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CGD in the News

The Promise of Social Impact Bonds (New York Times)

June 20, 2012

CGD's work on social impact bonds was mentioned in a New York Times piece.

From the article:

Most of the pilots focus on cutting crime and homelessness — two issues that have interventions we know work, and we know save money. In addition, they offer outcomes that can be measured in the medium term — important, because these determine whether investors get paid. A prison project was chosen for the pilot, in fact, because it was relatively easy to measure recidivism. Peterborough has a large number of people serving short sentences, and when they get out, they tend to stay in the community. “We wanted to fund something with a clearly defined outcome,” said Alisa Helbitz, the director of research and communications at Social Finance in London. “You can’t measure ‘well-being.’"

Gonzalez, however, said that if the pilots are successful, Massachusetts will expand into other areas, perhaps higher education. There are also possible applications in health — for example reducing re-hospitalizations, diabetes prevention, or keeping the elderly in their homes as they age.

Even poor-country development projects might be suited to bonds. Social Finance in Britain is now working with the Center for Global Development, a Washington think tank, to explore ways that bonds could be used to finance projects such as preventing disease or installing clean water systems.

There are various ways social impact bonds could create a more intelligent approach to social programs. Typical social programs usually end up focusing on the easy cases — so their success rates stay high. Social impact bonds have the reverse effect:they provide an incentive to help the really hardest cases. Popeye’s future criminal activity is going to be counted whether he’s a client or not — so it’s a good idea to work with him.

Social impact bonds could also make service work more rational. Like politicians, nongovernmental organizations are constantly fundraising. Financial uncertainty can rob them of the power to plan more than a few months ahead. Social impact bonds could give them the up-front money they need to be effective, and they can use the money however they think appropriate to meet their targets.

A recent study by the consulting firm McKinsey points out some of the challenges. The complex structure of these bonds adds layers that makes them more expensive then simply having the government pay for the services directly. And in some cases, the financial benefits to the government may depend on hitting a certain threshold — incarcerating fewer prisoners, for example, is only cheaper if the reduction is big enough to allow a prison to close a wing and cut staff. The Peterborough pilot, in fact, may be too small to save the government money from reduced incarceration, although if it is successful, a scaled-up version certainly would. But the government might save money, even in the small pilot, in reduced use of courts and emergency rooms.

The excitement around social impact bonds — and there’s a lot of it, judging by the number of jurisdictions looking seriously at them, is unusual for a project that only exists in one town in Britain and has yet to show any results. “It adds a whole new meaning to the idea of faith-based initiatives,” said Bill Pinakiewicz, vice president of the Eastern region of the Nonprofit Finance Fund, a group which provides loans and strategic help to nonprofits.“But there’s a real breakthrough here. Social impact bonds established that there is economic value to positive outcomes being delivered to families, individuals and communities in need. It creates a dollar value that can be used to pay back investors. They have real economic value and attract financing — like breakfast cereal and software.”

Read it here (subscription required).