Government, Foundations Look to 'Social Impact' Bonds to Boost Program Effectiveness

Policy makers at the local, state, and federal levels are considering ways to bring the discipline of markets to government programs, the New York Times reports.

In an effort to improve the effectiveness of government programs and encourage greater efficiency in the delivery of social services, government leaders are looking at the feasibility of "pay for success" or "social impact" bonds in which foundations and nonprofits would put up the initial funding for a new program and administer it, with government oversight. In turn, the government would reimburse their costs several years later, possibly with a bonus, if agreed-upon benchmarks were met. If a program fell short of its benchmarks, taxpayers would owe nothing.

Such a program is already being tested in Great Britain, where Social Finance, a not-for-profit organization working to develop financial products that marry the ambitions of investors with those of the social sector, has raised nearly $8 million from investors, including the Rockefeller Foundation, in an effort to reduce recidivism rates at Her Majesty's Prison Peterborough. Anthony Bugg-Levine, managing director of the Rockefeller Foundation, told the Times that the foundation expects it will get its money back and be able to re-invest it in other social ventures, and also believes that social impact bonds have the potential to attract for-profit investors, vastly expanding the pool of capital available for social programs.

According to the Times, President Obama intends to launch seven pilot programs that would issue a total of $100 million in bonds to support programs in the areas of job training, education, juvenile justice, and children's disabilities, among others. Officials in Massachusetts and New York City are reportedly looking at similar funding mechanisms but have not decided whether to issue bonds.

While social impact bonds have limitations — it's virtually impossible, for example, for private money to cover the costs of multibillion-dollar programs such as Medicaid or education — the potential for improving the government's performance is considerable, and the costs associated with business as usual increasingly are unacceptable. "If we just keep funding social programs the way we have been," said Jon Baron, president of the Coalition for Evidence-Based Policy, "there's not a lot of reason to think we'll have much success."

David Leonhardt. "For Federal Programs, a Bit of Market Discipline." New York Times 02/09/2011.