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  • What’s The Real Responsibility Of The Free Markets

    Social impact bonds (SIBs) — a promising new financial instrument designed to address social problems — face a number of obstacles, even as government leaders in the U.S. are ready to give them a try.

    Social impact bonds (SIBs) — a promising new financial instrument designed to address social problems — face a number of obstacles, even as government leaders in the U.S. are ready to give them a try.

    SIBs take money raised from outside investors to fund social programs — such as drives to decrease the number of homeless people — and generate a return only if the program is successful. While SIBs will soon be offered in New York and Massachusetts, they could be a hard sell, for several reasons.

    Identifying what types of programs are suitable for a SIB structure and figuring out exactly how to measure the success of those social programs are challenging issues. In addition, SIBs bring with them higher costs — expenses that include paying a third party to evaluate results, for example — when compared to simply delivering the services directly.

    Yet despite such hurdles, Wharton management professor Keith Weigelt says social impact bonds have tremendous potential. “If social investment is going to grow, you have to tie it to performance,” says Weigelt, adding that social impact bonds could alter how non-profits function. “Non-profits are very inefficient,” he notes. SIBs “bring market discipline” to the sector.

    The first significant trial of social impact bonds, also known as “pay for success bonds,” came in the United Kingdom. In 2010, the non-profit advisory organization Social Finance, Ltd. and the U.K. Ministry of Justice signed a SIB contract aimed at reducing recidivism among inmates at Peterborough prison in Cambridgeshire, England, which houses both male and female inmates. About 60% of those serving relatively short prison sentences commit at least one offense within a year of release.

    Seventeen investors, including the Rockefeller Foundation, provided five million pounds to fund a set of non-profit organizations to deliver several services to inmates and their families that would help discourage repeat criminal activity and a return to prison. The investors will get their investment back if the program cuts the recidivism rate by 7.5%. If the reduction is greater than that, investors earn a return linked to that performance — with the total return capped at 13%. That return is based on the amount of money the government will save, thanks to the reduced rate of repeat offenders.

    While it is too early to judge the results of the Peterborough program, government leaders in the U.S. are already jumping on the SIB bandwagon. In Massachusetts, work is under way to use SIBs to address recidivism rates among young people as well as the chronically homeless. And in New York City, Goldman Sachs is putting up $9.6 million for a SIB aimed at reducing recidivism rates among young inmates at Rikers Island prison.

    Read it at Knowlege@Wharton.com

    Good luck.

    Calvin Wilson
    Founder and CEO
    Upstart: Business and Management for 20-40 Year Old Professionals
    calvin.wilson1@verizon.net
    http://twitter.com/Upstart__Nation

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