Finance

Social Impact Bonds: Finding Funding for an Ounce of Prevention

Social impact bonds are a relatively new financial instrument that promises to earn returns for investors while giving state and local governments the upfront capital they need to pursue money-saving programs.
by | October 2012

It’s an old truism in government that prevention saves money. You can save health costs by preventing obesity. You can save costs on social services by preventing homelessness. Spend a little money now, and you can save a lot in the future.

But two political realities can get in the way: Budgets are typically written for a single year, and political lives are short. Both of those factors often lead governments to make choices that have lower short-term costs, but may be more expensive in the long run. Tracy Palandjian wants to help governments make a wiser fiscal choice.

As a founder of the Boston-based nonprofit Social Finance Inc., she’s a leader in the world of social impact bonds -- a relatively new financial instrument that promises to earn returns for investors while giving state and local governments the upfront capital they need to pursue money-saving programs. To put it plainly, Palandjian says, “It monetizes prevention.”

The idea is that if a government gets an infusion of capital to pay for prevention programs now (say, to support recently released prisoners), then it will eventually save money in the long run (in this case by avoiding future incarcerations). Investors would front the money for a prevention program, and if it works, they’d get paid back along with interest from the savings they achieved. Investors typically earn returns of anywhere from 2 to 13 percent, but there’s a risk that they lose it all if the programs don’t work. Investors include foundations and philanthropic organizations, wealthy individuals, and (eventually) institutional investors.

The poster-child for social impact bonds (SIBs) is a program launched in 2010 by Social Finance Ltd., an older United Kingdom affiliate of Palandjian’s organization that seeks to reduce the recidivism rate of prisoners in Peterborough, England, by providing them with support upon their release. Palandjian’s organization started getting attention when Massachusetts was seeking partners for a pair of social impact bonds. Her group didn’t win those deals, but it did just enter into a partnership with New York state to help finance a workforce development program. Palandjian says she expects a growing number of municipalities to consider SIBs and says federal agencies, including the departments of Labor and Justice, are trying to encourage states to include SIB components in some grant proposals.

Palandjian is quick to note that SIBs aren’t a silver bullet. They work best when a particular intervention has an established track record. And the economics are such that an SIB is only feasible when the long-term savings exceed the cost of the intervention itself. Programs that address homelessness, recidivism, workforce development, senior housing and childhood obesity lend themselves to the tool.

“It’s really too early to tell” whether SIBs will remain on the periphery of government finance or became a key fiscal tool, Palandjian says. “The track record of the early transaction will dictate the fate of the market.”

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