How social impact bonds put private profit ahead of public good

Source: Mark Rosenman, PBS Newshour, Making Sense, February 19, 2014

Not long ago, New York City and Goldman Sachs began to experiment with a new financial instrument — social impact bonds (SIB) — to reward private capital for financing a nonprofit program that might otherwise have been passed over for municipal funding.

There has been some excitement about this notion, as deficit-strapped governments, underfunded charities and too-limited foundations see a potential new source of program dollars, especially one rife with sanctified market aphorisms.

Unfortunately, the SIB model is being touted much more broadly as the next best thing without any critical examination of the assumptions behind it or the funding crisis which drives it.What, for example, would happen if taxes were cut to the point that government is hard pressed just to fund defense, public safety, entitlements and its own operations, and so has to turn to private investors who demand a profitable return to finance critical public infrastructure and nonprofit services? If some have their way, we’re likely to find out.

In fact, we’ve already begun to face exactly that situation. Over 57,000 children have lost Head Start services because of tax cuts and the sequester while Goldman Sachs has launched a “social impact” investment fund to provide private capital as an alternative to public funding for early childhood education and for many other nonprofit program areas experiencing government shortfalls.

We know Head Start saves government at least $7 for every dollar spent on it. If Goldman and Morgan Stanley have their way, we’ll soon have to pay them and their clients a portion of those savings for having replaced taxpayer funding for such programs with private capital investments.

Let’s call it what it is: private profit crowding out a public good. But how did we get here?….
Opinion: Why Let Financial Institutions Profit From Financing Services for the Needy?
Source: Mark Rosenman, Chronicle of Philanthropy, December 12, 2013

Private Investors Put Money on Decreasing Teen Recidivism Rate
Source: PBS Newshour, April 9, 2013
Rikers Island prison houses 88,000 inmates a year, many of whom are repeat offenders. In an effort to decrease the teen recidivism rate, high finance and do-good innovation have made an unlikely partnership. Economics correspondent Paul Solman explores a new way to fund government social services through private investment.

At Rikers Island, Investing in Decision-Making Lessons for Teens in Trouble
Economics correspondent Paul Solman reports on efforts to keep young people from returning to New York’s Rikers Island once they’ve served their time. A privately financed pubic program utilizes evidence-based behavioral therapy to imbue teens with a sense of greater control over their lives and decisions.
Source: PBS Newshour, April 10, 2013