Policy Initiative Spotlight: Social Programs Funded by Success

Last month Harvard’s Kennedy School and the Rockefeller Foundation announced a program to provide free technical assistance to four states and local governments pursuing social impact bonds (SIBs), one of the first efforts in the United States to scale up an innovative tool for increasing the quantity and effectiveness of social spending. In announcing the program, Jeffrey Liebman, who oversees the effort, said that "social impact bonds bring together the public, private, and nonprofit sectors in a program designed to boost social innovation and direct public dollars to programs that work."

SIBs are a relatively new phenomenon designed to funnel private investor money to social programs. The world’s first SIB was launched in September 2010 in the United Kingdom. Social Finance raised $8 million from a pool of 17 investors—mostly philanthropic institutions—to fund services to short-sentence male prisoners exiting Peterborough prison with the aim of keeping them out of prison in the future, thus saving money for the government. Funding will go to outside organizations providing the services, such as the YMCA.

Investors will fund the program for six years, and will only recoup their initial investment and earn a return if the program is successful at reducing recidivism. Currently 60 percent of short sentence prisoners re-offend within a year; if the program can reduce that by 7.5 percent, then the government will pay investors back their initial investment; if the program can exceed the goal, then investors will earn a greater return.

In the United States, Massachusetts has been a leader in SIB adoption. The state authorized funding up to $50 million over several years to reimburse investors in successful programs that deliver savings to the commonwealth, with programs targeted to needy groups such as the homeless. New York City and Minnesota have also set aside funding for SIBs.

While SIBs in theory only cost governments if they succeed, they may require higher implementation costs. A successful SIB requires not only service providers, but a willing pool of investors, a manager who coordinates activity and financing, and impartial evaluators who can judge the level of success of a program.

Still, there is significant excitement about the potential of SIBs to enhance certain kinds of social programs. An extensive report by the McKinsey and Company management consultancy found that homelessness, and juvenile and adult criminal justice, could be fertile ground for SIBs. The authors advised three core actions: "developing a robust education and communications plan, embracing SIBs primarily for their social (rather than financial) benefits, and paying careful attention to design and implementation."

As this model spreads to American shores, the United Kingdom continues to innovate. Allia has launched the Future for Children Bond, which is the first SIB for retail investors rather than large philanthropic organizations. Individual investors who can afford a minimum of £15,000 can invest in a bond fund combining a more traditional loan to a provider of affordable housing with a SIB to deliver family support therapy to needy 11-16 year olds.