Social Impact Bonds

Today’s focus is on social impact bonds. A Social Impact Bond, also known as a Pay for Success Bond or a Social Benefit Bond, is a contract with the public sector in which a commitment is made to pay for improved social outcomes that result in public sector savings. I have been following this investment scheme for a few years and am somewhat skeptical since Goldman Sachs and other Wall Street banksters are promoting them. The jury is out on their success.

A New Investment Opportunity: Helping Ex-Convicts
A New York program asks outsiders to fund a promising initiative to reduce recidivism. If it gets results, they get a payout.
Alana Semuels, The Atlanatic, December 21, 2015

“Every year, the government spends billions of dollars on programs designed to help America’s neediest citizens. In many cases, whether these programs work is anyone’s guess.

“Less than $1 out of every $100 of federal government spending is “backed by even the most basic evidence that the money is being spent wisely,” wrote Peter Orszag, the former head of the Office of Management and Budget, and John Bridgeland, the former director of the White House Domestic Policy Council, in a 2013 piece in The Atlantic.

“In their article, Orszag and Bridgeland advocate for a “moneyball for government,” arguing that an era of fiscal scarcity should force Washington to become more results-oriented.

“A new partnership among New York State, 40 private investors, and a nonprofit called the Center for Employment Opportunities seeks to apply this sort of thinking to an area of policy that has been particularly resistant to interventions: lowering the recidivism rate in an era of growing prison populations.”


Getting Back More Than a Warm Feeling
Caroline Preston, New York Times, November 8, 2012

“…The “social impact bond,” also known as a “pay for success” bond, is the latest — and most discussed — tool in a broader playbook philanthropists are using to blend business and charity to make a bigger difference. Sometimes known as impact investing, these approaches include providing low-interest loans to nonprofits, making equity investments in companies that tackle social problems and investing a portion of a foundation’s endowment in enterprises that produce measurable benefits to society and a financial return.“There’s a recognition that philanthropy and government can’t solve all the social problems,” says Judith Rodin, president of the Rockefeller Foundation, which has spent $40 million since 2009 to develop the field of impact investing. “And then you have investors who maybe didn’t want as bright a line between their charity and philanthropy on one side and their financial investments on another, and they began to look for blended opportunities.”

“While many of these opportunities focus on microfinance, farming or other fields in which there is an obvious way to generate revenue, social impact bonds offer something new. They pay back investors through the savings a government could accrue if a preventive program succeeded in its goals of reducing recidivism or keeping children out of foster care, bringing an opportunity for financial returns to a new set of society’s knottiest problems.

“The bond concept has drawn interest from many government officials and some nonprofits eager for new financial support. But it has also stirred concerns among people who say the idea is impractical, ignores political realities and risks putting profits ahead of what is best for society.

“The bonds were first tried in Britain two years ago, to finance a program for 3,000 prisoners at Her Majesty’s Prison Peterborough. In Britain, 60 percent of prisoners who serve short sentences land back in jail within a year; by helping parolees find housing and other support, the program aims to reduce the recidivism rate by 7.5 percent.

“Initial results won’t be available for another two years, but Alisa Helbitz, director of research and communications at Social Finance, in Britain, says anecdotal feedback has been positive. Participation rates are high — the program is optional for prisoners, though organizers are trying to reach as many people as they can — and some local police say they are pleased with the project. The “investors,” in this case, included philanthropies like the Rockefeller Foundation. …”


A Guide to Evaluating Pay for Success Programs and Social Impact Bonds
In the Public Interest, December 9, 2015

“There’s no free lunch. Yet across the country, advocates of Pay for Success (PFS), or Social Impact Bonds (SIBs), serve up this alternative private financing model as a cost-free, risk-free silver bullet to support critical, yet underfunded, public services. As local and state governments rush to pass enabling legislation and strike deals with investors, a closer examination of these schemes is warranted.

“A Guide to Evaluating Pay for Success Programs and Social Impact Bonds aims to help advocates identify the critical issues surrounding PFS contracts and their impact on vulnerable individuals and the public. We describe these issues and include a list of key questions advocates can raise to help ensure that decision makers make choices that advance the public good.

“What is Pay for Success?

“PFS brings venture capital to the provision of public services. Investors, such as Goldman Sachs or Bank of America, provide up-front funds for critical preventive services with the expectation of receiving a return on their investment. The theory is that the private investment dollars can fill a funding gap when government doesn’t have adequate financial resources to spend on prevention activities.

“Under a PFS arrangement, the government repays the loan with interest if pre-determined social outcome targets are met. The theory presumes that even after paying the investors and service providers, the state ultimately reaps financial savings through foregone budget dollars spent to address future more costly, but now avoided, social problems. But PFS looks better on paper than in reality. A closer look at how they operate raises issues that warrant careful consideration for decision-makers looking to undertake a PFS.

“Some Important Questions to Ask

  • What is the price and performance advantage of the PFS model over traditional financing and performance methods?
  • If PFS is being considered to scale up a program with a proven, evidence based record of success, why is the PFS structure being used in lieu of traditional public funding?
  • Do the investors, consultants, intermediaries, service providers or government
  • Are the outcomes appropriate for the program intervention?”




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