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.
However, he seems to misunderstand the basic facts about Social Impact Bonds (SIBs) and their ultimate goal: improving social outcomes. SIBs offer non-profits access to new sources of capital to expand their intervention programs. If the interventions are successful, SIBs pay for themselves by lessening the need for more expensive and less effective government remediation efforts in the future. SIBs raise private investment to fund nonprofit programs up front while investors assume all the financial risk. In return, investors share in the financial savings if and only if the programs succeed.
SIBs are a new way to forge partnerships across sectors to address long-standing social challenges. SIBs are designed to empower nonprofits by getting them access to sustainable, long-term capital and more control over the best way to serve their populations, while giving governments an opportunity to leverage their resources to meet societal needs in a time of budget shortages.
Jonathan Greenblatt goes into more detail here: http://www.huffingtonpost.com/jonathan-greenblatt/shot-heard-round-the-worl_b_858961.html
There are many investments that offer much greater return for much less risk than SIBs. But the organizations and individuals who would fund these non-profit initiatives are not just focused on the bottom-line – they are focused on creating lasting positive social change, and willing to take the financial risk to make that change happen.
As easily noted, my principal concern goes to the source of funding for the human and other services needed by our society. My argument is that primary responsibility for advancing the public good should be held by government and the philanthropic sector, by civil society, and not the market. To turn to private commercial investors rather than to depend on public agency is to
institutionalize reward systems that will generate profit in addressing critical human needs rather than to develop more popular/progressive models to frame and finance necessary services.
To suggest, as do some, that we must turn to capital markets to fuel needed services is to accept as an immutable driver the current state of public finance -- which political leadership in fact created and maintains with strong endorsement from the market and those holding capital. We need to deny the current situation its power to define the rules of the game and the universe in
which we must cleverly respond. We need to question critically the underlying assumptions and actions that brought us here. We need to work on changing those institutional dynamics and structural forces instead of preferring development of innovative ways to finance services for the individuals who suffer as the consequence of societal malfunctions and inequity.
The underlying principle is that future savings to society can be high- however currently so are the costs of building, administering and measuring an SIB.
It's important not to be completely fawning over SIBs (lest it's built up to be a panacea like microfinance), or any other way to tackle poverty but innovations to tackle these problems are vital.
I disagree with your main point Marc, that only governmental or philanthropic institutions should tackle social problems. Relying on these groups is not working- governments are bureaucratic, slow and politically driven, and the problems are too big to rely on philanthropy alone.
There are deep systemic problems with the dominant force of capitalism in the world. It will take another Marx, Adam Smith or Plato to see beyond this (not me anyhow). In the meantime it is much more effective to collaborate across sectors than to leave it all to philanthropic and governmental forces.
I certainly agree that there are "deep systemic problems with the dominant force of capitalism in the world," but don't think we need to await the arrival of an extraordinary theoretician or philosopher to initiate corrections to the social and economic malfunctions it produces. While the market has not shown itself to be self-correcting, there indeed is a role for altruism and action on the part of those with capital. I contend, however, that it needs to be actualized through the public agency of the regulatory authority and the tax-fueled programs of government, as well as philanthropy, rather than private profit-making investment.
You're correct that the SIB does aim to encourage the flow of commercial investment into social causes, but by definition they are structured so the investor can't make money without improving the social conditions it sets out to tackle (be it recidivism, drug taking, cruelty to children).
You make the point that investors should not be allowed to make money on the backs of the needy. Why not flip this on its head? Surely commercial investors should be rewarded not lambasted for investing to improve the conditions of the worst off?
The aim of the SIB is to encourage commercial investors to invest. There is a limit to philanthropic resources, as your article implies (competition for this money seems to irk you). If just 5% of institutional investors money were diverted to SIBs in the US that would mean tens of billions flowing into the social sector, that otherwise wouldn't have been there. Wouldn't this be a good thing?
The SIB is not perfect - the idea is simple but the detail is complex. It may not succeed but it is innovative and attempts to solve social problems in new ways.
My principal concern goes to the source of funding for the human and other services needed by our societies. My argument is that primary responsibility for advancing the public good should be held by government and the philanthropic sector, by civil society, and not the market. To turn to private commercial investors rather than to depend on public agency is to institutionalize reward systems that will generate profit in addressing critical human needs rather than to develop more popular/progressive models to frame and finance necessary services.
To suggest, as do some, that we must turn to capital markets to fuel needed services is to accept as an immutable driver the current state of public finance -- which political leadership in fact created and maintained with strong endorsement from rthe market and the holders of wealth. We need to deny the current situation its power to define the game and the universe in which we must cleverly respond, and question critically the underlying assumptions and actions that brought us here -- and to work on changing those institutional dynamics and structural forces instead of just being clever in finding new ways to finance services for the individuals who suffer as the consequence of societal malfunction and inequity.
If I read this article correctly, (which Iam not sure I did) it seems to be arguing there's money & profit to be made on the backs of the less-advantaged. If that is the case, then what happens to human compassion and empathy? Are we becoming so disconnected from one another that helping our fellow brothers and sisters must be monetarily rewarded because simple gratification is not enough?
Wealth is not always measured in terms of dollars & cents, but in the way we treat one another. We, as individuals and as a collective, are connected on so many levels, but greed is not one of them. The minute we put a price on people's lives, society's ills and/or needs, the greater good then we've lost sight of the bigger picture: our humanity.
If we lose our humanity, then humankind ceases to be. Do we want to live in a world where everyone is out for their own self? We are already seeing the consequences from this new paradigm that has barely begun to take shape. It isn't pretty.
Yet if Republicans, god forbid, get their way we won't even have Medicare or Medicaid or Social Security. I.E. the paradigm I was referencing in my post (although it is not necessarily "new,") gained traction when Bush was in the WH.
I had heard the UK might be adopting for-profit healthcare. I cannot imagine the people allowing this to occur. But given the corporate sector has and continues to gain such incredible amounts of power worldwide it is hardly surprising. Nevertheless, the developments, inasmuch as they are disturbing, are definitely something to keep an eye on.
As it is we reward greed - so the greedy succeed.
Remove the incentive and the greedy folks will move elsewhere.
A CAUSE,
ACTIVISM
ACTION
John Gardner once said, "If citizen action is to be successful, it requires careful preparation, effective organization, and stamina. Lots and lots of stamina."
WHEN DO WE MARCH?
----------------------------------
Great idea.
Now, (in all seriousness and with no sarcasm), how do we accomplish that?
http://www.dailymail.co.uk/news/article-2001010/SWAT-team-launch-dawn-raid-family-home-collect-womans-unpaid-student-loans.html?ito=feeds-newsxml
Responsibility will have to be drummed into the heads of all our children if we are to prosper in the future.