Social Impact Bonds: a revolution in government funding

In his recently proposed budget, President Obama has asked for up to $100 million to implement programs funded by Social Impact Bonds (SIBs). These bonds are the cornerstones of a new way to pay for public services, one that its proponents hope will address social problems with greater efficiency and higher success rates than current government approaches. In the UK SIBs were piloted to tackle the problem of prisoner recidivism by funding intensive counseling, employment, housing, and other support services for recently released prisoners. Something known as supportive housing is a potential area where SIBs may make their debut in the U.S. This program would deal with homelessness from a preemptive approach, by paying people who are at-risk of having to go live on the streets to stay in their homes.

The model of Social Impact Bonds consists of governments agreeing to reward private, for-profit entities, called “social impact bond-issuing organizations” (SIBIOs), for their work. But the government only pays if the services deliver as promised, and only out of government cost savings. No taxpayer money will be wasted on failed programs in this plan. The idea behind these bonds is that investment is like prevention, and social problems can be more effectively addressed before they urgently need a cure. Governments, unlike private financiers who are motivated by potential profits, are likely to wait until a problem needs mitigation, rather than foreseeing it.

In addition to supportive housing, SIBs may be used to fund programs that address prisoner recidivism, assisted living, kindergarten readiness, workforce development for at-risk populations, and visiting nurses, according to what Kristin Giantris, of the Nonprofit Finance Fund, told Dowser. Giantris also said that SIBIOs will rely on one fundamental question to identify sites of intervention: “What area has the greatest opportunity for investment that will result in strong outcomes and save the government money?”

Actually putting the SIB program into practice may not be as simple as it sounds. Giantris mentioned some long-term concerns, particularly around the ability to scale the SIB model. Specifically, the challenge is determining how to create an asset class so that there is liquidity and comparability. “It’s very hard to develop market-oriented security,” she said, without a large enough sample of these projects nation-wide. She also said that there is the question of “how to satisfy investor interests while having enough time to achieve measurable outcomes.” Some issues may require more than 5 years involvement to show the cost savings. Education is one example where we might have to wait years to see results, said Giantris, and it could be too long for investors to wait as it increases the risk of the investment.

Harvard Economist Jeffrey Liebman, in a report for the Center for American Progress, has analyzed potential successes and challenges of the Social Impact Bonds plan. There may be obstacles to the program’s success, according to Liebman, if interventions do not meet five main criteria. They will need to have sufficiently high net benefits, have measurable outcomes, have a well-defined treatment population up front, use a credible impact-assessment method, and include strategies for reducing harm to populations in cases where interventions are unsuccessful and investors pull out. Liebman also suggests, given the newness of the concept of Social Impact Bonds, that it be applied to models that have already proven effective. He also predicts that successful interventions will provide savings to the government that exceed program costs. Furthermore, Liebman foresees the first Social Impact Bond programs occurring at the level of local government.

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