Social Impact Bonds

We've heard the adages many times. "It's cheaper to pay to reform people than jail them." "It's chaeaper to educate them than support them later through welfare." But if the governemnt is already struggling to pay for existing services, how are they going to make the investment that will result in the long-term savings?

How about issuing bonds? That works when you need to build a canal or a power plant and the theory is the same. They will pay dividends in the future to those who make the investment now.

An experiment is being run right now in Britain to test out the theories using the bond model.

An article in Saturday's NY Times explains the program:

The idea comes from various thinkers, social service experts and captains of industry in Britain who formed a group called Social Finance to build a social investment market there. It raised £5 million — about $8 million — from 17 investors in Britain and the United States,  The investors will get their money back only if One Service succeeds.   The bondholders are mostly charitable groups who would normally give money away; they were willing to be guinea pigs because of their desire to see this financial instrument succeed.

Convicts leave prison in Britain with £46 in their pockets and nothing more; often, they walk out of the prison gate alone. The One Service, meets everyone in Peterborough at the prison gate, even the prisoners who didn’t sign up for the service. They go to breakfast — usually at McDonald’s, at the men’s request — and then to the office. “Sometimes you see the person inside prison and he says, ‘I don’t need help,’” said Janette Powell, who runs the One Service. “But when you meet them at the gate they say ‘I’m glad you turned up.’ ”

Over the next six years, the recidivism rates of men released from Peterborough (all of them, not just the ones who become clients of the One Service) will be compared to the recidivism of a matched group of prisoners elsewhere. If Peterborough’s re-conviction rates are 7.5 percent less than the control group,the British government will repay the bondholders with interest. (If that threshold isn’t met, investors lose their money, which means that technically it is not a bond.) The better the recividism rates, the larger the payout for investors, which is capped at the equivalent of 13 percent per year over an eight-year period.

Massachusetts will be the first place in the United States to try one. The state is hoping to sign contracts this summer to back $50 million in bonds for two projects:one to help people coming out of the juvenile justice system make the transition to adult life, and another to house the chronically homeless.

This sounds like a great idea to me. If the program works, the government saves money. If it doesn't the government pays no money. And we finally get to test out these ideas. What do you think?