Social Investment Bonds - a new way to privatise public services

Vanguard November 2013 p. 3
Nick G.

One of the features of modern neoliberal capitalism is the handing over to private capital of more and more of the functions of government.

We have seen this with Public Private Partnerships through which private investors take from government the task of building public infrastructure (eg roads, schools, hospitals) and managing them on a long term basis with the guarantee of handsome returns from the public purse.

What can be done with capital works can also be done with service delivery.  In place of a build-and-operate arrangement for infrastructure comes the social investment (or “impact”) bond, or SIB.

Investors from the private sector place their funds into a “bond” managed by a private agency.   Investors from the private sector are guaranteed a return on their investment (typically between 10-15%) provided goals established for the program are met.

SIBs enable governments to:

• Develop business-friendly credentials with the big end of town by creating new opportunities for profitable investment
• Claim that “risk” is transferred to the private sector: if policy goals are not met, the investors lose their money. Government funds are not vulnerable.
• Shift costs off their balance sheets and conceal them as recurrent expenditure.
• Cut back on staff in real terms or at least to avoid having to take on more staff.

Not surprisingly, there are many problems with SIBs:

• The inevitable conflict between quality of public service and maximising return on private investment
• Expansion of insecure working conditions outside of the public sector workforce but in the area of public sector service delivery
• Cost – significant budget savings to the government are claimed but costs are simply shifted to governments and taxpayers of the future.  This helps to create the illusion that public sector debt levels are declining, when in fact the rate of return on a social bond, spread over a number of years, may be much higher than if the government provided the service itself.
• Measurement of outcomes on which returns to investors are based are contestable, an “insurmountable problem” and a “litigation nightmare” according to one financial analyst (http://www.thirdsector.co.uk ).
• Unproven -  there are very few social bond programs and the results are mixed. 

Several examples can serve to illustrate the latter point.

(1)A July 2013 report on the British “Future for Children Bond” by its designer Allia (The Social Profit Company) referred to a “limited pool of capital”, and that “engaging with retail investors while at the same time protecting them from making inappropriate investments is extremely difficult”. “Our experience suggests a note of caution to policy makers and developers of social investment structures.”  Because of all these and other problems “Allia decided not to go ahead with issuing the bond”. 

(2) A program to reduce recidivism (prisoners reoffending and going back to jail) in Maryland, USA, was investigated by the State Department of Legislative Services which observed that “Given the difficulty of linking the evaluation of a social program to a highly complex contract centered on an outcome payment, the government may actually increase its operational risks in operating an SIB.”  It therefore recommended that the Department of Public Safety and Correctional Services “continue to directly finance and operate reentry programs while pursuing other organisational and policy changes likely to have greater impact while posing less risk than a SIB financed program”. 

(3) A report by the British Social Market Foundation titled “Risky Business” listed a number of problems deterring private investors from SIBs and stated that “significant subsidy” will be needed from the government to entice mainstream investors into the market.

Despite these problems, governments continue to wave their policy responsibilities under the noses of the capitalist class.

On October 1, 2013, SA Premier Weatherill announced that a committee had been set up to bring SIBs to SA.  This is despite a June 25 letter to the Public Service Association in which he stated that he was “yet to be persuaded that they are beneficial”. 

No doubt internal polling showing that Labor is poised to lose the 2014 March state election has hastened his overtures to the big end of town.

One of the local bodies pushing SIBs in SA is the philanthropic Wyatt Trust.  It was featured on the front page of the Advertiser on October 15 2013 with a photo of an 18-year old mother of an 11-month old child who has been assisted by a grant from the Trust to study Year 12 at Para West Adult Campus.  This is quite commendable.  However, Wyatt Trust has run two seminars this year on SIBs and identifies “retention and re-engagement in education to Year 12 or its vocational equivalent” as one of its four focus areas.  One can only assume that it sees a role for itself in the creation of an SIB in this area.

Weatherill has identified two target groups for social bond investment: children at risk, and elderly people who want to stay out of hospital.  There may be more targets groups yet to be publicly identified.

SA Unions executive recently voted to reject the privatisation of government service delivery through SIBs.  Opposition to SIBs is strong within both the public service and education unions.

Weatherill will find growing opposition to SIBs as community organisations and unions combine to defend and expand the public sector and prevent its cannibalisation by capitalist adventurers.