A few blocks from where I work, there’s a guy who lives on a sidewalk in the Financial District. That guy is incredibly expensive. For the amount we pay in social services to keep him alive, he could practically move into the Ritz. The yearly cost of caring for a homeless person with substance abuse and mental issues (that is, most of them) ranges from $55,000 up to $134,000, according to various research studies.
Everybody knows there must be a better way. Get that guy into long-term housing and give him the social supports he needs to stabilize his life, or at least to spend less of it in hospitals and jails. That’s expensive too. But it’s a lot cheaper than what we do now, and certainly more humane.
Even though preventive services can often save money in the long run, governments are loath to fund them. Prevention is expensive. It requires long-term investment, which is not how governments operate. The payoffs are often hard to measure and far in the future. Effective prevention programs also require co-ordinated services, innovative and even risky new approaches, and a laser-like focus on measurable results. Governments are terrible at all these things, especially the results.
All of this explains why “social finance” is suddenly so hot. The idea behind social finance – also known as “impact investing” – is to get more private money into social projects that will pay off for society, and also for investors. If the projects get results, investors will be handsomely rewarded.
In New York City, Goldman Sachs has offered to put up $9.6-million in the form of a “social impact bond,” to fund a program that’s designed to keep young prisoners released from Rikers Island out of jail. The rationale for helping ex-cons is the same as for housing the homeless – keeping people out of jail saves money in the long run. The program is delivered by a non-profit group. If it can cut recidivism rates by 10 per cent over four years, Goldman gets its money back. If it does better, Goldman could make a healthy profit. A similar program, launched two years ago at Britain’s Peterborough prison, is producing promising early results. More people are getting help, and local crime has fallen.
In Massachusetts, the government has been using “pay for success” contracts to cut homelessness. It figures it saves $9,423 per year for every person housed, including program costs. Fresno, Calif., is trying an asthma prevention program.
These programs have two requirements that government programs don’t have. They are tied to outcomes, not outputs. And investors only get their money back if they work. Warm feelings (which are the main output of many, if not most, social programs) aren’t good enough. As Massachusetts secretary of finance Jay Gonzales told the Boston Globe, “There’s a new-found interest … in changing the culture of state government to focus on results.” Social financing tools “can empower governments to innovate in ways they wouldn’t otherwise attempt,” Mayor Michael Bloomberg told The New York Times.
Social finance has drawn strong support from some of the world’s biggest charitable foundations, as well as from U.S. President Barack Obama. Canadian advocates include Paul Martin and other leading thinkers, as well as a new generation of social entrepreneurs who are as interested in doing good as doing well. The Harper government also wants to jump on board, and has asked for pitches from the private and charitable sectors.
As you’d expect, not everyone is crazy about letting the private sector in the door. The NDP and other left-leaning groups detect the stench of stealth privatization. They are certain that the pursuit of profit by the likes of Goldman Sachs inevitably means less money for the needy. Other skeptics point out that designing and measuring effective programs is harder than it looks – and that it will be years before we understand if, and how well, they work.
But we also face a set of hard and unpleasant facts. Many government services are demonstrably wasteful, inefficient and ineffective. And governments are out of money. The only way they will be able to maintain the social services we already have is to deliver better results at less cost. The old models are finished, and we’ve got to start inventing new ones.
Follow us on Twitter: