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Monday, June 20, 2011

Market Logic - Tori

In his recent article Let’s Stop Commercializing Services for the Needy, Mark Rosenman laments what he considers to be the next market driven approach to addressing social problems, namely the President’s call to create a social-impact bond program. Based on a United Kingdom program, social-impact bonds create a financial intermediary between the more traditional government – nonprofit social service provider model. Financial investors lend capital to a service provider. If the service provider achieves designated performance targets, the government pays the investor for their costs plus enough to earn a profit. Because private investors absorb much of the risk, they have an incentive to rigorously monitor program performance. Supporters of the project believe the social-impact bond program could drive innovation in program delivery.

Rosenman’s main objection appears to be his distaste for solving social problems with market oriented approaches. For Rosenman, the market privileges profit interests over social and/or environmental goals. In this case, Rosenman fears that short term, easily measurable goals will be more likely to draw investors than more long-term, structural social problems. In essence, Rosenman believes that social-impact bonds are yet another example of lawmakers lacking the political courage to deal with institutional failures, preferring instead to kick the proverbial can down the road rather than taking a substantive look at the origin of social problems.

Rosenman’s most convincing concern is that programs will be designed to guarantee investors a profitable return. A service delivery provider that can produce measurable gains will become an attractive investment risk. For example, a job training service provider in a rust belt state could create a program to retrain middle aged factory workers. The program could be designed with reliable and standardized metrics that are easily verifiable. However, the program would not do much to change the structural economic problems that created the need for job training in the first place. Rosenman’s fears that programs will in effect be ‘teaching to the test,’ producing results in a vacuum.

While Rosenman’s concerns are valid, I believe social-impact bonds could drive innovation in the delivery of services. In a competitive marketplace, nonprofit organizations will be incentivized to identify innovative solutions as investors will seek out creative, ground breaking approaches. It will also be fascinating to see how nonprofit boards change their fundraising strategies to become more attractive to private investors instead of government regulators.

Works Cited:

Jeffrey B. Liebman, “Social Impact Bonds: A Promising New Financing Model to Accelerate Social Innovation and Improve Government Performance,” Center for American Progress, February 2011.

Mark Rosenman, “Let’s Stop Commercializing Services for the Needy,” Chronicle of Philanthropy, June 8, 2011.

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