Social Impact Bonds

Economic crises inevitably bring change.  Flimsy old paradigms collapse with financial retraction.  In the short term (and hopefully not prolonged into long term structural ails) unemployment, foreclosures, and poverty are strikingly widespread.  But today’s crashes and budget crunches have forced both private and public sectors to get creative and spend every penny as effectively as possible.  As a plausible counter proposal to the neoconservative push to slash and burn government programs, President Obama will set aside $100 million for seven pilot projects that could radically change and improve social programs, government spending, and the entire non-profit industry.

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Initially on a trial basis, President Obama will advocate the use of Social Impact Bonds to sponsor government programs.  Social Impact Bonds are risk-free vouchers governments can use to promote public and non-profit sector competition.  Under the proposed system, a bond issuing organization will announce specific, measurable targets it seeks to attack (ie, raise high school graduation rates by 8% at individual public schools or decrease the average time it takes unemployment recipients to return to work in a given county).  Non-profit groups entering into the proposed arena will be held responsible for their own start-up costs (and thus completely assume all risk).  But once their projects complete the goals set by the bond issuing organization, the government will then retroactively fund the entire project.  The government will reimburse successful ventures for operating costs plus interest.

The proposed bond issuing organizations will help the federal government establish a much needed evaluation system.  The bond initiative will help identify and weed-out failing programs, while promoting, funding, and expanding successful ones.  Non-profit resources traditionally come from fundraising and grants.  Like the many vulnerable groups they help, NGOs are left behind in capitalistic markets.  Social Impact Bonds finally seek to incorporate non-profits within market economies so as to encourage social innovation, fueled by competition for funds.  Adopting a market-based approach, government spending will become more efficient and results oriented.  This could forever reshape the structure of government spending, social projects, and non-profit finance. (Under this system, could it even still be called “non-profit”?)  Successful investors in England’s first pilot program, which focused on prison rehabilitation, were rewarded with between 7.5% - 13.5% returns.  These are even higher than stock market payouts and could therefore attract massive private investment in social programs.

The British non-profit Social Finance
helps released prisoners find work and
stay out of trouble.

A recently released Harvard study classifies Social Impact Bonds as “A promising new financing model to accelerate social innovation and improve government performance.”  The past two British Prime Ministers have aggressively promoted the pioneering idea of Social Impact Bonds.  The State of Massachusetts (always on the forefront of innovation), along with New York City, has begun to adopt similar programs.  Social Impact Bonds offers promise of a revamped structure of social projects. 

After the unprecedented success of microcredit establishing a market-based approach for providing social assistance, social business models have begun to blossom.  African entrepreneurs sell low-cost water filters and irrigation systems to rural farmers.  Haitians harvest bamboo for cheap, but extremely sturdy, construction material.  The Indian conglomerate Tata mass-produces the infamous $2,000 car.  By now adopting Social Impact Bonds, President Obama is opening America to socially responsible innovation while effectively restructuring the public spending status quo for the debt-ridden nation.  Obama can appease voter discontent over unbalanced budgets with this radical change, and while doing so, Obama is finally on the brink of promoting the social change he once promised.

Social Impact Bonds