Social Impact Bonds blur the lines between philanthropy and financial return. Are they a good or bad thing?
First, let’s talk about what a social impact bond, or SIB, consists of. An SIB is when an investment bank, or any investor for that matter, raises capital for a philanthropic or environmental agency. Then, based on the success of the agency, the investors get a return on their investment. The organization is aimed towards systemic changes that will save the local, state or federal government money. If the program is successful, which will save the government money, then the government pays back the investors based on the amount of money the government didn’t have to spend.
For example, in Massachusetts the program being funded focused on helping at-risk young men. These young men had been imprisoned and had a high rate of ending back in prison again. To prevent this, just under 1,000 of these men were given highly intensive behavioral and re-integration training for two years. Keeping these men out of jail and integrating them back into society will have a couple different benefits. First, it is on the government, indirectly taxpayers, to fund the care for people in prison. This will save the government money and that is how the government will be able to pay the investors back. Also, if there are 1,000 more people working, that is 1,000 more people who have money and will want to spend it. This affects the economy positively. Lastly, fewer people in jail means the neighborhoods are safer and the value of the property in that area rises.
The way that the payback works is different for every area. Here is the respective payback system for the Massachusetts example, “If the project is a success, the intermediary and service provider receive deferred services fees and the loan providers are repaid their investment, plus a rate of return: 5% for the senior loan and 2% for the junior loan. Payments begin at a 5% reduction in prison-bed days and lenders are fully repaid at 40%, with bonus payments for further reductions. If the project fails to deliver, the state pays nothing.”
Now, one area that was a little bit gray to me was the measurement of the success of the program. It turns out that there is a non-profit corporation, the Global Impact Investing Network, which has come up with a way to measure success. It is based off of USAID’s model and also supported by the Rockefeller Foundation. The GIIN manages a smaller non-profit that compares investments into SIBs and has created a metric to measure the scale and effectiveness of investing, called IRIS.
There are arguments coming from both sides of this topic. One side says that the government could just fund these projects without the investor middle man. The opposing sides say that the government would never take these types of risks and not make their money back. One side says these programs would never have the money to carry out these projects. The other side says that the investors are only worried about returns and will only fund the projects with the biggest returns.
I definitely can see both sides of the equation but I have to say I support SIBs. I think it is a great way to get funding to the people who need it. I do see some issues that will occur with investors who want to maximize their profit but I think if the right regulations are put in place, this problem can be offset and lead to a lot of successful ventures.
http://iris.thegiin.org/introduction
http://www.thegiin.org/cgi-bin/iowa/resources/about/index.html
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