Social Impact Bonds could revolutionize the way social programs are delivered in Canada.
Here’s the deal: private investors fund the operations of a firm that agrees to achieve a desired positive social outcome.
If the positive outcome is achieved, governments pay a portion of the resulting public sector savings back to the firm, which then provides an economic return to its bond-holding investors. It’s a blend of financial and social return that is gaining momentum.
Last year, a private British firm launched a program designed to keep recently-released prisoners from reoffending. The program is the first of its kind that sets clear benchmarks for government savings on incarceration costs. A portion of these savings are then funneled back to investors.
Opponents of Social Impact Bonds say they’re a risky investment with no proven record of success, and it’s a valid point.
Unlike regular bonds, Social Impact Bonds don’t have a fixed rate and are dependent on a social return that’s difficult to guarantee.
But if Social Impact Bonds aren’t a sure thing, they come pretty close. There are several reasons to believe these bonds offer a better way to deliver social programs.
First, the government only pays for effective services. Private firms and their investors bear the risk for those that fail to reach their benchmarks.
Second, privatized social do-gooders have an incentive to create as much social wealth as possible, and as efficiently as possible, since a larger social impact generates a greater return.
Third, any social program would be subject to ongoing and intense scrutiny from a diverse body of stakeholders, allowing for shortcomings to be addressed and improved upon.
If this sounds a lot like a business model, that’s because it is.
The reality is that social programs in Canada are often inefficient and expensive. Charities are even worse; a Toronto Star investigation from 2002 revealed that one in six Canadian charities spend more on fundraising than on actual charitable work.
Infusing a private bondholder structure makes these bodies more accountable.
With mounting pressures on areas like health care and post-secondary education, Canada needs to get serious about Social Impact Bonds as a cost-saving measure. If we don’t, public debt levels will continue to skyrocket.