Early Intervention Bonds - Big Risk. Low Opacity?

Here's a piece from the Prevention Action website, of May 2010:

"Among new mechanisms for funding early intervention that do not depend on Government money, Allen (Graham Allen, MP, Labour) and Duncan Smith suggest an early intervention bond or some similar financial instrument that will allow private and public investors to invest in proven programs.

"Funds could be raised on the market and dividends paid as children's health and development improves (and calls on expensive treatments subside)."

They end on a pragmatic but optimistic note. "As politicians we must avoid the temptation of claiming to have found the magic bullet, whether it is Family Intervention Projects or Family Nurse Partnerships, in isolation from all the vital supporting components. In Nottingham's case, several proven programs working alongside excellent mainstream services compound and complement each other. 

"As in other aspects of politics the stakes with respect to early intervention are very high. It matters for the millions of individuals and future generations who will benefit, and it moves us closer to giving early intervention the same depth and permanence as the National Health Service."

Scroll forward to June 2011. The ideas have developed and firmed-up enough to be launched formally. Here's what Polly Toynbee writes in today's Guardian:

"... the plan put forward yesterday by Iain Duncan Smith, Oliver Letwin and Labour MP Graham Allen to issue "early intervention bonds" to solve the infinitely complex problems of families in trouble flaps away into delusion.

Here is the fantasy. Poverty and social dysfunction, addictions, depression, crime, teen pregnancy and illiteracy cause expensive crises. One person can cost scores of thousands a year in prison, courts, rehab and A&E overdose visits. But what if the very clever people in the City could roll all that sub-prime behaviour into an investment product? It's as clever as a credit default obligation. With a wave of a wand, the risk from all that bad stuff can be placed with investors instead. Social investment bonds could evaporate poverty and its consequences at no cost to you or me. These people can be monetised to turn a profit for all. Amazing.

Nick Clegg, speaking in the City recently, explained that if investors paid for preventative work up front, the state would repay them later out of money saved. He called for "creative ways to bridge the gap between initial investment and the long-term returns", praising the City as "one of the most innovative financial services centres in the world". Duncan Smith, writing in the Guardian last week, quoted private equity investor Sir Ronnie Cohen as predicting that social impact bonds are "the wave of the future" and "the new venture capital".

Do these bonds sound suspiciously like a relative of the sort of bonds based on packages of toxic debt, traded until their mortgagees defaulted on their loans? That then unraveled so rapidly in 2008/09 taking several international money houses with them, Lehman Brothers, Bear Sterns included? And almost sank RBS and LLoyds, consuming over £60bn in public funds to keep the service tills working? Surely not. 


Or maybe it's a type of back-end loaded PFI. The sort of pay-later model that leads to this recent report:

"HM Treasury’s ‘inadequate’ monitoring of trading in Public Finance Initiative (PFI) debt has allowed banks and builders to ratchet up £2.2bn in undetected profits, an industry analyst has claimed.

There are about 920 PFI projects in the UK with a capital value of £72.3bn, of which 720 are operational. A report by Dexter Whitfield from think tank the European Services Strategy Unit alleges few PFI projects would have received approval if average subsequent profits of 50.6% had been taken into account at the evaluation stage.

Entitled The £10bn Sale of Shares in PPP companies, the report reveals the Barnet hospital PFI project was subject to five later transactions and the Calderdale hospital scheme was sold nine times between 2002 - 2010.

Research shows PFI firms have subsequently sold the equity of 622 schemes on the secondary investment market and the scale of such deals is significantly higher than the sales identified in the HM Treasury PFI equity database and estimated by the National Audit Office (NAO).

Report author Dexter Whitfield said:'The level of profiteering from PPP equity transactions makes a nonsense of the original value for money assessment.PPP projects are little more than money-making mechanisms for builders and banks.'

Among its recommendations the report calls for standard contracts to be re-written, imposing a ceiling on profits taken from PFI equity, together with a requirement that the public sector should have a 50% share in any profit above a specified level.

It also calls for the scope of HM Treasury's PFI equity database to be extended to cover all historic and future equity sales, made publicly available and regularly updated.Additionally,spending watchdog the NAO should research the longer-term effects of the growing secondary market.

Margaret Hodge, chair of the influential Public Accounts Committee agreed with Mr Whitfield’s call for greater oversight of the system,'so that if there is some profit over time in the funding of these PFI contracts, that profit can be shared between the taxpayer and the private investor.' 

Now, early intervention clearly works, and Sure Start centres were one of the manifestations of that understanding. So, if the Coalition believes so much in early intervention why is it calling for the creation of what we must consider to be risky, bond-based initiatives to fund the interventions? Might it be to do with cuts elsewhere that are damaging projects like Sure Start with 20% cuts and removing ring-fencing and/or getting expenditure like this off the public books? 


Short termism amongst traders has variously caused the collapse of the pound, the collapse of banks and rupture of sovereign economies. Why would we possibly want to introduce this risky model into the funding of (early) interventions, with the attendant difficulties of measuring improvement statistically tight enough to trigger payments to the investors? 


Finally, what's the safety net for the bonds if their market fails? Will it be the taxpayer again, as it was with the banks recently, even though risk purportedly rested with the banks - which in the final analysis could not be allowed to fail, in the UK at least?     

These bonds really require a long, hard look.