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Mark Rosenman

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Commercializing the Public Good

Posted: 06/08/11 01:10 PM ET

A couple of decades ago, with the nonprofit sector approaching 5 percent of GDP, you didn't need a crystal ball to see that the market would eventually find ways to peel off some of the larger and more profitable parts of charitable activity. First it was nonprofit health care, with everything from medical insurance programs to hospitals and clinics being converted to for-profit status. Next came higher education -- colleges, universities and vocational schools were acquired or started up by for-profit corporations.

While these were by far the most obvious and lucrative targets for profit-seeking investors, one had to wonder how long other program areas, such as human services and anti-poverty efforts, would be spared the avarice of capital. We need wonder no longer.

Led by the United Kingdom's Conservative government and mimicked by some in the Obama administration and various state governments, there is movement toward "social investment bonds." These are intended to replace government funding for social problems with newly created opportunities for private capital to gain significant returns. This is but the latest in a string of efforts to substitute market models -- and values -- for altruism, philanthropy and government responsibility for the common good. Let's quickly look at recent history.

The first of these was cause-related marketing -- arrangements in which for-profit enterprises boosted their brand image and sales by tying some small portion of their profits to a charity or social need. Arrangements like Product RED, while generating some good, always seem to benefit the commercial enterprise more than the nonprofits they were intended to help. Indeed, studies have shown that such arrangements actually reduce individual consumers' donations to the causes they ostensibly support, as well as altruism in general. As tax-evading Product RED spokesperson Bono once famously said, You don't have to give money anymore, you can just shop. Similarly, when corporations try to build their customer base using social networking and crowd-sourcing for their contributions programs, it is principally the businesses and tech-savvy charities that win.

Cause-related arrangements were followed by "social entrepreneurs" determined to use the wisdom and experience of the market to rationalize the charitable sector and bring it to higher levels of efficiency and impact. Often backed by "social venture capital," they sought a new way to "do the deal" to leverage private resources for public good while still achieving significant returns on investment, thus disrupting the flow of capital into existing philanthropic foundations.

These efforts have generated some positive outcomes, but too often they have washed up on the shoals of their own arrogance as entrepreneurs discovered that the economic and social spheres are characterized by profound differences which need to be honored. When ignored, they lead to such things as reported abuses in "micro-lending" -- perhaps the best known such scheme, too frequently overburdening the needy with scandalous practices and, in some cases, usurious interest rates from social enterprise charities and unconscionable ones from commercial entities.

Next came Low-Profit Limited Liability Corporations (L3Cs) and B (as in benefit) Corporations hoping to obtain special protections and preferential tax treatment for capital investors in commercial enterprises that serve a double or triple bottom line (personal profit along with a social and/or environmental good). While corporations have long benefited from tax deductions for their philanthropy, recent years have seen altruism replaced by the profit motive, with donation programs serving corporate marketing departments rather than the larger society. But that's still not enough for some capital investors -- today they want additional financial benefits and prerogatives for behaving in socially responsible ways. Unfortunately, as history has shown, when the elements of the double or triple bottom-line come into conflict with profit, shareholders' interests win.

Now the new scheme du jour: social impact bonds. The notion here is that instead of using their general revenues to fund much-needed human service programs, governments will issue investment-quality bonds in private capital markets. They are to use a "pay for performance" model, employing metrics to monetize the outcomes of nonprofits' programs that may demonstrate a quantifiable economic value. Charities that prove that they provided a net positive financial benefit to government will then be retroactively paid some of the savings yielded from the services that they had performed; bond investors will receive interest payments on the principal.

Bonds are being touted for fields such as early-childhood education, job training, and anti-recidivism efforts for criminal offenders. These are some of the more obvious areas where spending on early intervention and prevention can yield significant downstream savings.

But haven't we always known that? Our grandparents taught us that "an ounce of prevention is worth a pound of cure." And yet government hasn't provided sufficient funding for such programs. Why? Maybe it's because politicians are afraid to be seen as "throwing good money after bad people," that there isn't the political will to make wise expenditures. Or maybe it's because we are a shortsighted society that bases its reward systems on next quarter's profit-and-loss statement and is unduly skeptical of nonprofits' ability to produce results over the long haul.

Still another plausible reason is that individually-focused intervention doesn't make a whole lot of sense as the principal approach to broad-based social problems. Many of the problems we face represent the failures of institutions, not individuals. It's not people who need to be fixed; it's our society. So, does it make sense to create new capital investment opportunities that generate profits on the backs of the needy individuals that our society continues to produce? And what do we think is likely to happen if these bonds start producing significant investment returns?

Certainly individuals may need critical services and charitable programs providing them ought to be funded by government and by philanthropy. That makes it more absurd that our elected leaders steadfastly refuse to generate the revenues government needs to do what needs to be done and instead favor an increasingly inequitable distribution of wealth ("Everything is on the table except tax increases," says Speaker Boehner); politicians cut the funding of cost-saving programs, preferring to come up with new avenues for capital to make private profit in meeting public needs.

While there is much to be commended and welcomed in the thinking behind social impact bonds (such as taking a long-range view of outcomes and employing reasonable and coherent metrics to improve program evaluation and accountability), there is no reason that these ideas cannot be more broadly applied under government and nonprofit auspices. We do need to improve and expand funding for these efforts, but we don't need commercialization to drive them.

Of course, social impact bonds raise a host of other questions. Where does a nonprofit get the funding to provide the services from which they are to later show a monetized gain to government? How far out in time does the performance metric need to go before quantifiable economic value can be shown and the charity repaid its expenditures? What happens when a nonprofit is providing superb and highly effective services to individuals, but other institutions and variables deteriorate and affect its outcomes? What happens to the funding streams of other nonprofit programs which produce social gains rather than significant economic yields?

But perhaps most importantly: Where is the public will, where are the necessary public resources, to address the complex societal problems, the very real institutional failures that then require the compensatory individual remediation now to be financed by bonds? What happens when we have political leaders who insist on cutting tax revenues in favor of the wealthy and who believe more in the private market than in the public good?

We need a society in which our government and our people embrace responsibility for the common good and in which altruism and philanthropy are more a motivation in supporting charitable activity than in the profit-seeking greed of capital markets.

Mark Rosenman, a long time nonprofit sector activist and scholar, directs Caring to Change, an effort in Washington that seeks to promote foundation grantmaking for the common good. Versions of this piece also appear in The Chronicle of Philanthropy and PhilanTopic.