Social Impact Bonds (Pay for Success): Yet Another Privatization Scam

For those of us who know more about public education than Wall Street investment schemes, Valerie Strauss and Kenneth Saltman (education writer and professor at the University of Massachusetts, Dartmouth) did us a favor last week. In her Washington Post column, Strauss published a column by Saltman explaining simply and clearly what Social Impact Bonds are, how they are now privately funding education projects at public expense, and problems with these investment instruments.

In her introduction to Saltman’s column, Valerie Strauss’s describes the use of Social Impact Bonds for funding education projects: “Within the 2015 Every Student Succeeds Act, the K-12 education law that replaced No Child Left Behind, is a provision that provides for the use of federal funds by states and school districts for something known as ‘Pay for Success.’ The Obama administration has actually been funding Pay for Success programs in education and other areas for years, and Congress likes the concept… According to the Corporation for National & Community Service: ‘Pay for Success (PFS) has emerged as a new approach for government to partner with the private sector to fund proven community-based solutions. PFS is an innovative contracting and financing model that leverages philanthropic and private dollars to fund services up front, with the government, or other entity, paying after they generate results.  This strategy has gained strong bi-partisan support in Congress, as a strategy for increasing return on taxpayer dollars while improving the quality of services provided in our communities.’ If it sounds as if it’s a way for the private sector to make money off investments in pubic education, that’s because it is.”

Strauss provides an example of the use of Social Impact Bonds: “A Pay for Success program in Utah funded by Goldman Sachs earned a profit for the global investment bank for every student who went through an early-childhood program and was not referred for special education. According to the New York Times: ‘Goldman said its investment had helped almost 99 percent of the Utah children it was tracking avoid special education in kindergarten  The bank received a payment for each of those children.'”

Saltman begins his piece by explaining who is pushing Pay for Success as a way to reform education: “Pay for Success, also known as Social Impact Bonds, is being heavily promoted by power corporate entities and politicians as a solution to intractable financial and political problems facing public education and other public services. They include investment banks such as Goldman Sachs, Bank of America, and J.P. Morgan; philanthropies such as the Rockefeller Foundation; politicians such as Chicago Mayor Rahm Emanuel and Massachusetts former governor and now Bain Capital Managing Director Deval Patrick; and professors at elite universities such as Harvard University.”  Saltman adds that Social Impact Bonds were imported from the United Kingdom in 2010, originally advocated by McKinsey Consulting, the Center for American Progress, and the Kennedy School of Government at Harvard: “Jeffrey Liebman went from Obama’s Office of Management and Budget to… the Government Performance Lab in the Kennedy School of Government dedicated to expanding Pay for Success.”

Why are Social Impact Bonds being heavily promoted? “In these schemes, investment banks pay for public services to be contracted out to private providers and stand to earn much more money than the cost of the service… Pay for Success is promoted… as an innovative financing technique that brings together social service providers with private funders and non-profit organizations committed to expanding social service provision.  In theory, Pay for Success expands accountability because programs are independently evaluated for their success and the government only pays the funder (the bank) if the program meets the metrics… Politicians (especially rightest Democrats) love Pay for Success because they can claim to be expanding public services without raising taxes or issuing bonds and will only have the public pay for ‘what works.'”

Saltman examines five claims made by supporters of Pay for Success and systematically rejects each of them.  I urge you to read his analysis carefully.  Here are merely some highlights.

Supporters of Pay for Success claim that Social Impact Bonds transfer risk from the public to the private sector for programs that may be controversial or risky. Chicago, for example, has used Pay for Success investment to add a pre-Kindergarten program for 2,600 public school children: “However, critics of Pay for Success point out that in reality there is little risk for investors of losing that nearly $17 million because the investors select already proven projects…. (I)nvestors make not only big profits but additionally receive positive public relations, good will, and image boosting… Risk is also mitigated for the banks by philanthropies such as Rockefeller or Bloomberg that guarantee repayment of the money the banks invest.”

Proponents of Pay for Success claim that private investment is necessary to motivate experimentation with public policy for which there does not exist the political will for change.  Saltman responds that polling indicates widespread public support for improvements in infrastructure and for investments in education, health and social service programs: “Parents and community members are not the ones who lack the political will.”

Programs paid for with Social Impact Bonds are said to be accountable because their very being depends on measurable proof that must be provided before investors can be repaid. But what about the manipulation of data and misuse of measures? (Even though I know about extensive educational research confirming the benefit of quality preschool programs, for example, my own central question when I read about the Utah preschool program, supported by Goldman Sachs Social Impact Bonds, that prevented children from being later diagnosed for special education is how it could have been known and measured even before preschool children entered the program whether they were likely later to be referred to services under the Individuals with Disabilities Education Act. And how could it be proven mathematically that the particular Pay for Success program prevented such later diagnosis?) In education there are enormous questions about the advisability, validity and reliability of measurement—quantitative assessment—of what is a qualitative process.  What about the underlying assumption of the whole scheme—that we have the capacity accurately to measure school quality?   William Mathis and Tina Trujillo, academics writing on behalf of the National Education Policy Center, recently questioned our tendency these days to trust only quantitative evaluation in education: “The problem is in defining what should be measured, how it should be tallied, and how multiple scores can be combined into one… The challenge is that schools have many purposes and each would lend itself to a different way of measuring and weighing… The companion difficulty is trying to validly represent an important feature with an imperfect measure….  Such decisions are central but are not empirical. They are based on our underlying values.”

Like Mathis and Trujillo, Saltman rejects the assumptions made by proponents of quantitative, test-based school accountability and those who support Social Impact Bonds that pay off only when a program can demonstrate measured success: “The message… is that the government spends billions of dollars on public services that are not measured and hence has ‘little to show for it.’  Implicitly here is an assumption that that which cannot be immediately measured quantifiably also cannot be justified as a public expense.  This presumes that the kinds of subjects that are less quantifiably measured such as the humanities or abstract sciences are less valuable and that funding in the future ought only to follow that which can be justified.”

Finally there is the whole contention of Pay for Success supporters that Social Impact Bonds will guarantee cost savings even as private actors ultimately make enormous profits: “The private sector project of Pay for Success is not merely one that involves the private capture of public wealth but also the public reframing of symbolic meanings that make such wealth capture possible, remaking common sense in ways that suggest that only the rich can promote just social change by pursuing their financial interests. Such ideologies suggest that the very private forces responsible for draining and weakening the public are in fact saviors for the public, that there is no alternative to markets in every social realm, that public citizens are nothing more than economic actors, and that these projects are apolitical rather than representing the interests and perspectives of capitalists over workers and most citizens.”

Saltman adds that privatization schemes like Social Impact Bonds also undermine the democratic process: “As with venture philanthropies, the public ends up not only financially subsidizing private banks but also subsidizing the loss of public control over public governance for public services.  With venture philanthropies, the subsidy takes public revenue in the form of tax breaks for rich donors and corporations. With Pay for Success, the public pays a premium for services that could have been provided directly through the government, and loses democratic governance control over the service.”

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