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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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