Social impact bonds: Another attempt at privatizing government?

On June 9, the Manitoba Progressive Conservative Party introduced the idea of issuing "social impact bonds" to finance the province's social services, vowing to use them if they ever formed the next provincial government.

But voters and taxpayers beware: social impact bonds are just another attempt at privatizing government, and may end up costing you more.

Most voters have yet to really hear about social impact bonds, or SIBs as they are called (also referred to as "pay for success bonds"), but they are definitely on the agenda of conservative movements worldwide.

Essentially, they are a new way of funding and delivering a number of social services, from social housing, to daycare and prisons, but with very damaging implications.

SIBs have grown in popularity ever since they were first introduced in the United Kingdom in 2010. The Harper government has also floated the idea of using them.

Austerity an excuse

SIBs are born out of two phenomena. First, in times of fiscal austerity, SIBs are seen as an efficient way of offering the same social services for less, or so we are told. 

Second, austerity is really just an excuse. We are meant to accept the scarcity of public funds in order to justify the privatization of government services. This is an old story. Conservatives have always wanted to privatize large components of the state, especially social services, and SIBs have given them the appearance of legitimacy on the question.

SIBs are based on the idea that a specific program or social service would no longer be delivered by government, but rather delivered and financed by the private sector (a bank or a hedge fund, for instance), on behalf of the government. In exchange, specific guidelines and goals would be set, and if they are met, the government reimburses the investor (say, the bank), in addition to a hefty bonus. Some research estimates the bonus to be as high as 20 per cent.

So after years of cutting and gutting these programs, despite a tremendous growth in their demand, governments are now considering privatizing whatever is left of them.

Since many of these programs target the poor and the disenfranchised — imagine a program aimed at rehabilitating troubled youth — governments now find it acceptable to unload these vital programs to the private sector.

In turn, the private sector is all too happy to assume this new role: meet some easy target by whatever means, get all your money back plus a hefty profit. And since the government always wants such investors in the future, it will most likely never refuse to reimburse the investor and meet their profit demands.

5 problems with SIBs

There are a number of problems with SIBs. 

First, one of the underlying assumptions of SIBs is that the private sector is somehow more efficient than the public sector, and therefore would naturally offer the same services for less, thereby saving taxpayers some of their hard-earned income. Empirical research just does not support this claim; the evidence on whether the private sector is more efficient than the government is at best inconclusive. Yet the myth survives.

Second, we are told the delivery of these services will cost taxpayers less. There is no proof of this. In fact, there is the distinct risk that rather than save money, the services would end up costing taxpayers more, not less. At a minimum, to be cost-neutral to the taxpayers, we need to assume that the profit margin is exactly equal to the supposed savings. In fact, many studies show that privatization does not lead to cost reductions.

Speaking of performance, this leads me to the third reason why SIBs are a bad idea. SIBs are based on performance and outcomes. Yet how do we measure social service output?

The problem of measuring the productivity of services is well known. Are we just talking numbers? Quality of service? We can perhaps be able to measure success of the program by the number of new social housing units created, for instance, but there are a number of services where "output" is not so easily measured. For instance, a program that introduces street kids to art and culture — how do you measure the success or output of such a program?

Fourth, consider that now your tax dollars are no longer going to the government with the hope of offering quality social housing or daycare. Rather, under SIBs, your tax dollars are going to pay bonuses to banks and hedge funds. This is quite a different story.

Fifth, it gives donors too much say in how services are delivered. Shareholders must be kept happy, after all.

There are too many unanswered questions regarding SIBs and what they represent. Let's not rush into introducing a potentially dangerous new way of providing services.

Governments may have had some problems in the past, but we can certainly reform the way governments offer services without necessarily handing them to the private sector so they can make a quick profit.

Louis-Philippe Rochon is an associate professor at Laurentian University and co-editor of the Review of Keynesian Economics.