Updated: Jan 17, 2021
How do government maximize the efficiency on their funding to social programs? The Systems of Exchange model can explain.
“Social impact bonds” are a new financial instrument being used to support successful social and environmental programs and reduce government spending. Investors provide the initial capital for contracted service providers, and the government agrees to pay the contractors only if the program meets its goals. In this way, the government doesn’t have to pay for unsuccessful programs, and service providers have an incentive to find and implement highly effective interventions. At the same time, investors get to make money supporting philanthropic projects.
The first social impact bonds were created in the UK in 2010, and they’ve since been piloted in the US and Australia (where they’re called “pay for success bonds” and “social benefit bonds,” respectively). The first program to use this funding strategy was a non-profit in Peterborough County, England that was working to reduce criminal recidivism. At the time, 60% of the offenders serving short sentences were back in prison within a year of their release. The non-profit launched a 6-year support program for short-term prisoners, and it was backed by private investors. If the program succeeds in reducing recidivism by 7.5% or more, the investors will receive a share of the government’s long-term savings. The greater the reduction in recidivism, the higher the returns to investors (up to a maximum of 13%).
Social impact bonds infuse a traditionally Price-based financial instrument with an Associative and Moral purpose. From an Associative perspective, the bonds are mutually beneficial for governments, investors, and non-profit service providers. Governments cut costs on ineffective programs, investors make money, and non-profit service providers get resources to expand their programs. In the case of the Peterborough experiment, the bonds also benefit the people who stay out of prison. From a Moral perspective, the bonds encourage investors to support social and environmental issues that align with their values. Not only have these bonds been used for anti-recidivism efforts, but they’ve also funded programs for the homeless and at-risk youth, low-income housing, job training, and drug rehabilitation.
Social impact bonds may seem like a win-win situation, but support for the bonds isn’t universal. Some people are critical of the fact that they reduce government responsibility for social services; they believe the government has a social contract to provide these services, and moving them to the private sector could have unintended consequences. The “pay for success” model may encourage narrow evaluation criteria and exclude programs that focus on structural issues that are less easily measured. Additionally, investors may put pressure on service providers to shift their mission or adopt businesslike operational strategies.
Because social impact bonds are so new (the first one won’t mature until 2016), it will be several years before we can measure their impact. They seem to offer an exciting opportunity for socially responsible investment, and they have the potential to highlight innovative community programs and replicate their successes. As long as governments maintain core social service programs and encourage diverse evaluation criteria for social impact bonds, they may be able to avoid the outcomes most feared by critics.
Image from www.socialfinanceus.org.
Bolton, Emily. (2010). “Social Impact Bonds: Unlocking Investment in Rehabilitation.” Social Finance. (http://www.socialfinance.org.uk/sites/default/files/SF_CriminalJustice.pdf)
Solman, Paul. (2013). “How Modern Finance Promises to Break the Cycle of Recidivism.” PBS Newshour. March 14. (http://www.pbs.org/newshour/rundown/2013/03/how-modern-finance-promises-to-keep-criminals-out-of-prison.html)
Biggart, Nicole Woolsey and Rick Delbridge. (2004). “Systems of Exchange.” Academy of Management Review 29(1): pp. 28-49.