Saturday, November 10, 2012

Can Social Impact Bonds Be a Model for Transport Finance?

The Canadian government just announced social impact bonds to supply public services. From the Toronto Star:


OTTAWA—The Harper government is introducing a controversial new approach to funding social services called “social impact bonds” that can turn a profit for private investors. 
“Social finance is about mobilizing private capital to achieve social goals, creating opportunities for investors to finance projects that benefit Canadians and realize financial gains,” the government said in a statement announcing the financing mechanism.
Human Resources Minister Diane Finley commented, “The government recognizes that we must take steps to enable communities to tackle local challenges. 
“By harnessing private sector capital and business practices, we can better respond to social challenges such as homelessness, unemployment and poverty,” she said in a speech in Toronto explaining the initiative. 
The bonds, which were mentioned in the March 29 federal budget, are a complex mechanism to increase funding for social objectives.
The government contracts with a non-profit organization or a private, for-profit business to supply a service, such as building affordable housing, counseling ex-convicts or working with at-risk youth. Funds are raised from investors or charities to finance the project and, if the goals of the project are reached, the investors are repaid their original investment plus a profitable return.
“The government will partner with organizations, businesses, and not-for-profit organizations to build further momentum in Canada around social innovation and social finance tools,” the Human Resources department said in a background document.
The bonds, pioneered in Britain, have been widely questioned by critics. They say the bonds are a way of getting governments and the public off the hook for paying for needed social programs and question how success or failure of the projects can be accurately measured.

A key question associated with these types of bonds is whether the public should provide direct investment in places and things that should positively affect citizens, or should the public invest in people and leave other businesses and agencies to worry about supplying things.

I think we should try more people based policies, and transportation is ripe for such efforts. I have argued for mobility credits as a way to improve transport finance and improve social equity (see here or here). You can find a bit more background on mobility credits at the Transport Economics wikibook (links available at the site):

Tradable mobility creditsA more acceptable policy on automobile travel restrictions, proposed by transport economists[25] to avoid inequality and revenue allocation issues, is to implement a rationingof peak period travel but through revenue-neutral credit-based congestion pricing. This concept is similar to the existing system of emissions trading of carbon credits, proposed by the Kyoto Protocol to curb greenhouse emissions. Metropolitan area or city residents, or the taxpayers, will have the option to use the local government-issued mobility rights or congestion credits for themselves, or to trade or sell them to anyone willing to continue traveling by automobile beyond the personal quota. This trading system will allow direct benefits to be accrued by those users shifting to public transportation or by those reducing their peak-hour travel rather than the government.[26][27]
In short, social bonds should be encouraged as a way to increase competition and accountability while ensuring desired services. Such bonds are great opportunities for policy experimentation and improvement.
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