Can private wealth cure social ills, at a profit?
An edited version of this story was published in Smith Journal, Volume 8
THE Peterborough prison was opened in 2005, at the old Baker Perkins engineering works, half a mile from the centre of town. Where once they had manufactured industrial machinery, now they would punish and rehabilitate humans.
The jail was designed and managed by Sodexo, a French multinational hospitality company; the UK’s prisons chief said it would provide a blueprint for prisons of the future. But initial results were troubling: after just three years, a leaked assessment revealed that Peterborough, an hour north of London, ranked last out of 132 clinks across the country. Among other deficiencies, it had scored poorly for reducing the rate of re-offending.
What to do? The authorities doubled-down on privatisation.
In mid-2010, the justice minister Crispin Blunt went on location to announce a world first: private investors would fund a scheme that worked with 3000 short-term jailbirds to help them stay out, once they got out. He called the initiative a “social impact bond”. Investors would provide the cash to pay for the social workers and support staff, and if reoffending fell by more than the target amount, the government would give their money back, plus 13 per cent interest.
The payoff hasn’t yet come, but already the Peterborough bet has been replicated elsewhere around the world. In New York, Boston, London, Leeds, Manchester and Sydney, on recidivism, chronic homelessness and child welfare: private investors are now speculating on cures to society’s most challenging problems. It is only the beginning. Governments in Canada, Scotland, Germany, Israel and Ireland are eyeing the bonds too.
“This promising financing model has potential to transform the way governments around the country fund social programs,” said Michael Bloomberg, mayor of New York, announcing a plan to work with young men at Rikers Island prison, bankrolled by $10 million from Goldman Sachs.
Mayor Bloomberg’s personal philanthropic foundation guaranteed a loan on the scheme. “Social impact bonds have potential upside for investors,” he says, “but citizens and taxpayers stand to be the biggest beneficiaries.”
In early spring last year, academics, bureaucrats, bankers and do-gooders gathered at the Sydney Harbour Marriott Hotel, near Circular Quay, for the “Inaugural Social Finance Forum”, organised by the Centre for Social Impact, at the University of New South Wales. For a day, they debated social impact bonds.
The first speaker was Peter Shergold, formerly Australia’s top public servant under Liberal prime minister John Howard. His talk was called “Creating a win-win for government, social enterprise and investors”. He stressed the financially volatile times in which we live, when governments face increasing pressure on their budgets. It was an oft-repeated theme, including in the keynote speech, by David Hutchison, the CEO of Social Finance, and the broker of the Peterborough bond.
Hutchison described the government spending cycle in the grip of austerity: funds are directed to acute needs and cut from prevention; over time, this leads to more demand for crisis services, and further diminishes the budget for prevention – and so on. Social impact bonds, he argued, break the cycle by funding early intervention.
Earlier in 2012, the New South Wales government had announced a pilot scheme comprising three “social benefit bonds”: two would aim to reduce the number of children in out-of-home care, and the other, like Peterborough, would target recidivism.
For now, more than two-in-five prisoners in the state are back in the slammer within two years of being released. Cameron Robertson is the treasurer of Mission Australia, the large charity that is negotiating the recidivism bond, together with private prison operator The GEO Group. Financially, reoffending is costly all the way along the line, he explains, from the policing and the courts, all the way to the building and running of jails.
“If a program reduces reoffending it brings savings to everyone – that’s the financial side. More importantly, there’s a significant benefit to the individual and to society more broadly.”
Even before his bond has been issued, Robertson is confident that on the financial markets, there’s “significant demand for this type of product” among “high net-worth individuals, super funds and corporates”.
The investors in the Peterborough bond were almost exclusively charitable trusts. They’ve funded a program that works with criminals sentenced to fewer than twelve months. The men receive additional support inside jail and on the outside, and so too, do their families.
This June, the UK government announced interim results – a slight fall in reconviction rates from 41.6 per cent to 39.2 per cent. Elsewhere around the country, re-offending has risen by 2 per cent over the same period.
The measures were different to the ones specified in the bond, so it isn’t clear whether or not the program will meet its target for investors. The philanthropists won’t know until halfway through 2014 if they’ll get their money back. Nevertheless, Chris Grayling, the justice minister, described the results as “very encouraging indeed”.
The market for social impact bonds is a tantalising prospect: investors make money, governments save it, and prisoners, the homeless and broken families make good.
At the social finance conference at the Sydney Harbour Marriott Hotel, Shergold put it this way: “In the best of the possible worlds, this can be a win for the private sector, a win for the public sector, and a win for the community sector.”
That day, several speakers turned their minds to the obstacles between the world as it is, and the preferable world – the one with social impact bonds. Among the chief difficulties is the task of creating a market – establishing buyers and sellers, prices, measurements and yields – where once there was only taxing and spending, philanthropy, or nothing at all.
Shergold, who is now a key advisor to the New South Wales government on social investment, observed that no one knows whether investors will come. “Information is scant. Risks are hard to predict,” he said. Even so, he predicted that public sector contracting “will increasingly take the form of bonds”.
When Hutchison launched the Peterborough initiative, a big investor enquired about a derivatives market – four or five social impact bonds combined in a portfolio and exchanged like stock options, say, or sub-prime mortgages.
But even if there can be such a market, should there be?
In Australia and the UK, citizens volunteer to donate their blood to strangers for uses they will never know. In the US, some people donate theirs, while others sell to commercial blood banks as a way of making money.
The market for blood, thought British sociologist Richard Titmuss, is a market well worth dissecting. In his book, The Gift Relationship, published in 1970, Titmuss analysed the practicalities of blood supply and use. He argued that commercial exchange was less efficient: wastage and costs were higher in the US than in the UK, shortages more frequent, administration more excessive, and the risks of contamination more acute.
Titmuss began with those details – “the particular and microscopic” – but zoomed out to questions about the role of altruism in society. One consequence of blood money, he argued, was the creation of a new class: “an exploited human population of high blood yielders”. The redistribution of blood “from the poor to the rich appears to be one of the dominant effects of the American blood banking systems”, he said.
He believed that his subject illustrated something corrosive about economic thinking: rather than simply expanding people’s choices, as economists argued, establishing market mechanisms can take something important away. The commercialisation of blood “erodes the sense of community” and “represses the expression of altruism”, he said. Why give when others are earning?
“The ways in which society organizes and structures its social institutions – and particularly its health and welfare systems – can encourage or discourage the altruistic in man; such systems can foster integration or alienation; they can allow the ‘theme of the gift’ – of generosity towards strangers – to spread among and between social groups and generations,” he wrote.
“Where are the lines to be drawn – can indeed any lines at all pragmatically be drawn – if human blood be legitimated as a consumption good?”
As with Titmuss and the buying and selling of blood, the arguments against social impact bonds can be marshalled along both practical and ethical lines.
First, the practicalities – measurement. In the case of the Peterborough bond, Professor Sheila Bird, from the University of Cambridge, observes that it “might well be a brilliant success; it might achieve little. But we aren’t going to know either way.”
Neither the prison, nor the prisoners were chosen at random. The warden nominated his facility, and participation is voluntarily. Their reoffending rates will be compared against other convicts who don’t receive support, but under these circumstances, Bird says, no one can be sure it’s a good comparison. Did those crims have better attitudes, or fewer drug and mental health problems? Did the hard cases stay clear? Did the warden’s enthusiasm make a difference?
Neither will the trial explain attribution. Should the results be put down to the particular social work program, to the extra money alone, or to the innovative private funding mechanism?
To know if government is getting a good deal, these are crucial questions. Assessing impacts is always complex – arguably too complex to form a base for a financial product. It’s complex no matter who funds the program, but with bonds, the stakes are higher.
The Benevolent Society is one of the charities taking part in the New South Wales trial. Together with Westpac and the Commonwealth Bank, they’ll run a program designed to keep vulnerable children safely at home, and out of the child protection system.
At the social finance forum, Jocelyn Bell, the charity’s business development manager, referred to modelling on the scheme’s results. One option, she said, is to provide a level of service that ensures the highest number of children stay home, and therefore, offers investors the maximum return. But that level of service “would not sufficiently support children to thrive in a home environment”. There’s a trade-off between the interests of the kids and the money-makers.
The second practicality – money. This one, says Christopher Stone, from progressive think tank Centre for Policy Development, is one that should be apparent to economists: why pay more, when you can pay less?
“Governments could borrow that money at a far lower rate than the private sector does, and they won’t expect to make a profit,” he says. “Logically, government investment in these same programs would be more sensible than private investment.”
With social impact bonds, the public sector ends up paying anyway – it just pays significantly more. Year upon year, bond upon bond, the extra costs will mean governments can afford fewer programs overall.
At the social finance forum, Hutchison – the founder of the Peterborough bond –noted that public servants in the UK had struggled to justify high payments for bonds, when they could borrow at a risk-free rate and deliver the services directly. He believes the bonds are worthwhile because they’re more likely to succeed and the public won’t pay if they fail.
Stone is sceptical. He was one of the authors of ‘Big Society and Australia’, a report on the privatisation policies of the Conservative government in the UK and how they might apply in Australia. “There’s a question about whether government can ever really transfer risk,” he says. “And there are examples where even when the outsourced firms fail, they can still win.” Most of the claimed benefits of the bonds, he argues, such as extra investment in prevention, or a rigorous focus on outputs, can be achieved by other means.
He’s concerned about transparency too. In New South Wales, the government says modelling of the costs and benefits of its pilot social bonds, undertaken by the consultants KPMG, demonstrates the good value for taxpayers. But that modelling? You can’t see it. It’s confidential.
Titmuss died in 1973. In the four decades that have passed, market values have encroached on social policy in such a way as to support his warning that “no lines can be drawn”. Although markets have not yet acquired blood donation in Australia and the UK, many other elements of the welfare, education and health systems have been privatised or outsourced, at least in part.
Social impact bonds advance the project in a way likely unimaginable to Titmuss: where previously the rich were taxed to reduce inequality and pay for social programs, now they can earn a healthy return on them instead, directly underwritten by taxpayers.
“All policy would become in the end economic policy and the only values that would count are those that can be measured in terms of money,” Titmuss wrote. These are ethical objections to the bonds: they undermine the obligations of governments and wealthy citizens to the struggling. They alter the meaning of philanthropy, too. Why give when others are earning?
Cameron Robertson, the Mission Australia treasurer, acknowledges the experiment: “If, in five years’ time, we haven’t increased the pool of funding, and the wealthy philanthropist who was previously donating his money is now putting it in a bond, then we won’t have been successful.”
He’s hoping they’ll keep the donations and add something extra on top. “If we can get even a small portion of industry superannuation fund money, for example, then we’ll have increased the amount of capital and the number of programs.”
Just before Titmuss died, the philosopher Peter Singer wrote an essay defending the sociologist against economist Kenneth Arrow. In a critique of The Gift Relationship, Arrow had argued that altruism was a scarce resource – we’d better save it for when it really matters, rather than squander it where a price will work instead.
Singer disagreed. Altruism was not limited in supply, like crude oil, but more like sexual potency: “much used, it constantly renews itself, but if rarely called upon, it will begin to atrophy”.
For Singer, the matter came down to a choice of questions: “We must ask ourselves not ‘How can we obtain the most blood at the least cost?’ but ‘What sort of society do we want?’”