New Financing Tool for Social Programs Opens Doors for Juvenile Justice

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This story originally appeared on Reclaiming Futures.

Identifying the best programs for solving serious social problems is challenging for governments in the best of times, and all the more so in a constrained fiscal environment where every dollar must count. This is particularly true in areas like juvenile justice where the most effective interventions may involve combining approaches that governments currently support through separate funding streams—and where politicians’ personal views may steer disproportionate amounts of funds to programs that sound good on paper but don’t deliver results.

But an innovative new financing tool called Social Impact Bonds may help solve some of these challenges. Social Impact Bonds, or SIBs, take traditional government funding structures and turn them on their head. Instead of paying costs upfront for a proscribed set of services, SIBs allow governments to define outcomes they want to achieve—and not pay a dime if those goals are not met.

At their core, Social Impact Bonds are a straightforward concept. A SIB is an arrangement between one or more government agencies and an external organization where the government specifies an outcome or set of outcomes they want to achieve and promises to pay that external organization a pre-agreed sum if it is able to accomplish the outcome(s). For a SIB agreement to work, the contracting agencies must place few, if any, controls on how the external organization seeks to achieve the outcome. This allows the external organization to use a combination of approaches to achieve the outcome.

Consider the many programs that work with troubled youth. Research has shown that Scared Straight programs, popular with politicians and television audiences alike, can actually increase a participant’s chances of committing crimes. In a Social Impact Bond agreement to reduce juvenile delinquency in a certain city, then, the external organization that wins the SIB contract would certainly not choose Scared Straight to be one of the interventions it uses to achieve the outcome. Instead, the organization is likely to work with a set of service providers specializing in proven interventions like cognitive behavior therapy, substance-abuse treatment, and wilderness challenge programs, thereby offering a combination of approaches that can be tailored for each child.

There is particular excitement about using Social Impact Bonds to fund preventive projects with outcomes that will save money down the line. The first SIB in the world is currently under way in the United Kingdom, where the British government has contracted with an external organization called Social Finance to attempt to reduce the rate of recidivism among short-stay prisoners in the Peterborough prison facility. Under this arrangement, the government will release funds if there is a measured reduction in ex-prisoner reconviction of 7.5 percent relative to a group of similar prisoners discharged from other prisoners. The greater the reduction in the re-offending rate, the greater the payments, which are capped at around $12 million. The British government calculated how much it is willing to pay for this outcome by considering the savings likely to accrue to government as a result of reductions in recidivism. These included savings in future incarceration costs as well as savings in court and police time.

Social Finance, the external organization in Peterborough, needs money to pay for its operations in advance of any payment from the government, so it raises money from investors. In exchange for paying the upfront costs, these investors receive an agreed-upon return if the outcome is achieved. It’s a somewhat risky investment, as the investors stand to lose their capital if the outcome is not achieved and the government doesn’t release any funds. To date, the investors are all socially-minded trusts and foundations.

While the detailed operations of a Social Impact Bond agreement may seem complicated, SIBs represent an exciting opportunity for social service areas in which a combination of interventions yields the best results. Because the external organization is heavily incentivized to achieve the outcome and receive its payment, they are likely to look for service providers who have proven successful in the past. In this way, SIBs will allow proven interventions to “scale up” and expand to new cities and states. And in cases like Peterborough, where the outside organization receives more money the more successful it is, SIBs may encourage some experimentation with new and innovative approaches to solving old problems.

Social Impact Bonds are in their infancy in the United States, and there remains a great deal to learn. But these unusual financing vehicles have the potential to transform how we fund social services—and improve outcomes for taxpayers and beneficiaries alike.

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