Social Impact Bonds

They aren’t charity. They aren’t social justice. They’re a new way for business to profit from social services.

By David MacDonald

Imagine you’re running a shelter for homeless youth, and the government grants you’ve always relied on suddenly dry up. Imagine waging the equivalent of a Dragon’s Den pitch to potential investors on Wall Street, asking them to fund your homeless-youth program in a scheme designed to yield the investor a return of up to 20 per cent in profit. This is the underlying premise behind social impact bonds; and for governments looking to get social service spending off book, they’re being touted as the next big thing in the non-profit world. They could be coming to a homeless shelter near you.

Interest in social impact bonds has been accelerating in Alberta following Premier Alison Redford’s musings in January on the topic. “One of the things we’re beginning to talk about, which is slightly different, is… what we would call a social infrastructure bond,” Redford told PC supporters over a conference call. “We could go out to Albertans and say, ‘We want you to invest—if you want to—in the same sorts of projects that we’re asking people in other parts of the country or other parts of the world to invest in.’ ” Previously, during the PC leadership race in 2011, Redford had pledged in her campaign literature to introduce the bonds, which she said “permit private investors to support programs that save taxpayers money.”

Alberta isn’t the only Canadian jurisdiction where social impact bonds have been discussed. Ontario’s Drummond Report in 2012 recommended that Canada’s largest province launch pilot projects using social impact bonds for a range of services. The New Brunswick government touted social impact bonds in its March 2013 throne speech. At the federal level, Human Resources and Skills Development Canada (HRSDC) has already asked for potential social impact bond projects and has compiled a report. Finance Minister Jim Flaherty has said the bond concept holds promise.


Readers unaccustomed to this complicated way of funding social services can be forgiven their unfamiliarity with this new type of “bond.” Traditionally, social service agencies pitch ideas to government granting agencies. For instance, they suggest ways to reduce homelessness or youth recidivism in their communities. Good ideas get funded; bad ideas get canned. The social services agency submits reports on how well the program is accomplishing its goals. If the program is successful, the underlying approach is, ideally, adopted by the government more broadly so more citizens can benefit.

This is actually how we built high-quality public services in Canada. The traditional system isn’t perfect, of course, though it has served our society well for many decades. But the lure of social impact bonds could substantially change things—and not for the better. Before Alberta’s non-profits are pushed further toward this new approach, a few aspects of social impact bonds are worth considering.

Social impact bonds have a much more complex structure than traditional government grant-making. First of all, an investor pays a social agency to run a program. The program has defined benchmarks, such as reducing criminal recidivism by a certain percentage. When—and not if, as I’ll explain later—the program meets its goals, the government pays the investor back all the money plus a tidy profit margin.

Yes, you read that right: Instead of governments paying non-profit organizations money to deliver social services, governments pay business investors a profit for making the investment on their behalf. Social impact bonds are not charity. They’re not philanthropy. In fact, they stand in direct contrast to philanthropy, where the giver expects nothing in return, except maybe good karma. Rather, they’re a financial scheme with a promise of a healthy private-sector profit. Under the social impact bond scheme, the investor expects all of their money back and then some. Social impact bonds are profit-driven, government-funded business deals—the Wall Streetification of public services.

The implementation of social impact bonds is very recent. Worldwide, no social impact bond schemes have run to completion. To date, no such programs have even started in Alberta, or anywhere in Canada for that matter. But this new approach to service delivery appears to have traction with governments at various levels. Canada’s finance industry is keenly interested too. RBC, for instance, has announced a $20-million Impact Fund that would invest in social impact bonds, among other projects. The Alberta-based company Finance for Good, which founder Mark Hlady (not the former PC MLA of the same name) calls “the first built-for-purpose social impact bond intermediary in Canada,” aims to connect would-be investors to projects. Hlady says he has met with four Alberta government departments that are “considering the idea,” including Human Services, Justice, Education and Health.

The UK has been the fastest early adopter of social impact bonds, with 14 programs currently underway, from youth unemployment to homelessness reduction programs. The UK’s flagship and longest-running program, kickstarted in 2010, will run for six years. It’s located in Peterborough, and aims to reduce recidivism. The US has launched fewer social impact bond schemes, but its flagship program focuses on a youth recidivism program at Rikers Island prison in New York.

In each of these cases, the investors—who range from wealthy individuals to big banks such as Goldman Sachs—aim to make all their money back and enjoy 10–20 per cent profit for their trouble.

Given their complicated structure, there is room for plenty of debate in Alberta about the merits of social impact bonds and about the role government should be playing in ensuring quality public program delivery.

Organizations such as Finance for Good and the MaRS Centre for Impact Investing (“a social finance hub and project incubator that… mobilize[s] private capital for public good”) argue that social impact bonds can save governments money. This argument is based on a hypothetical risk transfer: If social thresholds aren’t met, investors simply lose all they’ve invested in a social impact bond. As Hlady puts it, “The investors make a return if we do social good. We’re helping people live better lives. If we do that, we get paid.”

There are two problems with the savings argument, however. The thresholds themselves are nominally based on the costs that would otherwise be incurred by governments. For instance, it may cost $1-million to provide healthcare to 10 homeless people for a year, due to their high incidence of emergency room visits. However, a social impact bond program that costs $1-million up front to keep 10 homeless people off the streets and out of emergency rooms means that the government isn’t spending any less; they are just spending differently. However, these hypothetical spending differences will rarely play out that cleanly in the real world.

Imagine the cringe-worthy headline: “Hospital cuts required to pay off big banks.” That kind of tradeoff may sound unlikely, but such service cuts would be required in order to turn hypothetical savings into real savings. In practice, funding for social impact bonds will be funded out of pre-existing social service budgets. And it will come at the expense of other government funding.

Instead of governments paying non-profits to deliver social services, they would pay investors a profit for making the investment on their behalf.

The other false notion behind social impact bonds is that they are risk-free for governments and citizens. The assumption is that investors shoulder the risk for funding programs—which might not meet the stated goals, in which case the government pays nothing and the investors take a bath. But in the real world it wouldn’t actually happen that way. In practice, there will likely be very little experimentation in social impact bonds. No investor in their right mind is going to put up $5-million with a 50/50 chance of losing it all. It’s far more likely that investors will back projects that have a proven track record. True experimentation is almost always going to be on a smaller scale and funded by government money because of the high risk of failure.

But if by some fluke a project with a proven record still doesn’t work as expected—say, it reduces recidivism by 8 per cent instead of 10 per cent—investors will likely still be bailed out. No matter how tempting it might be to burn Goldman Sachs for $5-million, if you force investors to take a bath, they won’t come back next year. If several of these bonds were allowed to fail, bankers or investors would not come around again. The project would die on a cold and barren vine.

There is no free lunch with the social impact bond model. Make no mistake: The government always pays. Even if the project misses its targets, investors will be paid off so that they’ll pony up for next year’s bond. Otherwise, the house of cards collapses.

To keep this complex model going, governments would have to ante up, no matter the outcome. There would be no risk transfer. Rather, the backers of social impact bonds—financial investors and bankers—would have managed to insert themselves as middlemen in the social contract. As with any middleman, they would require a middleman markup for their trouble. Investors pursuing the social impact bond idea smell government-guaranteed profits that aren’t too shabby in a stagnant economy. The upside for large banks such as RBC or Goldman Sachs is that they get their money back with interest and receive free corporate social responsibility points for reducing homelessness or helping young offenders. The fact that these programs would be paid for by the Alberta government and that the company would profit from the public purse would likely not be included in the ensuing ad.

Making sure investors get paid, irrespective of outcome, is not a theoretical problem. It is already in force in the youth recidivism project at Rikers Island. According to that scheme, the investor, Goldman Sachs, can only lose 25 per cent of its investment if too many youth reoffend after being released from prison.

Interestingly, it isn’t the government guaranteeing Goldman’s investment; in this case, it is a charity that is shouldering the risk. In this bizarre role reversal, a charity is guaranteeing that a profitable bank doesn’t spend too much on social causes. If things don’t turn out as planned, the charity cuts back on its other philanthropic goals in order to ensure the bank doesn’t lose too much money.

In the topsy-turvy world of social impact bonds, the interests of the investors—not the long-term promise of a new program, not the experience of those receiving or providing the service—become paramount. Once investors expect their money back with their middleman markup, their interests take precedence. No matter what it takes, the middleman needs to be paid back, and if a charity has to insure them against loss, so be it. It’s all about the financial scheme. In traditional social services, those receiving the services—such as a homeless person or a recently released youth—are at the front of the line and their interests take precedence. Under the social impact bond framework, the investor middleman manages to push his way to the front of the line.


This reversal of who benefits from government programs is the most troubling aspect of the social impact bond scheme. People pay their taxes (and expect corporations to as well) in part because they want their government to deliver effective services to the people who need them. However, social impact bonds direct tax dollars to bank profits instead of to a homeless person trying to get off the street. This dramatically changes who is being served by the government: from those who need a helping hand to the shareholders of a bank; from those who have empty pockets to those who have deep pockets.

Since social impact bonds cannot fail in the real world without risking future funding, social service budgets would now pay an additional 10–20 per cent to investors on top of what it costs to run these projects. Social services will cost more, not less.

The introduction of this dramatic change in social services funding also needs to be contextualized against the backdrop of austerity in the aftermath of the 2008–2009 Great Recession. On the one hand, slow economic growth has increased the need for social service supports as well as the strain on the social service agencies that provide them. For instance, higher unemployment and underemployment put more stress on families, make it harder for young people to find work and generally make it more difficult for those at risk to improve their circumstances.

On the other hand, austerity cutbacks have constrained the capacity of social service supports to help those in need. Social services agencies caught in the middle of government funding cuts might understandably consider untested and potentially dangerous new funding models to meet the pressing needs they see in their community. But the cure may prove worse than the ailment.


The danger lies not only in the impact on the social services themselves but also on the agencies that deliver them. Since bondholders expect to be paid back, there are real dangers to the social service agencies if they fail to meet their targets. It would almost certainly discourage the creation of new and innovative approaches to service delivery, because the financial model would have no tolerance for failure.

To organize a social impact bond is not an easy process. While economists are fond of “frictionless” transactions, in the real world complex multi-year projects like these require substantial investments in accounting and legal expertise. The investors and the social service agency alike want to know they’ll be protected if things go wrong.

Investors and banks, with substantially more expertise in these types of contract negotiations, are likely to gain the upper hand. The first beneficiaries of any social impact bond will be the lawyers and accountants collecting rich fees negotiating for each side. With traditional social services funding, legal and accounting fees amount to little or none of the cost.

With these bonds, the interests of the investors—not the experience of those receiving or providing the service—become paramount.


Most social impact bonds are designed for success, but they can fail nonetheless. Once a project starts going south, social service agencies will come under substantial pressure from investors, who stand to lose real money. This could initially involve moving staff and resources in from unrelated projects, paid for from unrelated funds, in order to support the social impact bond project. As bondholders’ interests take precedence, the social service agency would be compelled to shift resources to support those bottom line interests, pulling funding and support away from other projects serving other populations.

If worse comes to worst and a social impact bond project reaches completion without meeting its goals, investors stand to lose substantial sums of money. Post-mortem evaluations would likely question whether the social service agency implemented the social impact bond as initially described or whether their failed implementation led to investors losing their money. It’s not hard to see that question being resolved in the courts, again with the beneficiaries being lawyers and accountants instead of a young person trying to get a job and stay out of prison.

For the social service agency trying to make a positive impact on its community, social impact bonds could represent a glimmer of hope in an austerity-charred funding landscape. However, the path to social impact bonds is marked with significant upfront expenses, increased outside interference and the potential for legal action if the project goes awry.

The real shame in social impact bonds is that if you can overlook the banks making government-guaranteed profits while taking on little to no risk, some of the underlying projects are very forward looking. Social service providers have known for some time that the homeless, the unemployed and young offenders can be incredibly expensive for publicly funded services such as healthcare, emergency shelters and income supports. At a smaller scale, local agencies using government grants have shown that what seem like expensive upfront interventions end up saving money when the various costs of doing nothing are tallied. Social impact bonds would pry open government coffers to implementing these ideas on a much larger scale.

For instance, the interventions with recently released prisoners in Peterborough, UK, are comprehensive. They aren’t short-term, one-off solutions that keep releasees from reoffending; instead they embrace a multi-faceted approach. They involve finding appropriate housing, finding work, opening a bank account, improving employable skills, fighting substance abuse and finding a dentist and a physician. All of these interventions are in addition to guidance and emotional support provided individually by dedicated counsellors.

The project is a long-term, six-year investment—a rarity for social service projects. For most social services agencies, government funding is never more than temporary, starting up one year only to be cut the next. While projects may be meant to last several years, shifting government priorities routinely cut projects short, even if they are successful. The casualties of this on-again, off-again approach are inadequate evaluation, missed opportunities and a target population being left without support.

Social service agencies are no strangers to evaluations both during projects and after completion. I recently spoke with an executive director of a mid-sized family service agency in southern Ontario. She explained to me that, over the course of a year, they collect more than 300 different data points for funders.

This is not a unique issue. Social service agencies are routinely expected to track and evaluate projects, with few, if any, additional resources to do so. Consciously incorporating evaluation costs at the onset, as is the case with social impact bonds, is a far more proactive way of extracting consistent and useful data.

The Peterborough example isn’t unusual. In fact, the projects being executed under the social impact bond umbrella in the UK and the US are almost universally large-scale, long-term, ambitious projects that could have a significant impact on their target populations. The multi-faceted nature of these projects allows them to tackle several issues at once. These types of interventions have shown promise at a small scale, and social impact bonds are ushering them onto the main stage.

And there’s the rub: Great interventions are paired with risk-free profits for investors who don’t need the money. But providing ambitious, multi-faceted interventions does not require paying a bank a 20 per cent profit margin. Since there is no real risk transfer, and since the government is going to pay either way, let’s say “thanks but no thanks” to the middleman markup. Instead of paying a bank a 20 per cent margin, let’s help 20 per cent more people get access to these programs.

The Alberta College of Social Workers is opposed to the social impact bond approach for another reason entirely, suggesting that the bonds “allow financial institutions to turn human suffering and conditions into commodities.” ACSW president Lori Sigurdson added, “We don’t want people to profit from the misery of others. The motive becomes profit, not service. The primary responsibility of government is to support vulnerable and marginalized people.”

That responsibility comes with a cost, which governments across the Western world are increasingly under pressure to reduce. This pressure creates incentives for governments to be seen pursuing alternative funding arrangements, such as social impact bonds. But whenever governments suggest that services can be provided at “no cost to taxpayers,” often what they mean is that there won’t be a cost today—but things will get more complicated and costly several years from now.

If the projects underlying social impact bonds are worth doing, they are worth doing without paying a middleman markup. Government resources should be used to improve the lives of all citizens, not the returns of bondholders. If bank CEOs and investors want to do some good, they can donate to charitable causes or contribute to a financial transaction tax aimed at funding public programs. Their reward shouldn’t be profit on the backs of citizens, but the awareness that everyone benefits when society invests in social services and ultimately spends less on policing, the courts, jails and healthcare. #

David Macdonald is a senior economist with the Canadian Centre for Policy Alternatives, based in Ottawa.

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