Transforming the social order

July 13, 2011

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity…”

A Tale of Two Cities by Charles Dickens

I view the new proposals for “social impact bonds,” financial instruments that try and address the problems of society’s underclass, as the latest iteration of “the epoch of belief” that Dickens was writing about. These “social impact bonds” (SIBs) are monies raised from private investors and charities that pay rich annual yields and return principal only if prescribed social goals are met.

The pilot program for social impact bonds is an effort to reduce recidivism at the UK’s Peterborough Prison. The British Parliment describes the project:

[T]he first such scheme in the world will run for six years.  The social investors include charities such as the Esmee Fairbairn Foundation and the Monument Trust.  Through Social Finance, they have invested in the bond, which will close at £5 million by the end of the year.  This will be used to fund a range of third sector organisations, such as the St Giles Trust, to work with around 3,000 short term prisoners to prepare them for release and help them after release to reduce reoffending.  If these services are successful and re-offending drops by more than 7.5 per cent within six years, investors receive a payment representing a proportion of the cost of re-offending. The payment will increase based on the reduction in re-offending with the total cost of the project capped at £8m.

This sounds like an interesting proposition with a “pay-to-cure” investment. Investors will get rich returns for improving society. But looking a little deeper, how rich will those returns be? An opinion piece in Reuters by Sir Ronald Cohen gives the details (emphasis mine):

The financial return on investment in an SIB varies directly according to the social benefit achieved. The first SIB [Peterborough Prison], issued in September 2010, will pay investors up to an annual return of 13.3%, but only if reoffending is reduced by at least 7.5%. If reoffending is reduced by anything less than this benchmark, the government pays nothing and investors lose their principal. At the same time, SIBs provide long-term, upfront capital to not-for-profits.

I see these bonds as medium-term lending with high return and high risk. They may be characterized as an effort to raise up the social order, but this can be done in many ways without the incredibly rich cost of paying the bondholders. I don’t buy the argument that those who work in finance are better placed to choose, monitor and discipline the non-profits who will administer the social services that the bonds fund.

Based on one tiny £5 million bond — which has yet to issue any interim progress reports — it’s much too early for Sir Ronald Cohen to be advocating that we amend U.S. laws to facilitate their use here. I’m fine with our cousins across the sea fiddling with them for a few years; they could save us many missteps. I do think the idea of providing fixed terms of funding upfront to non-profits and more rigorously monitoring outcomes is a very good one and could adopted in the current environment.

When Dickens wrote A Tale of Two Cities, economic conditions for the poor were so harsh that men robbed graves to feed their families. The state did very little to help the poor other than to roundly punish them for breaking laws. We have come along from brutalizing lawbreakers as they did in Dickens’ time. But I’m not convinced that involving private investors in the process is going to improve society.


UK Parliament: Social Impact Bonds – the Pilot at Peterborough Prison

The Guardian: Who’s in the market for sub-prime behaviour bonds?

Panahpur: Come Back, Polly!

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Social Impact Bonds Can Help Achieve Progressive Goals in an Era of Austerity al-impact-bonds-can-help-achieve-progres sive-goals-in-an-era-of-austerity-54375/

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