Social Investment Bonds
By Albert B. Kelly
In a time of start-up
companies, crowd funding, environmental or “green bonds”, sustainable
investment, etc.; we might want to consider adding Social Investment Bonds or
SIB’s to the mix as well. I don’t know that SIB’s have worked to their fullest
potential, but as we wrestle over entitlement spending and safety net programs,
why not try?
The basic concept has
investors providing capital upfront to a nonprofit or program whose primary
mission is to reduce or solve a particular societal problem (i.e. homelessness,
crime, drug abuse, joblessness, etc.) among a set group or in an area. If
successful, investors would receive a future payment from the government with
interest.
The idea is that everyone
benefits. Agencies tackling certain ills in society get the resources they
need, the government spends less in response to intractable problems, investors
realize a decent return on their investment, and those on the fringes get a
shot at turning their lives around.
The program is now being
tried in Peterborough England. Several charitable foundations provided money to
a prison training program with the promise that the Ministry of Justice would
make a future payment if the effort actually worked; meaning there was a certain
reduction in crime among a select group of inmates.
After the first phase of
the program, the initial results were mixed. According to the finance blog
“Civil Society”, the goal of the Peterborough effort was to reduce recidivism
among a set group of inmates a minimum of 10% for investors to receive a return
on their investment. Reductions came in at 8.4%.
But even if pilot results
were less than hoped for, that doesn’t mean the idea is not workable. As with
many things, the devil is in the details. For my part, it’s a creative approach
which is something we need today. Government programs to reduce some rate (i.e.,
poverty, crime, drug abuse, drop outs) are unpopular in some quarters and
subject to changing political winds.
But by partnering with
investors and building in a straight forward profit incentive, government can
leverage its resources and make social investment worthwhile. A lot will depend
on “triggers”; meaning those metrics that actually trigger a payout to
investors. The rest will depend on the delivery.
I think the best place to
start is at the community level. I say that because most communities have
groups that are already engaged in solving problems. What they generally lack
is funding and resources.
If the social investment bond
were centered on homelessness, what’s the trigger for a payout? Would it be homeownership,
long-term placement in a facility, or achieving self-sufficiency? These
questions would have to be answered along with providing a performance timeframe.
The same would hold true
if bonds were based on reducing the number of high school drop-outs. What would
the percentage be and over what time frame? Tackling these societal problems
means addressing multiple underlying issues and this takes time.
If the traditional bond
market puts out three, five, or ten year bonds for government as a matter of
course, why not do the same for social investment bonds thereby recognizing the
long-term task at hand? It could work but the metrics have to be right.
Taken a step further, such
an approach might also involve payments to individuals; not in the form of a
handout, but payment for good performance. In Richmond California, in the midst
of dealing with juvenile crime, gangs and everything that comes with that, the
community decided to offer young offenders a deal.
If they would sign a
contract and meet certain performance measures (i.e. school attendance,
graduation, steady job, remain drug free, etc.) they would receive cash
payments each month along with support through outreach and fellowship
programs.
They did this in part because
they realized that 70% of the homicides and firearm assaults in the community
were being carried out by roughly 17 individuals. The approach worked; not only
were homicides drastically reduced, but some of those individuals went on to
graduate college and live productive lives.
The main take-away is that
we have to find new ways to engage these issues and problems if there’s to be
any hope of change. I get the fact that some people are tired of entitlement
programs that have no end; just as others are tired of always needing the government’s
largess.
That’s why it’s time to
consider new models that give investors incentives along with those who need to
be invested in. If we can do that, everyone profits.