“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.
[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):