Editorial: Too many worries with social bonds

Health Minister Jonathan Coleman has announced that "social bonds" will be used to encourage private investment in ...
Mark Taylor

Health Minister Jonathan Coleman has announced that "social bonds" will be used to encourage private investment in solving intractable social problems.

OPINION: The Government says it will try "social bonds" to improve difficult social problems.

The first will focus on getting people with mental health conditions into work. Other possibilities include re-offending rates and the management of chronic health problems.

The bonds, an idea borrowed from Britain, are complex instruments. The general idea is "payment by results"; investors fund providers to take on a problem – more or less however they like. If there are big improvements, the government pays out. No improvements, no profit – or  a smaller one.

As ever, there's a certain elegance to the theory – the government only stumps up once someone else makes inroads on the problem, at which point everybody wins.

Yet the problems with this idea, and others like it, run deep. Designing the bonds is a minefield of guesswork. They must be financially attractive, but investors cannot make a killing. The work gets outsourced, yet a large and expensive administrative apparatus is still necessary. Even judging results is hugely difficult – have more people gone into work because of the fancy programme, say, or because the economy has improved?

"The history of the world is incentives work," writes National Party pollster David Farrar in support of the idea. That is an inadequate synopsis, to put it mildly, yet many of the incentives operating here are dubious. There are obvious reasons for companies to massage the numbers, to push for lenient contracts, and to make worrying decisions in pursuit of targets.

The history of the world is also that profits transmogrify into rents, wherever they can – by monopoly or by lobbying or by regulatory capture. Consider global security outfit Serco, which runs Auckland's Mt Eden prison; it is now under investigation by Britain's Serious Fraud Office for overcharging for the electronic tagging of offenders – some were found to be overseas, back in prison or even dead.

The Government, too, has a powerful incentive to tout a success – it has backed the project. This is not to say that targets are not useful – they can be extremely clarifying – but they have their limitations.

There are deeper questions too. Can it really be appropriate for companies to make money by "innovating" on vulnerable groups? What happens to the people in need if they fail? Even the bonds' supporters suggest they be used only where big improvements are plausible. But why trust bureaucrats to work that out, if they are so inept at solving the social problems at present?

Of course there must be an openness to new ideas; the Government should run its own pilots frequently.

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Yet criminal reoffending and persistent unemployment among high-needs groups don't exist because bureaucrats are ignoring solutions. They are profound problems that need constant, long-term attention.

The tools of finance are not a good fit here. Who really believes that investors chasing good numbers will cater to the complex needs of a mental health consumer struggling for work?

Social bonds have barely been tried overseas. They smell like a gimmick. The pitfalls outweigh the prospects of a happy ending.

 - The Dominion Post

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