By Thomas Kostigen
SANTA MONICA, Calif. (MarketWatch) — Investors took notice of them in London. They popped up recently in Australia, Canada and other parts of the world, too. Now they’ve made their way to the United States.
They go by a variety of names — social-investment bonds, social-impact bonds, and in the United States they are called pay-for-success bonds.
They may be the best marriage between public and private financing ever created. And here’s why: they lay off the initial cost of financing programs that benefit society at large on the private sector. If the programs work, the public sector — local, state, or federal government — takes over. Initial investors in the bonds get paid. The government gets to manage a successful, proven program. It’s a win-win, especially in the environment of government spending cuts that we are in.
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The pay-for-success bonds are buried deep within the Obama budget, and who knows if they will ever see the light of day. The administration had asked for $100 million for the program in the 2012 budget. It’s too early to know if Congress will fund the pilot program. Meanwhile, New York City and Massachusetts, among other governments, are considering smaller, local versions of the bond offering.
In Great Britain, social-impact bonds received generally positive reviews as investors improved services and took “the loss away from civil society,” as one editorial in The Guardian newspaper put it. In Australia, similar plaudits were given for programs offered in that country.
The seven domestic pilot programs the Obama budget called for range from job training to rehabilitation to family care.
Social Finance, a sort of investment bank for the social sector that designed the social-impact bond in Britain, has launched a sister organization here in the U.S. to find suitable candidates for pay-for-success bonds.
How they work
In Britain, one such program worked like this: Social Finance raised money from private investors to fund the expansion of programs run by charities to reduce the rearrest rates of criminals. If the recidivism rate fell, investors earned up to a 13.5% annual rate of return. If there is no improvement, investors could lose all their money.
These bonds have the potential to drastically change the world in a way that encourages private investment and discourages government dawdling.
To be sure, social-impact bonds don’t come without problems. Critics argue that the programs that these bonds support are the easiest to prove results quickly. Hence, the private sector is merely speeding up government programs that have been proven successful — and getting paid for their facilitation.
I don’t see anything wrong with that.
As Jeffrey Liebman, a Harvard economist, writes: “Insufficient attention to objectives and performance measurement means that unsuccessful programs can persist for years. As demonstrated by the recent Head Start evaluation, which found that few program benefits persisted to the end of first grade, even large important programs can receive funding for decades without the kind of rigorous evaluation necessary to reveal that the program delivery model needs to be reformed. Meanwhile, innovative programs with promising results have a hard time securing government funding because the proof-of-concept process is slow and innovation necessarily entails a risk of failure.”
Of course in the developing world social impact bonds could make a huge difference, too.
So whether half a world away or the next town over, social-impact bond offerings should be encouraged.
Let’s hope the politicians in Washington also agree.