Social Finance and Social Impact Bonds are becoming a popular idea for public sector funding.
Social Impact Bonds (SIBs sometimes called Payments for Success Bonds) began under the Labour government in 2010. Private investors lend the public sector money to meet certain social “benefits” or targets. Investing in social projects for profit is led in the UK by Social Finance UK. (Its sister organisation in the US is Social Finance US).
One of its key projects is Social Impact Bonds, often using payment by results. With SIBs, Social Finance identifies an area where they believe they can help reduce long-term costs by investing up front. Key examples so far have been prevention of reoffending, and children in care.
As with PFI, the investors will ensure they make money (by receiving a payment for the service plus a return). As with PFI, the private sector is experimenting with public services, but this time the risks are not to the building or council finances but to the lives of the most vulnerable in our society.
David Cameron and the chief economist of Goldman Sachs claim SIBs will revolutionise public finances, enable innovation and returns to investors.
They have even been given tax relief under the new investment tax relief.
Cash-strapped local councils are now embracing social finance and SIBs. Several councils including Manchester, Birmingham and Essex have SIBs for vulnerable children, the GLA has SIBs to challenge homelessness and DWP are using SIBs to tackle unemployment.
Public funds identified for vulnerable children, the unemployed and homeless will be paid to these private investors, who are skillful at setting outcomes that they know they can achieve and thus secure a return on their “investment”.
Why are Labour councils joining the queue to work with SF and use SIBs? Councils so strapped for money they knowing they will soon not be able to meet their legal requirements are desperate for solutions.
If the work is successful, they say, then the social benefit is achieved. In these austere times when councils or hospitals are strapped for cash, why not let the private sector lend a hand?
For councils to cut preventive services and then bring in the private sector in to “solve” the crisis they create for the most vulnerable is ridiculous. But this appears to be just what is being considered. We can challenge this, but only if we make an attempt to understand this new phenomena.
The labour movement must stand up to “PFI Mark 2”. We need to fight crude targets linked to profit, for reduced workload and more resources.
The unions should demand a future Labour government and local councils reinvest public and democratically accountable funds into services.
Otherwise the results are likely to be similar to those with PFI.
Under the Labour government we saw the expansion of private finance in the public sector through PFI in capital projects.
The initial cost of these expensive projects were borne by the private sector. The way they got profit was by taxpayers, i.e. us, paying them back through rent over 30 or more years.
New Labour’s thinking was that the public could bear the encroachment of profit into public services as long as private companies didn’t deliver the services, and weren’t directly profiting out of the sick, children or the poor.
But gradually these projects started to take on what were called “soft” services such as cleaning, management of the facilities and catering. The companies wanted to profit from us renting our own buildings back from them (at vast cost) — and from the staff who worked in them as well.
Hence PFI contracts for buildings included outsourced cleaners, catering and support staff.
103 PFI deals in the NHS under the last government, were worth £11.4 billion.
By the time that they are paid off, they will have cost more than £65 billion. When these costs were revealed as part of a report on Government use of PFI, Margaret Hodge MP, chair of the Public Accounts Committee, described them as “staggering”. PFI has been totally exposed for what it was — privatisation.
As councils and hospitals face massive cuts to budgets, councils and the NHS are still paying for buildings in which they can no longer afford to run services — such as libraries, schools and hospitals! All this when government borrowing is cheaper than private borrowing, and in fact pays interest rates lower than inflation.
PFI buildings also had restrictive contracts and limited access. A PFI school building was only the school’s from 8am to 6pm. The community which used the school as a hub for regular activities, (clubs, sports, meetings, leisure) could rarely afford the private rent of these gleaming new buildings in the middle of working class estates.
The building were like statues erected to “show off” private finance.They were a reminder of the failure of PFIs, from a government who had failed these communities.
And how was PFI for workers?
Look where the battles for union recognition, living wages and rights at work in the last few years have taken place. They are in outsourced contracts, cleaners and catering staff at universities, schools and colleges, in hospitals. Where soft services were outsourced as part of PFI, the results for workers were cuts to pay and conditions and rights.
We might have hoped the unions had learned the lessons from PFI.
Even the Tories under Osborne have proposed not to include soft services and to include greater public-to-private ratios, public appointments on boards, less debt and higher scrutiny.
This is not because the Tories oppose private finance in the public sector. They just want to reinvent it so it looks less obscene.