Thursday, January 3, 2013

Worried About Change

These are tough days to be in the public sector and it’s not going to get much better any time soon.  This isn’t a time for sugar-coating the situation in which we find ourselves.  Sir Ronald Cohen, Chairman of Big Society Capital in London, pretty much captures it when he says, “Government is out of money and out of breath.”  Social needs are rising and government can’t keep up.  Civil society is coarsening, poverty has become intergenerational and the tools of social mobility are calcifying.

As someone who has spent nearly 40 years working in and around government, and believes deeply in the social compact, I talk to a lot of public officials and employees who are frustrated and discouraged, but soldier on nonetheless.  These front-line troops know things have to change.

I’ve been working full-time on Social Impact Bonds for two years now because I think they have real potential to transform anti-poverty programs like nothing we’ve seen since Lyndon Johnson’s Great Society (which I’m old enough to remember first-hand).  But I’ll be the first to admit that raising money from private investors is an extremely unorthodox way to pay for innovative social programs.

James Clancy, the President of the National Union of Public and General Employees (NUPGE), has expressed his indignation about SIBs in a commentary entitled, “Top 10 reasons to be worried about Social Impact Bonds.”  Here’s his main argument:

“Like other privatization schemes, they are intended to help governments shift costs off their balance sheets. They try to do that by allowing the private sector to run services to make profits for investors.”

First off, SIBs don’t privatize anything.  They fund nonprofit prevention programs that the government doesn’t provide because their budgets are exhausted by safety-net, emergency response, acute care, and other remediation programs. 

But Mr. Clancy is not the first and won’t be the last detractor to weigh in against SIBs.  I’ll give him this:  his long list does a pretty good job of collecting virtually all criticisms of SIBs in one convenient place.  Having been involved in a many controversial government programs in my time, I’ve known all along that those of us promoting SIBs would have to address these concerns at some point.  Every one of his “reasons” are fair subjects for debate, so let me respond briefly to each.  This is a discussion we’ll be having for a long time to come.

“10.  There’s no proof they even work.”

Quite true, although that’s hardly a reason not to try.  But there’s considerable irony in the fact that SIB investors don’t get paid unless they can prove that they do work.  I don’t need to unfairly condemn government programs to say that one thing we don’t have much of is evidence of their effectiveness. 

Much of the impetus behind SIBs comes from the fact that we either know many government-funded programs don’t work or we have no idea whether they work.  Worse, some nonprofit programs that have been proven to work reach only a tiny fraction of the people who need them, in large part due to a lack of sustainable funding.  Those of us working on SIBs are fully prepared to be judged by our performance.

9. They allow governments to hide debt and pass costs onto future generations.”

SIBs are not government debt.  Private intermediaries issue SIBs to raise capital from private investors.  The government agrees to pay the investors back, with interest, only if and when they achieve contractually-agreed results that save government money by reducing the need for expensive safety net programs like uncompensated emergency care, prison cells and homeless shelters.  If they don’t, the government has no financial obligations.  In fact, the whole point of SIBs is to transfer the financial risk of expanding nonprofit prevention programs from taxpayers to private investors.  That’s the bet investors make:  if the programs they invest in don’t work, they lose their money.

“8. Setting up Social Impact Bonds is complex and costly.”

It is, but the current system of responding after the fact to preventable social problems is much more so.  For example, it costs well over $40,000 a year to send someone back to prison after they’ve been released because they couldn’t find a job, a decent place to live and a drug treatment program, all of which cost less than half as much.  States pay upwards of $33,000 per person per year to provide emergency shelter, acute medical and mental health care, and countless other safety-net services to hundreds of thousands of chronically-homeless adults, many of whom can be so much safer and healthier in permanent supportive housing that costs about $24,000.

What’s complex and costly about SIBs isn’t so much the programs they fund, but the difficulty of shifting from an ineffective emergency response system funded by taxpayers to a privately-funded system that focuses on prevention.  The status quo isn’t based on contingent contracts that obligate states to repay investors if specific outcomes are achieved, investors aren’t familiar with how effective nonprofit programs work, and data about current costs and potential savings often isn’t available or reliable.  We’re in the process of trying to fill those gaps, and it is too soon to say whether we’ll pull it off. 

With the help of some innovative foundations and intrepid government leaders, we’re working hard to expand proven prevention programs using someone else’s money.  We have to convince investors that these programs work, we have to convince nonprofits to consider a whole new way of doing business, and we have to convince government to commit public funds based on avoiding unnecessary government expenditures.  Stay tuned.

“7.  Governments end up paying no matter what.”

This is just flat wrong.  All of the SIB contracts under development are being written as “pay-for-success” agreements, which means exactly what it says.  In fact, SIBs set the bar especially high because success has to be verified by an independent assessor before investors can be paid.  Investors know full well this is what they’re signing up for, and most won’t have any interest in SIBs because the financial returns are likely to be much lower than conventional investments that are much safer. 

The “social investors” who are eagerly exploring SIBs are primarily foundations and other philanthropists who will recycle their investments if they get paid back from successful programs.  No one’s going to get rich from investing in SIBs, but it could be an attractive alternative to just giving money away in the form of donations and grants.  The fact that investors hope to get their money back with a small profit means they’ll be more selective about which programs they back and keep a watchful eye on the intermediaries and nonprofits spending their funds.  If governments paid “no matter what,” there wouldn’t be any point.  None of us is interested in wasting our time.

“6.  They undermine community agencies and charities.”

To the contrary, SIBs provide local nonprofits with predictable, long-term funding without the strings and red tape that come with government contracts.  Can we have a show of hands for those who agree with Mr. Clancy that human services contracts provide “community agencies and charities ... some flexibility to innovate or deliver services that best meet the needs of vulnerable families and communities”?

The only way SIB investors get paid is by finding nonprofits that can produce the outcomes required under the government contract.  Why in the world would an investor, or an intermediary for that matter, want to tell an effective nonprofit with a strong track record working on difficult social problems like homelessness, recidivism or troubled families how to do their jobs?

SIBs have a good chance to produce better results precisely because the investors have strong incentives to find the best nonprofits with the most effective innovations, and the investors, nonprofits and intermediaries all have aligned interests to make sure that the pay-for-success contract won’t allow the government to micromanage decisions by nonprofit leaders who need the flexibility to adapt to real-world developments over a long period of time.  By focusing on results rather than the complicated and unpredictable steps involved in reaching those results, SIBs give nonprofits more control about how they work with clients.

“5.  They provide a smoke screen for cuts to public services.”

Actually, no.  Draconian cuts to public services are taking places whether or not SIBs gain traction due to overwhelming economic and political forces against which SIBs are, at this point, nothing.  SIBs don’t aid and abet budget cuts, but they offer a small glimmer of hope for ameliorating the worst effects of the fiscal crisis by providing independent funding to expand more effective programs.  Far from trying to “hide the fact that cuts to social services are leaving vulnerable people with nowhere to go for help,” we’re trying to light a candle rather than curse the darkness.

“4.  Investor profits and extra bureaucracy push up costs.”

It costs money to shift from ineffective safety-net programs to performance-based prevention programs.  We have to conduct detailed financial analysis to show potential savings, convince social investors to absorb financial risks that have virtually no track record, negotiate outcomes-based contracts that provide greater flexibility for innovative service delivery while maintaining government oversight, establish performance measurement and evaluation systems that will capture trustworthy data about program results, and implement prevention programs with fidelity to proven models under unconventional collaborative governance mechanisms. 

If SIBs can’t pay for all of this and still save government money, they just won’t happen.  We can justify incurring the additional costs only if we create demonstrably greater value by doing so.  Mr. Clancy’s right that “these are costs we don’t have to pay when services are publicly provided,” but we don’t get the results, either.  SIBs have to prove you get what you pay for.  If we don’t, no one will buy them.

“3. Services are no longer accountable or transparent to the public.”

SIBs shift public accountability from focusing on meaningless short-term inputs (e.g., how many people enrolled in training) to meaningful long-term results (e.g., how many people got a job).  The question of “how services are being run” is far less important than whether they’re working.  In exchange for telling investors they’ll only get paid back years down the road and only if they reduce the demand for emergency services, the government agrees to let smart nonprofits figure out the best ways to help their clients.  The contracts will preserve government oversight but eliminate micromanagement.

Intermediary organizations don’t “have a legal obligation to put investors’ interests first.”  The terms of the investment will clearly establish that both intermediaries and investees will focus first and foremost on accomplishing the results, and that investors’ rights are entirely contingent on success in doing so.  If that’s not acceptable, they won’t invest.

“2. Quality and continuity of services suffer.”

SIBs don’t depend on “kindly corporations,” but on social investors who act in their enlightened self interest, which is what smart investors do.  With SIBs, there isn’t a tradeoff between “helping those in need” and “making money.”  The latter won’t happen without the former.  That’s the point.

And, yes, SIBs are “usually a 5-year commitment,” which is 4 more years than most public spending, a crucial difference that is likely to enhance the quality and continuity of services.

If a SIB doesn’t work and investors lose their money, we’re no worse off than we started, with inadequate government funding of ineffective remedial services.  But if a SIB works and investors get their money back with interest, a new and larger group will be ready to sign up.  Rather than the downward spiral of budget cuts driven by unsustainable safety-net costs, we have an opportunity to create a virtuous cycle in which effective nonprofits will be rewarded by successful investors taking smart risks.

“1.  Investor profits are incompatible with universal programs that provide a safety net for all.”

SIBs can’t and won’t replace the social safety net.  They only have potential to work in the small percentage of cases where effective prevention programs can pay for themselves by generating offsetting savings.  But that small percentage of programs affects millions of vulnerable, poor, disabled, and discarded people, and costs taxpayers hundreds of billions of dollars for the safety-net treadmill.  The safety net ain’t what it used to be and it’s bankrupting us.  We need more effective and less expensive alternatives, and SIBs might just fit the bill.

Mr. Clancy repeats the canard that “people who are deemed too difficult and expensive to help (some of the most vulnerable people in our communities) will be excluded from Social Impact Bond projects and will get no help at all.”  In fact, the opposite is true.  The greatest potential savings from SIBs comes from preventing problems facing people with the most complex needs that cost society the most. 

SIBs fund innovative prevention programs that brilliant social entrepreneurs have tested and refined for decades and which have the best chance of avoiding a lot of wasteful public spending.  Examples include permanent supportive housing for chronically homeless people, transitional employment services for ex-offenders with high recidivism rates, family reunification services for kids stuck for years in foster care or out-of-home placements, and aging-in-place programs to keep low-income seniors from prematurely entering and languishing for years in expensive nursing homes.  We need these exceptional programs to grow exponentially, but there’s no – repeat, no – government funding to scale them.  Private investors just might.

SIBs are a “disruptive innovation” in both senses of the term.  They’re designed to significantly transform the way we respond to massive social problems.  Inevitably, transformation changes business as usual, which is an understandable source of concern to those habituated to the status quo.  We get why Mr. Clancy thinks people should be worried, but progress isn’t possible without trying new approaches that might or might not work.  I  like our chances, but we’ll have to keep on our toes to prove him wrong.