Let’s Stop Commercializing Services for the Needy

Decades ago, when America’s nonprofits grew to about 5 percent of gross domestic product, it was pretty easy to guess that the market would start to find ways to peel off some of the larger and potentially more profitable parts of charitable activity.

First it was nonprofit health care, with hospitals, clinics, and health-insurance groups like Blue Cross and Blue Shield converting to for-profit status. Next came higher education—colleges, universities, and vocational schools were acquired or started by for-profit corporations like the University of Phoenix/Apollo Group and Kaplan.

While those were by far the most obvious and lucrative targets for profit-seeking investors, one had to wonder how long other parts of the nonprofit world, such as human services and antipoverty efforts, would be spared the avarice of capital. We need wonder no longer.

Led by the United Kingdom’s Conservative government, and mimicked by the Obama administration and several states, social-impact bonds are the latest push to commercialize the financing of the nonprofit world. The idea is both to give nonprofits a way to pay for their programs and to give investors a way to achieve a financial return when they save government money, such as by reducing the number of criminal offenders who land back in prison after they are released.

This is but the latest in a long string of efforts working to substitute market models—and values—for altruism, philanthropy, and government responsibility for the common good.

Let’s quickly look at the recent history of benevolent capital’s efforts to do good while also doing well.

First came corporate marketing deals that allowed businesses to boost their brand image and sales by tying some small portion of profit to a charity or social need. These arrangements—started by American Express in the 1980s to raise money for the Statue of Liberty renovation and now seen everywhere—do some good, but they almost always benefit the commercial enterprises more than the nonprofit organizations.

What’s more, they reduce the likelihood and amount individuals will give to those very causes as well as their general altruism, according to researchers at University of Michigan’s business school and the University of Toronto. As Bono, the creator of one of the most ambitious business efforts—the Product Red campaign, to raise money to fight HIV/AIDS—famously said, you don’t have to give money anymore, you can just shop.

This was followed by the growing number of “social entrepreneurs” who promised to use their superior wisdom and experience in business to help charities accomplish more by adopting the ideas of the for-profit world. Often accompanied by “social venture capital,” they diverted money away from existing philanthropies in search of new ways to “do the deal” and turn a profit while producing public good.

These efforts accomplished many positive results. But all too frequently they washed up on the shoals of their own arrogance as entrepreneurs suddenly discovered the profound differences between the economic and social spheres. One case in point: microfinance businesses that offer small loans to struggling entrepreneurs in developing countries at unconscionable interest rates.

Next came low-profit limited-liability corporations and so called benefit, or B, corporations hoping to persuade government to give special deals to capital investors in commercial enterprises that ostensibly serve a double or triple bottom line (personal profit along with a social or environmental good, or both).

While corporations always received tax deductions for their philanthropy, that’s still not enough for some capital investors—today they want additional financial benefits and prerogatives for behaving in socially responsible ways. And as experience has taught all of us, when social or environmental goals come into conflict with profit interests, the desire to serve shareholders always wins.

Now the scheme du jour—social impact bonds. The general idea is governments would issue investment-quality bonds to private capital markets to finance efforts that government now pays for directly, like job training or early-childhood education.

Charities would be paid for their program services, and the people who invest in bonds would get repaid with interest if they proved they saved the government money over the long run—such as by ensuring that more people get decent-paying jobs that get them off the welfare rolls and paying taxes. The idea is to spend now to save later. The emphasis on the long run—and on measuring results—is good. But haven’t we known all along that an ounce of prevention is worth a pound of cure?

And yet government hasn’t provided sufficient money for programs designed to prevent people from getting into trouble. Why? Maybe it’s because politicians are afraid to be seen as “throwing good money after bad people,” that there isn’t the political will to make such wise expenditures.

Or maybe because we are a shortsighted society that bases its reward systems on next quarter’s profit-and-loss statements and that we do not trust nonprofit organizations to produce results over the long haul.

Another plausible reason is that focusing on individuals doesn’t make a whole lot of sense as an approach to solving massive problems.

Most of the problems America faces today represent the failures of institutions, not individuals.

It’s not people who need to be fixed, it’s our society. So does it make sense to create new capital investment opportunities that will generate profits by serving the needy individuals that our society continues to produce? What inevitably happens, do you think, if these social-impact bonds start producing large investment returns?

Certainly individuals need education, decent health care, and other critical services, but let’s not turn these programs into investment profit centers. It is absurd that at the same time political leaders cut money for nonprofit programs and steadfastly refuse to increase taxes to pay for what needs to done, they come up with new avenues for the nation’s most affluent businesses and people to make a profit in meeting public needs.

Taking a long-range view of social programs and using reasonable and coherent measures to improve their performance is a worthy goal. But we don’t need social-impact bonds for that. Commercializing social projects is not the solution; putting more money into programs government and donors can support—and that are accountable and serve everyone in need—will do more good.

Of course, social impact bonds come with a universe of other problems:

• Where does a nonprofit get the money it is required to pay upfront to provide the services that government may pay for later?
• How far out in time will the measure of success go? Until a toddler from an early-education program is in high school;? Until a released convict has been arrest-free for a decade?
• What happens if while the nonprofit is providing superb and highly effective services to individuals, the economy or state government or other systems and institutions deteriorate and affect its results?
• What happens to the revenue streams of other nonprofit programs that produce social gains but don’t provide any direct economic benefits to government?

But perhaps most important: How will we muster the public will, the necessary government resources, to solve the real societal problems and institutional failures that lead to a need for social-impact bonds? What happens when we have political leaders who insist on cutting tax revenues in favor of the wealthy and who believe more in the private market than in the public good?

We need our government leaders and everyone else in our society to embrace responsibility for the common good and build a world in which altruism, philanthropy, and patriotism motivate charitable activity—not profit-seeking and greed.

Mark Rosenman, a longtime nonprofit activist and scholar, directs Caring to Change, an effort in Washington that seeks to promote foundation grant making for the common good.