Parkland Institute
Op-eds | March 05, 2014

Social Impact Bonds: An investment in the wrong direction

by Ricardo Acuña

EDMONTON - Do you have $5 million burning a hole in your pocket? If so, have we got a deal for you. The Government of Alberta will soon be allowing you to invest that money in the misery and poverty of fellow Albertans, and pay you a 10 to 20 per cent rate of return to do so.

The Alberta government’s Bill 1, introduced Monday in the provincial legislature, carves out $1 billion from the Alberta Heritage Trust Fund to create something called the Social Innovation Endowment Account. This account is designed, among other things, to fund the promotion and development of social impact bonds in Alberta.

If you’ve never heard of social impact bonds, you are likely not alone. Although Alison Redford has been talking about them since the 2011 PC leadership race, nobody has been paying much attention until now.

Social impact bonds are a scheme introduced in the UK by David Cameron after the 2010 election there. The basic premise is that private investors will fund a program or project delivered by a non-profit or charitable agency. If that project meets its previously agreed-upon measurable goals, then the government will pay back the investors the full amount of their initial investment plus a 10 to 20 per cent return on their investment.

Here’s a very basic example of how they work. Say you are a non-profit running a program for young drug addicts. Investors are invited to fund your program, which has a stated outcome of rehabilitating 100 addicted youth. Rehabilitating those 100 youth will in turn save the health-care system, the police service, and the criminal justice system a specified number of dollars. Based on those savings, if the program meets its goals, at the conclusion of the program the government pays back the bond plus an agreed-upon rate of return (usually 10 to 20 per cent). If the program fails to meet those goals, say, by only rehabilitating 75 youth, then the investors would, at least in theory, lose their money.

The main argument being made by the Alberta government is that these types of schemes can lead to greater innovation and creativity in program design.

What the government’s argument ignores, however, is the fact that private investors are fundamentally risk-averse and that they will do everything in their power to avoid losing money. What are the odds that a private investor will invest in a project with only a 50 per cent chance of success and only a potential 10 to 20 per cent rate of return?

The truth is that the private money will only flow to those projects which can guarantee success, and leave any innovative or creative projects out in the cold. If one of these projects was to fail, and the investors lose their money, they would certainly pursue any means necessary to get that money back, including suing the implementing agency for mismanagement and failed implementation. How many non-profit agencies have the resources to fight the likes of RBC or Goldman Sachs in court? Realistically, in Alberta, all it would take is for one high-profile project to fail before money managers flagged them as poor investments.

A social impact bond project at Riker’s Island Prison in New York demonstrates the risk-averse nature of investors. In that project, investor Goldman Sachs has written a guarantee into the project that, no matter what happens, they will not lose more than 25 per cent of their investment. In that project, the charity is actually back-stopping that guarantee. So if the project fails to fully meet its stated objectives, the implementing charity will have to pay Goldman Sachs 75 per cent of its investment.

In the end, these bonds accomplish none of their promises: There is no risk transfer, because investors will not fund projects that might fail; they accomplish no government savings, because governments remain the only ones willing to fund the truly creative and innovative programs; and they ultimately cost the government more money in the long run because government will still need to pay out a rate of return to investors. What they will accomplish is a change in the delivery of public and human services — to a desire to meet the needs of wealthy investors, rather than a desire to serve the needs of the public, the community, or the province.

Certainly we can put the proceeds of the Heritage Trust Fund to better use than encouraging private gain and profit from the misery and suffering of others.

Ricardo Acuña is executive director of the Parkland Institute, a non-partisan public policy research institute in the Faculty of Arts at the University of Alberta.

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