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Privatization & Government Reform Newsletter

Social Impact Bond Initiatives Gaining Traction in U.S.

Using private sector funding to advance new, performance-based social service delivery models

Leonard Gilroy
October 29, 2013

Over the last two years, a new public-private partnership (PPP) concept known as “social impact bonds” (also known variously as “pay for success” or “social finance” initiatives) has been spreading rapidly in the U.S., capturing the attention of policymakers at all levels of government. In a nutshell, a social impact bond is a PPP that uses private sector funding to advance new social service delivery models on a performance basis, and it is a conceptual variation on a theme that has been spreading rapidly in the arena of privately financed public infrastructure projects. Though pioneered in the United Kingdom, in August 2012 New York City became the first local government in the U.S. to pilot a social impact bond initiative (in the area of youth recidivism), and several other states and local governments have announced or advanced projects since then.

Experiments in social impact bonds can be expected to start spreading further and faster over the coming year, after the Rockefeller Foundation and the Social Impact Bond Technical Assistance Lab at Harvard University’s Kennedy School of Government announced that six winners—Colorado/Denver, Connecticut, Illinois, New York State, Ohio and South Carolina—had won a national competition in June to provide technical assistance to state and local governments to develop social impact bond projects. Michigan later became the seventh winner in September when more funding was made available for the Rockefeller/Harvard initiative.

Under a prototypical social impact bond, private philanthropic groups and other financiers fund social service interventions to be delivered by nonprofits and other nongovernmental organizations on behalf of governments under a pay-for-success contract model. If the privately financed interventions improve social outcomes and save public funds—essentially by getting better results than existing government social programs—investors would receive success payments from government that generate a return on investment. If outcomes do not improve, government doesn’t pay, placing the focus squarely on implementing evidence-based practices that deliver results, lest investors risk their investments. [For more details on the social impact bond concept and initiatives in the U.S. to date (including New York City’s youth recidivism pilot at Riker’s Island), see my article from Reason Foundation’s Annual Privatization Report 2013.]

It is important to note that the term "social impact bond" is somewhat misleading, as these programs are not typically derived from government-issued bonds; rather, they are performance-based contracts in which private investors provide upfront capital to launch the programs, with costs recouped later via a government success payment only if pre-determined outcome targets are met.

Given the emergent nature of social impact bonds and the complexity of the agreements—for starters, challenges include defining what’s measured and how in terms of performance, as well as specifying the relationships between financiers, nonprofits and governments—ensuring competency in crafting social impact bond arrangements will be significant hurdles in moving from concept to contract. Hence, the focus of the Rockefeller/Harvard competition on technical assistance seems to be an appropriate direction. Harvard’s Social Impact Bond Lab has worked with the states of Massachusetts and New York in developing their early initiatives, and the seven winners of the recent competition will receive similar pro bono technical assistance to help design and implement their procurements, which will likely span a variety of social interventions that include early childhood education, homelessness, reducing childhood mortality, and other areas, according to a press release.

Separately, the United Way of Salt Lake, Goldman Sachs and the J.B. and M.K. Pritzker Family Foundation announced a new social impact bond program in June designed to expand access to early childhood education for at-risk children in Utah. Goldman Sachs and Pritzker are committing a total of $7 million for a multi-year, intensive preschool program for disadvantaged youths designed to reduce the need for costly special education services later in elementary school. The United Way will deliver the preschool program, based on a pilot it implemented elsewhere in Utah in recent years that was estimated to have saved taxpayers over $2,600 per student annually (relative to the full costs of special education programs). More details on this program are available here, here, here and here.

It is noteworthy that the social impact bond concept has taken off so rapidly, given that it still remains unproven. The first social impact bond pilot project only launched in the UK in 2010, when the consultancy Social Finance raised $7.8 million from social investors to fund a recidivism reduction pilot project in the U.K.’s HMP Peterborough prison. In this multi-year project, approximately 3,000 short-term male prisoners are expected to receive intensive programming both before and after release to prevent re-offending. If the recidivism rate of this population falls by more than 7.5 percentage points within six years, investors will be repaid via a share of the long-term savings from avoided re-incarceration and can receive up to a 13 percent return on investment if they exceed the targeted reductions. By contrast, if the intervention fails to meet the recidivism reduction target, investors will receive no return. As the trailblazer that has already inspired so many similar initiatives elsewhere, this high-stakes pilot program will be closely watched as a barometer of the social impact bond concept itself.

Though the first full results of the HMP Peterborough pilot will not be available until 2014, the U.K. Ministry of Justice announced in recent weeks that preliminary data show that the program already appears to be lowering recidivism rates. The publication Civil Society Finance reported in June that the data show a 6 percent drop in reconviction events for inmates released from HMP Peterborough between 2010 and 2012, compared to a 16 percent increase in reconvictions nationally over that same time period. While these results are early, they at least suggest a promising start to the program that advocates of the social impact bond concept will certainly find encouraging.

At a broader level, advocates of public-private partnerships should watch the maturation of the social impact bond space closely, and they are likely to find a fascinating and rapidly evolving experiment in action. At a minimum, the plethora of pilots and programs already in motion will provide valuable case studies on what works and what doesn't, and their bipartisan nature—having already been embraced by conservatives like South Carolina Gov. Nikki Haley and Ohio Gov. John Kasich and progressives like Illinois Gov. Pat Quinn and Connecticut Gov. Dannel Malloy—will ensure that the concept transcends politics, which bodes well for continued experimentation.

For more on social impact bonds, see my colleague Tom Clougherty’s August 2013 interview with Social Finance UK’s International Director Jane Newman.

Leonard Gilroy is director of government reform at Reason Foundation and is the editor of the Privatization & Government Reform Newsletter, available here.


Leonard Gilroy is Director of Government Reform


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