*and a disaster in the making for Ontario’s social services
A policy paper of the Ontario Public Service Employees Union

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Executive Summary

A century ago, social services in Ontario were based on the idea of charity. Then, after the Second World War, government came to see social services as part of citizenship – a way to make sure that everyone had a chance to participate in society. Later still, government began to view social services as a kind of public investment that could benefit the economy and save government money in the long run.

Today, a new idea about social services is coming into fashion. This idea is that social services can be a destination for private investment and a source of private profit. The latest delivery vehicle for this idea is the Social Impact Bond (SIB).

Just like contracting-out, public-private partnerships (P3s), and public asset sales, SIBs are a form of privatization. As with all privatizations, its supporters promise better service and lower costs to the public purse. As with P3s, SIBs promise easy money for cash-strapped governments and instant relief from financial risk.

The first SIB was created in Britain in 2010. Here’s how SIBs work:

• Step one: Government identifies a need for a social service in an area where it is possible to a) measure the outcome of providing the service, and b) estimate the savings to government as a result of better outcomes.
• Step two: Investors put up private money to fund a program that will achieve the desired outcome.
• Step three: Government repays the initial investment, plus an agreed-on profit, using the savings achieved when the program succeeds.

Governments and investors alike are excited about SIBs. But there is every reason to think they are bad social policy. SIBs will make social services less affordable. They will reduce government funding. And they will transfer control over social policy to private investors.

SIBs redefine social investment. Previously, social investments were investments in people for their own sake and for the overall social good. With SIBs, however, those investments become investments in people as profit centres for private investors.

SIBs are a new policy in a larger suite of policies that aim to boost corporate profits at public expense. If social services lack investment today, it is largely because, for decades, governments have opted for tax cuts and privatization instead of funding public services properly.

The Ontario Public Service Employees Union represents frontline workers right across the spectrum of social services. We believe Social Impact Bonds pose a serious threat to social services. OPSEU has no plans to participate in any projects using SIBs and no intention of working with organizations that promote their use in Ontario.

Introduction: Principles of social service delivery

In the last century, social services[1] in developed countries have been shaped by three distinct principles. Prior to the Great Depression, virtually all social services were based on the principle of charity and run by private foundations, religious organizations, or local governments.[2] Following the Second World War, the provincial government began delivering more and more services. These services aimed to provide basic social care and protection as a right of citizenship and also to promote social cohesion. In the late 1970s, governments turned to market-oriented solutions to social issues. That’s when more policy-makers began to see social services through a public investment lens.

All three principles – charity, citizenship, and public investment – play a role in the delivery of social services today. 

Charity

Canada is home to more than 75,000 not-for-profit charities, funded by individual donors, governments (sometimes), and more than 10,000 public and private foundations. Together these foundations manage more than $55 billion in assets and provide close to $5 billion annually in grants to charities.[3]

Citizenship

Governments spend much more on social services than charities do. In Ontario alone, the Ministry of Children and Youth Services and the Ministry of Community and Social Services together spend more than $14 billion a year on social programs and income supports. Other ministries spend additional money on correctional services, enforcement of employment standards, and vocational training. Help and services received as a right of citizenship remain central to Canadians’ vision of social services.

Public investment

The concept of public investment in people is as old as public education. All parents know that education has not only personal, but also economic, benefits for children. Children are future workers, and public education has always recognized this. The child who can read, write, do math, and reason is likely to have a better income than the one who cannot. The enhanced skills that come with post-secondary education are just as valuable, and governments that invest in colleges and universities today always tout their economic benefits. These benefits go both to individuals and to the economy as a whole.

This common-sense understanding of public investment in people took on new meaning with the rise of “human capital” theory in the 1960s. When first introduced, the phrase was not popular. Critics of human capital theory said it reduced human beings to commodities whose only value was their economic value. Nonetheless, it was soon part of mainstream economic thinking. By the mid-1980s, for example, proponents of human capital theory had become strong supporters of early childhood education (ECE). Research in the field showed that money spent on quality programming for children, especially in the early years, was repaid many times over. Not only did the individual exposed to ECE programming have a better life and a better income as an adult; society was spared extra costs related to negative social outcomes and gained extra income, both for the economy and for government, as a result of the individual’s higher productivity and higher income.

In human capital theory, public investment in other forms of (higher) education is first and foremost an investment in the economy. Today, the skills future workers gain at college or university seem to be primarily valued for their contribution to the workers’ human capital, not their development as citizens with values other than economic ones.

Increasingly, traditional social services are now viewed in the same light. For government, part of the value of children’s aid, programs for “at risk” youth, employment counselling, and so on is an economic value: when successful, these programs reduce other program costs over the long term.

Changing priorities in the neoliberal era

The end of the 1970s marked the beginning of a new era, generally called the “neoliberal” era, that has made profound changes to the relationship between government, business, and society. It has also changed the relative importance of charity, citizenship, and public investment in the delivery of social services.

Under the profit-oriented principles of neoliberalism, the role of government was, initially, two-fold:

• first, to “stay out of the way” and let free markets operate with a minimum of taxation, regulation, and public ownership; and
• second, to provide support to markets to enforce contracts, provide a trained workforce, and make it easier to produce and move goods and services.

This policy direction has given corporations more power and governments less. With more and more wealth concentrated in the corporate sector, the influence of charitable foundations – funded by corporate wealth – has grown as well.

In the last two decades in particular, government has taken on a third role. It no longer merely supports profit-making; today, it is also a major source of direct business profits. This has moved the provision of public services into a new era: the private investment era.

Beginning in the late 1980s at the federal level and in the 1990s in Ontario, business-friendly governments began touting cuts to payroll taxes and corporate income taxes as a means to spur business investment. Tax cuts failed in their stated goal; the rate of business investment in Canada is now a weak and often negative contributor to economic growth.[4] Tax cuts did succeed, however, in boosting profits; each new tax cut provided a jolt of free money to every profitable corporation – and many unprofitable ones as well.

As a source of government-generated profit, tax cuts may now be poised to take a back seat to another policy: privatization. In Ontario, the last two decades have seen a steady expansion of private for-profit investment in the public sector in three main forms:

• contracting-out of service delivery;
• private-sector management and financing of public infrastructure projects; and
• outright sales of public assets to private investors.

Business, and business-oriented politicians, have pitched privatization as a way to get more value out of public dollars. Competition and “private sector discipline” will drive efficiency – they say. This will give citizens better quality at lower cost – they say. And in the case of asset sales, privatization will also “unlock” public dollars to spend on other priorities – they say.

In Ontario, as elsewhere, the reality of privatization has been very different from the promise. In service delivery, the profit motive has resulted in ballooning executive compensation for private companies coupled with cost-cutting that hurts service quality and reduces job quality for frontline workers. The promised cost savings seldom materialize, and cases of services costing more in the private sector than they did when they were publicly run are numerous.[5]

There is little doubt that Ontarians are paying hundreds of millions of dollars a year too much because of the privatization of medical lab testing, highway maintenance, and information technology work. But contracting out of management and financing of major infrastructure projects is costing even more.

Public-private partnerships: 28 per cent more expensive

Building infrastructure in Ontario has always involved private contractors, but until recently almost all of those contractors were architecture, engineering, and construction companies. They signed contracts drawn up by government and were paid with government funds. Government retained full oversight of the contract parameters and the contracting process. If special financing was required, government issued bonds to borrow the money at rock-bottom interest rates.

Since 2001, however, the process has changed. Through public-private partnerships, or P3s, government is handing control of the process to the private sector. Under the auspices of Infrastructure Ontario, a government body, contract details are handled by private-sector law firms and accounting firms while financing is provided by private-sector banks, hedge funds, and other lenders.

Less than 15 years since Ontario launched its first P3 hospitals in Brampton and Ottawa, the provincial government now has plenty of experience with the P3 model. So have P3s been a good deal for the provincial government?

No, they haven’t. In fact, they’ve been an unparalleled disaster. Recent news stories have highlighted the failure of P3s to deliver projects to an acceptable standard.[6] But even projects that appear to have met the outcomes required by contract have cost far more than traditional public procurement methods.

In December 2014, Ontario Auditor General Bonnie Lysyk published a special report on 74 public-private partnerships, which she referred to by the government’s more recent name, “alternative financing and procurement.” Said Lysyk:

For 74 infrastructure projects (either completed or under way) where Infrastructure Ontario

concluded that private-sector project delivery (under the Alternative Financing and Procurement [AFP] approach) would be more cost effective, we noted that the tangible costs (such as construction, financing, legal services, engineering services and project management services) were estimated to be nearly $8 billion higher than they were estimated to be if the projects were contracted out and managed by the public sector (emphasis added).[7]

Based on an overall value for the 74 projects of roughly $36 billion, the P3 project providers had received an average markup of 28 per cent above what the final cost would have been if traditional public procurement methods had been used.

Infrastructure Ontario’s response to the Auditor General’s calculation was that the P3 projects included an accurate costing of the risks involved with bringing in the projects on time and on budget. Oddly, however, Infrastructure Ontario could not back up its calculations with data. “Infrastructure Ontario estimated that the risk of having the projects not being delivered on time and on budget were about five times higher if the public sector directly managed these projects versus having the private sector manage the projects,” Lysyk reported. However, she noted, “there is no empirical data supporting the key assumptions used by Infrastructure Ontario to assign costs to specific risks” (emphasis added).[8]

P3s are highly inefficient at delivering value for money to government. When it comes to delivering profits to private investors, on the other hand, P3s are efficient in the extreme. In this regard, they may turn out to have a lot in common with the latest private-sector plan for public-sector dollars: Social Impact Bonds.

Social Impact Bonds: innovation in profit-making

Social Impact Bonds (SIBs) are being promoted around the world as a way for cash-strapped governments to achieve social policy goals through private investment. Simply described, SIBs work like this:

• Government identifies a social service that needs funding and for which it is possible to improve specific outcomes for a target group of individuals. This could involve, for example, a project to reduce recidivism among convicted offenders by a specified percentage, or a project to place a specified number of “at risk” youth in jobs, school, or training for a certain period of time.
• An intermediary organization, usually a foundation, works with government to design a project and finds investors to put up money for the project. The intermediary organization then hires one or more service providers to work with the target group.
• If the service provider meets the project targets, the investors then receive their initial investment back, plus the rate of return specified in the project agreement. Government pays for both.

Social Impact Bonds are something new. As of July 2015, only 40 projects, spread across seven countries, had been commissioned,[9] and so far only a few have been completed. This has not stopped boosters of SIBs from vigorously promoting them. According to their supporters, SIBs will:

• inspire innovation in service delivery because investors only get a return on their investment if a project meets its targets;
• shelter government from the risk that a project might not succeed – if it fails, investors lose, not governments;
• connect social services to measurable outcomes and ensure accountability for the way money is spent;
• expand successful programs to reach more people who can benefit from them; and
• save government money in the long-term through successful interventions that reduce the need for future interventions within the “beneficiary population.”

Based on these promises, several governments are working to support the growing SIBs movement. In Britain, the Centre for Social Impact Bonds of Cabinet Office has been set up to build capacity for “impact investors” and community agencies to participate in SIBs and has set aside £60 million (about C$120 million) to support the development of SIBs. In the U.S., the federal government’s “Pay for Success” program had a budget of $US100 million ($133 million) in 2012[10]; in 2015, that number had reached $382 million ($C508 million).[11] In Canada, the federal government launched its Social Finance Accelerator Initiative in the 2015 budget[12] to identify potential “social enterprise” projects and get them up and running in early 2016.

In May 2014, Saskatchewan launched the first SIB-funded project in Canada, a $1 million assisted-living project for young single mothers. Here in Ontario, the government is actively working to develop projects funded by Social Impact Bonds as one aspect of its “Social Enterprise Strategy.”[13] Work on SIBs is being led by the MaRS Discovery District, a troubled public-private partnership that has been heavily subsidized by the provincial government[14]. In April 2015, MaRS released its first Request for Proposals for a SIB. The “MaRS Centre for Impact Investing” aims to support SIBs by providing “Social Impact Bond Advisory Services.”[15]

Given the complex nature of SIB contracts and how hard it is to evaluate outcomes, it is no surprise that consulting firms and major investors are already seeing SIBs as a source of future business – and profit. Companies like Deloitte Canada and PriceWaterhouseCoopers are already educating investors about Social Impact Bonds. In August 2013, investment banking firm Goldman Sachs joined with the United Way and a private philanthropist to launch the first ever U.S. SIB in early childhood education. Thousands of major investors, foundations, and service providers are eager to get in on the SIBs experiment.

All indications are that we are on the verge of rapid growth in the use of Social Impact Bonds around the world.

What’s wrong with SIBs?

Despite the excitement around SIBs, there is every reason to think they are bad policy that will make social services less affordable and drain government funding away from important services. Here, the parallel between SIBs and P3s is useful:

Social Impact Bonds (SIBs) borrow key features from P3s: they both use private investment dollars to finance public purposes and both allow government to transfer financial risk from taxpayers to the private sector. Whereas P3s are used to finance public infrastructure projects, SIBs are used to fund preventive interventions for social programs upfront, with the promise of a financial return to investors if the program meets its goals. SIBs are a kind of “P3 for people”—”a P4”.[16]

As reported by the Auditor General, P3s in Ontario haven’t saved the government money, they’ve cost the government money – and lots of it. Ontarians will be paying those extra costs for decades. So it is worth knowing whether SIBs are likely to take us down a similar path.

SIBS won’t foster innovation

Private investors don’t like risk: as a rule, they try to avoid it. So they are unlikely to experiment with ideas that might not work. “The basic idea [of SIBs] is to take a proven operator with a proven program [and] have investors pay to expand that program,” said one investment adviser who worked with Goldman Sachs on the Salt Lake SIB.[17] This idea is echoed by the Ontario Non-Profit Network:

From experience to date with SIBs, it is becoming clear that private investors will not be willing to take on the level of risk and expense involved in program innovation because governments will be unlikely to pay them a sufficient return to cover the higher risks.[18]

Innovation in social service delivery actually takes place in the public sector. People who’ve devoted their careers to social services don’t tend to be found in corporate boardrooms.

SIBs won’t shelter government from risk

SIBs will never really shelter governments from risk, for a very simple reason: like P3s, with their inflated risk calculations, SIBs won’t actually be risky at all:

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?[19]

SIBs will always mean government paying more for a service than if they had simply funded it up front and kept the savings for themselves. That’s not a risk – it’s a certainty.

SIBs won’t do anything government can’t do

By investing money up front, SIBs may extend successful programs to more people. But government can do this as well – given the resources. Does government need to shift its capacity to adopt proven programs, as the Ontario Nonprofit Network suggests?[20] Probably. But unfortunately, SIBs actually take resources away from social services.

SIBs will cost more

“There is no free lunch with the social impact bond model. Make no mistake: The government always pays.”

— David MacDonald, Canadian Centre for Policy Alternatives[21]

SIBs will require government subsidies just to get started

As in the early days of P3s, SIBs will require a lot of support from government before investors and service providers are able to use them easily. SIBs need support in the form of “legislation, government policy, budgetary practices and institutions and lobbyists promoting and enabling SIBs.”[22] SIBs, which mostly benefit private investors, require “significant government subsidization”[23] to get off the ground in any jurisdiction.

SIBs will have high transaction costs

Like P3s, SIBs are complex. They can’t exist without drawing resources away from services and putting them elsewhere. SIBs put human resources into:

• complex calculations related to measuring risk;
• selection of program criteria and program recipients;
• development of evaluation methods and criteria for success (and payment); and
• extensive negotiations between service providers, intermediaries, investors, and governments with respect to all of the above.

Time is money, and when it’s being spent on corporate law firms and financial experts, it’s a lot of money. In the Auditor General’s analysis of P3 contracts, these “ancillary” costs added up to $400 million for the 74 projects she looked at. That’s more than $5 million per contract, on average.

With companies like Goldman Sachs involved, it would be naïve to assume that projects financed by SIBs will ever be cheap.

SIBs will funnel public money to private profits

The companies involved in Ontario’s P3s all make a profit when they build a bridge or a hospital. But under P3s, they and the other players involved in these projects take another markup on top of that – a 28 per cent markup, on average, that has already cost Ontarians at least $8 billion. In the same way, SIBs will be managed by private consulting firms and financed with borrowed money at private sector interest rates. There is no reason to expect the markups on SIBs to be any less hefty than they have been with P3s.

The cost savings just aren’t there

Ontario already has the lowest program spending per capita of any province in Canada.[24] In most cases, the money that will supposedly be “saved” through SIBs has already been cut from government budgets. To suggest that services will somehow pay for themselves through the magic of SIBs and the brilliant generosity of “impact investors,” as they like to be called, is simply absurd.

SIBs will transfer control over social services from government to business

Try to imagine what social services in Ontario will look like 10 years from now if SIBs dominate social services funding the way P3s now dominate public infrastructure funding. What will the landscape look like?

It’s not hard to guess. Lobbyists for the Social Investment Bond industry will be big players in the politics of the province. Investment banks, charitable foundations, and the larger social service organizations will lobby to have government support for the programs in which it’s possible to make a profit. “Impact investors” will be major donors to the governing party of the day.[25] Politicians will respond by moving money from other services.

There are many social services which, delivered properly, can reduce the need for other services.  For example, quality ECE programming for pre-schoolers can reduce the need for expensive special education programming in later years. But in many areas, the service is not about improving anything: it’s about caring for people. If SIBs come into wide use in Ontario, we can expect to see dollars moved out of caring services and in to services that have profit-making potential.

The larger context: austerity and the public interest

It is impossible to talk about Social Impact Bonds without mentioning the larger context out of which they appeared. Originally proposed by the Cameron government in England at a time of sharp cuts to government spending, SIBs are a product both of the current “Age of Austerity” and of the long-term neoliberal project. The goal of SIBs is to expand the role of “investment” into areas which have, until now, been public spaces where social services were protected as rights of citizenship. SIBs distort the original meaning of “investment” in public services. Previously, those investments were investments in people for their own sake and for the overall social good. Now, those investments are to be investments in people as profit centres for private investors.

Many of the people who will now become sources of corporate profit are among the most vulnerable and most marginalized in society. It is morally wrong to profit from their suffering. The correct response to misery is “How can I help?” not “What’s in it for me?”

Public investment in social services is a good idea, and we can afford to do it. In a globalized world where market forces influence every aspect of daily life, wealth is increasing every day. But the distribution of that wealth is far from fair. Both governments and working people are short of money and increasingly indebted.

It’s not that there isn’t enough money to go around. Canada’s Gross Domestic Product per capita, which measures overall economic activity per person, is at an all-time high – we really are “richer than we think.” Yet that income is poorly distributed:

• Business profit margins are at a 27-year high.[26] Non-financial corporations now hold a record $680 billion in cash – a number greater than the total debt of the federal government – that they are not investing in economic growth.[27]
• For working people, work has become increasingly insecure. More and more jobs are precarious part-time, temporary, temp agency jobs with substandard wages and few benefits, if any.
• Eight out of ten provinces are predicting budget deficits for the 2015-16 fiscal year. Most have been running deficits since the 2008-09 global recession.[28]

As noted above, Ontario currently has the lowest program spending per capita of any province in the country. In social services, the age of austerity means budget cuts and an increasing tendency for the costs of care and treatment to be downloaded onto vulnerable individuals and families.

Many social services have seen real per capita funding fall since the 2008-09 recession, and some sectors are reporting serious problems with the availability of services. For example, “individuals and families who need developmental services and supports are in crisis,” according to a recent report by a special committee of the Ontario legislature. “[A]fter struggling to obtain services and enduring waitlists for years, many families feel pushed to the brink of disaster.”[29]

Many Ontarians with knowledge of child treatment programs, child protection services, and youth correctional services could make a similar case.

Social services in Ontario face many challenges, including financial ones. As noted above, Social Impact Bonds will remove funds from those services, not add funds. What we really need in Ontario is a serious conversation about new revenue sources.

Finding the funding: a better approach to social services

Ontario’s low spending on public services grows out of 20 years of cuts to government revenues. Significant cuts to Personal Income Tax and Employer Health Tax rates in the Conservative era (1995 to 2003) were followed by tax changes that favoured business in the Liberal era (2003 to the present). These included the elimination of the Capital Tax, cuts to the Corporate Income Tax rate, and the introduction of the Harmonized Sales Tax, to name a few. There have been a few instances where a Liberal government actually increased tax revenues; the Ontario Health Premium has been the most significant of them. Nonetheless, provincial coffers receive $18 billion a year less today than they would if tax rates in 2015 were the same as they were in 1995.[30] Even for a provincial budget approaching $132 billion a year, this is a big number.

Restoring tax revenues to a level that can support the public services we all need, especially services for our most vulnerable citizens, must be an important priority both for Ontarians and for their government.

Similarly, the use of public-private partnerships to finance public infrastructure is an uncalled-for transfer of public dollars to private profits. Based on the Auditor General’s calculations and the provincial government’s stated goal of building $130 billion worth of infrastructure over the next 10 years, Ontarians can expect to pay more than $3 billion a year too much for infrastructure over the next decade because of P3s.

Funding for public services is hard to come by at the best of times. Ontarians simply can’t afford to be donating billions of dollars to private investors to do things the province can do more affordably itself. The province must end its experiment with P3s. Just as importantly, it must not bring the P3 model – in the form of Social Impact Bonds – to social services.

The notion that P3s and SIBs are an “innovation” in the delivery of public infrastructure and public services is misleading. These new forms of privatization are a political innovation only. True innovation means more efficient use of resources, not the transfer of public wealth to private investors.

Conclusion: Social Impact Bonds and the Ontario Public Service Employees Union

The Ontario Public Service Employees Union (OPSEU) represents 130,000 working Ontarians. OPSEU members work in health care, education, the Ontario Public Service, and a wide range of occupations from property assessment to liquor control. In the social services sector, OPSEU members work in child care, child treatment, children’s aid, developmental services, employment counselling, the Family Responsibility Office, the Ontario Disability Support Program, legal aid, women’s services including women’s shelters, youth correctional services, and in public administration.

Since its founding in 1975, OPSEU has been a strong voice for public sector workers and a strong advocate for vibrant, well-funded public services. We believe government has a central role to play in the economic and social well-being of our province – not only to provide policy direction, but to manage, finance, and deliver public services and public infrastructure. Unfortunately, the neoliberal era has seen democratic governments grow weaker while corporate interests exert more and more control over the everyday lives of citizens.  The result is visible everywhere: excessive income inequality, an increase in precarious work, and crumbling public services.

We believe Social Impact Bonds pose a serious threat to the common good that reaches far beyond the delivery of social services. OPSEU has no plans to participate in any projects using SIBs. Further, we have no intention of working with organizations that wish to promote their use in Ontario.

Notes:

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