Social Performance Bonds: Who succeeds gets paid – The Economist
Feb 17th 2011 | NEW YORK | from the print edition
Barack Obama imports a big idea from Britain
BURIED in the detail of Barack Obama’s proposed 2012 budget is a rule change that could have a big impact on how America tackles its thorniest social problems. The new rule would allow various government agencies to issue “pay for success bonds”. These would be bought by private investors and the money used to finance projects run by charities or businesses. But the investors would only be repaid, or make a profit, if the projects achieve certain results agreed in advance, such as reducing youth crime or getting students from poor areas into higher education.
Mr Obama proposes that up to $100m be freed up to run pilot schemes to test the idea. The rule changes are needed so that money can be committed over longer periods than is usual in public contracts, and repayment be made contingent on performance. They would also allow for much less detailed terms on the methods to be used, rather than on the outcomes, than is typical. Public money can be set aside for evaluation of whether the targets have been met.
The Pay for Success Bond is a catchier name for its British inspiration, the Social Impact Bond, the first of which was launched last year by David Cameron’s coalition government. (Social Finance, a sort of investment bank for the social sector, which designed the Social Impact Bond in Britain, this week launched a sister organisation in America, to find suitable candidates for Pay for Success Bonds.) These raised money from private investors to fund the expansion of schemes run by charities to reduce the reoffending rate among certain categories of criminal after their release from jail. If the recidivism rate falls far enough, investors can earn up to a 13.5% annual rate of return. If there is no improvement, investors could lose all their money.
The search is now on to find suitable pilot projects. The mayors of New York City and Baltimore are said to be keen to apply. Another possible candidate is the National Guard Youth Challenge, overseen by the Defence Department, which applies military discipline to provide skills training to at-risk youth. All this is a lot more inspiring than arguing over which bits of public spending to cut.