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Social Impact Bonds Hit The U.S.: Using Private Capital To Do Public Good

Instead of asking the government to invest its slim budget in innovative programs, what if you could invest in them and get paid back if they save money? That’s the premise of these popular new financial instruments for good.

The prison system is a money pit. The 2.3 million Americans in jail right now cost taxpayers $68 billion, and the recidivism rate is an embarrassing 68%. But maybe that could change with an infusion of cash from the private sector into prevention and early-intervention programs.

Perhaps you’ve heard of government social impact bonds, which raise private capital for prevention programs in the hopes of staving off the need for expensive safety-net and remediation services. Unlike an actual bond, the government pays back the money to investors only if programs are successful and save money—for example, if the number of repeat offenders in the prison system drops, or if homelessness is reduced (in this sense, it’s more like a stock). It’s a way to take the burden of risk for these programs off cash-strapped governments and to allow the market to assess the best options. To put it more simply: You could invest in a new program that keeps people out of jail. If the program hits certain benchmarks and saves the government money from not having to jail people, you’ll get paid back out of those savings.

Social impact bonds are already in use in the U.K., where a pilot program launched in 2010 at Peterborough Prison—the world’s first social impact bond—is showing some evidence of reducing prisoner recidivism. The program raised $8 million to allow a group of nonprofits to create a reentry program for former prisoners. Now social impact bonds are set to start rolling out in the U.S.—last month, Massachusetts became the first state to solicit financing ideas to support homeless adults and youth leaving prison, and President Obama proposed $100 million in funding for social impact bonds in the 2012 budget.

"It’s the economic environment. Government budgets are tight and this is a new way in which you can think about saving customer money. Preventative interventions can cost taxpayers a lot less in the long term than remedial interventions," explains Justina Lai, an associate at the Rockefeller Foundation, which is investing in social impact bonds both in the U.K. and in the U.S.

Where might we see social impact bonds in the U.S.? The Rockefeller Foundation discusses the possibilities in a new white paper: reentry programs for criminal offenders, permanent supportive housing for the chronically homeless, and aging-in-place housing for low-income seniors. If successful, these social impact bond-supported programs could save cash for the prison system (fewer prisoners, parolees, and people on probation), Medicare (fewer nursing home stays), Medicaid (less acute medical care for the homeless), homeless shelters, substance abuse facilities, and more.

It’s too early to tell whether the Peterborough pilot program, dubbed the One*Service, will offer a return to investors, but initial reports are promising. The Rockefeller white paper explains: "Clients are reporting better control of their lives and lower reoffending rates, a finding that has been corroborated by local police."

Social impact bonds are also investments that investors can feel good about. "This provides a new kind of investment vehicle for some of the impact investing capital out there looking for great ways to meet a double or triple bottom line," says Kippy Joseph, associate director at the Rockefeller Foundation. Expect to see a handful of social impact bonds popping up in the U.S. over the next year.

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  • Renato Chammas

    I discovered co.exist some days ago and I really appreciated some articles I've seen here, but I must say I completely disagree with the idea of social bonds.

    Maybe I didn't understand everything but for me this idea is an absurd! It is corrupting the social initiatives putting speculation in the core of them.
    We already pay taxes so the government does this job. If they are in a short budget situation, it is because they put themselves in this situation, before the 2 last big crises. The burden on people to get out of them is already too high. As it is said, through these bonds not only responsibility but also the risk is being transfered to people, which is unacceptable!
    If we think in a practical way: many social programs don't bring financial return (and are NOT SUPPOSED TO) but more of a 'quality of life' kind of return, or SOCIAL RETURN, such as safety, culture, etc... So it is quite possible that these people lose their money or don't get enough for it. First of all, it is quite difficult to measure a financial return on this kind of project, so the METHODOLOGY will surely be a good debate, and second, very important, is: how can we be sure that the calculation is made HONESTLY by those in the government?
    But if the money invested on the bonds is 100% DEDUCTED from the taxes people pay, why not? It would be a way to give people the liberty to choose what to do with the money they give to the government, since the latter has made so many mistakes in the last years. But it MUST BE 100% deducted from taxes.
    The majority of people don't want necessarily financial return (there are MANY other ways for that), they want A SOCIAL RETURN from the government which is their primary role, and this can't be sold through a speculative logic as suggested by these instruments.

    I hope you got my point and the discussion continues.