A new plan harnesses profit incentive to solve social problems. If it works, it could scale big enough to change government programs everywhere.
Help the unemployed! Cut spending! Provide a safety net! No new taxes! America expects the impossible of government right now, if campaign events are any indication. But what if government could do all that without spending a dime up front? A recent plan from England may prove an inspiration for penny pinchers, bleeding hearts, and rational economists alike.
It's called a social impact bond, and here's how it works: Social entrepreneurs or community groups are funded by private investors to try out solutions to social problems. If the solutions works, the government pays whoever invested in the solution a share of whatever spending is saved. In other words, as one writer put it, "It’s a way of transferring public sector savings to private investors who are willing to put money into preventative initiatives early on."
The social impact bondlaunched earlier this summer in England and it is a global first in government spending, mainly because the government doesn't spend anything until it gets results. And "results" means both cost savings as well as meeting a social goal. Win-win all around if it works, and if it loses, the investors are out, not the government.
The scheme might be coming to America soon, according to Toby Eccles, one of the designers of the bond at Social Finance, a British nonprofit. “There is definitely interest in the United States... that we are excited about,” he says. The specific form of a U.S. version depends, in part, on how the first use performs.
"Prevention is very hard to invest in. This provides a model to do that."\n
This first use of the technique is to cut recidivism of those doing short-term prison sentences at Peterborough Prison, in England, about two hours north of London. Right now about 60 percent of prisoners in that category re-offend, costing the state lots of money in policing, court costs, and prison operations. Simply put: If that recidivism figure drops, the government saves significantly in the long term.
To address this, investors pooled $8 million to fund three local charity groups, which will offer mentoring and drug counseling, among other things. If they meet their target of a 10 percent reduction in recidivism, investors will get their money back at between 7.5 and 13.5 percent.
But the investors didn't just fund the community groups. They also play a role in designing the program and finding the right partners—just like they would with any investment. In that way this plan harnesses the profit incentives and business acumen of investors just like any other equity plan might.
If they meet their target of a 10 percent reduction in recidivism, investors will\n
get their money back at between 7.5
and 13.5 percent.
If applied in the United States, Toby Eccles sees this being used to fund programs to fight truancy, teen pregnancy, even unnecessary emergency room visits. Or it might start with prisons as a way to tackle million dollar blocks, where so many people from one block are incarcerated that more than $1 million in prison costs are spent on that single block. Any expensive outlier is an opportunity under this model. "As the economic cycle flows through we believe there will be more areas where this can be used," he says.
Of course, there isn't enough foundation grant money to pay for a program like the one in Peterborough for every prison in America. But if the business model works, then private investors can line up to fund it, and we might just have a solution that the political right and left can agree on for a change.