axe. The benefits they produce are generally difficult to measure economically and are thus externalized. As a result, they can seem relatively more expensive than their internalized brethren and even given the title of unnecessary luxuries. Moreover, unproven programs are a tad risky, especially for a government counting every penny. Environmental programs share the same characteristics. The trouble, of course, is that just because something is difficult to measure doesn't mean it isn't valuable. In many cases they may actually save the government money. For example, relatively cheap anti-smoking campaigns could save the health care system quite a bit by preventing the public from smoking.    

When governments don't pony up the cash or resources, the slack is usually picked up by non-profits, charities, churches or corporations looking to do a good deed. But these are far from reliable sources. Much of the trouble is financial. As the economy struggles, there is less money to go around. And those with money to spend are less likely to put it towards something that doesn't pay direct financial dividends.

So what is an answer? Enter Social Impact Bonds.

The idea is simple. A government identifies a program with attainable and measurable goals. To pay for it, it reaches out to private investors. The investors will be paid back at levels that will depend on the success of the program. For example, the more people that quit smoking because of the campaign, the more money the investors will receive. The government affords the payout based on cost-savings arising from the program - ex. less health care dollars spent on smokers. 

Social Impact Bonds (SIDs) are a fairly new idea, but a few pilot programs have hit the ground running. In the UK, a non-profit organization called Social Finance has been running a six-year SIB program since 2010 to prevent re-offending. Under the scheme, approximately 3000 short term (serving less than 12 months) prisoners from a Peterborough prison will receive intensive rehabilitation and intervention programs. The program will be funded by private investors and the rate of return at the end of six months will depend entirely on the drop in re-offending rates. And if re-offending does not fall by more than 7.5%, the investors get nothing back.

The same organization is exploring similar schemes in the areas of drug rehabilitation, preventative health care services, and improving family support services, especially for vulnerable children. Because the idea of SIDs is in its infancy, much of the funding is coming from charities and major philanthropic foundations.

SIDs carry a wonderful array of benefits. First, it provides much needed funding for experimental social programs, many of which are aimed at prevention and early intervention - big cost-saving tools. Second, the public sector (taxpayers) only have to pay for effective services. That is, if it doesn't work, the taxpayer is off the hook. Third, and along with that, an investor has considerable incentive to make the program work, since the rate of return (and the principal investment) is tied to the success of the program. Service-providers will have incentive to deliver a solid product, otherwise they won't attract any investment. And the rate of return, since it is sourced from cost-savings in another area, could be significant enough to attract real investors. After all, prevention is almost always a fraction of the cost of treatment. It has the potential to be a win-win-win. 

Of course, no system is perfect. There are inherent problems in measurement. It is not always easy to measure rates of success and some are imperfect and fluctuating, which might throw investors for a loop, especially when they deal with money, a relatively stable measure. More to that point, to what degree does causation play a part? It might be easy to find a causal link in the Peterborough prison scheme, but how do you know that an anti-smoking campaign was a main contributor of people quitting smoking? And given the uncertainty in cost-savings, how uncertain will the rates of return be? If rates are too small, these schemes may stay relegated to the world of dreamy charitable investments from angel investors. And who knows how many private investors will trust an organization that doesn't even guarantee the return of its principal investment?

(Image: Social Finance)

There are peripheral dangers as well. What if the program is wonderfully successful and a complex market develops with traders exchanging SIBs? Would this start to overwhelm what is meant to be a supplementary investment vehicle for small, experimental programs? And there is the ever-existent danger of the government taking a serious step away from providing these services, so much to the point that such programs become almost entirely dependent on private investors. Potential problems far off in the future? Yes, but still important to think about.

These drawbacks are miniscule compared to the benefits such a system offers. One hopes the pilot programs succeed. The opportunities are seemingly boundless. SIDs will place an economic value on issues and programs we already know are valuable, but have yet to be able to properly reconcile with our economic valuation systems. That is, we can make them far more visible, accessible and attractive. 

The government's coffers may be draining, but Social Impact Bonds provide an effective and efficient method of re-filling the coffers, and making everyone else happy at the same time.