OKPOLICY.ORG
John Pearson is a retired executive in the worldwide logistics industry. He is chairman of the Oklahoma Partnership for Successful Reentry, a statewide coalition of organizations working to help ex-felons reintegrate into society.
Social Impact bonds (SIB) are a promising new approach to government financing of social programs or social “interventions.” By combining performance-based payments and market discipline, the approach has the potential to improve results, overcome barriers to social innovation, and encourage investment in cost-saving preventive services. In Oklahoma, SIB’s could provide a funding source to provide assistance to the eight thousand plus individuals released annually by the Oklahoma Department of Corrections to transition from incarceration to becoming a successful employed neighbor.
Under the social impact bond, the state of Oklahoma contracts with a private-sector financing intermediary, which we’ll call a “social impact bond-issuing organization” (SIBIO), to obtain social services. The government pays the SIBIO entirely or almost entirely based upon achieving performance targets. If the bond-issuing organization fails to achieve the targets, the government does not pay. In some cases, the government payments may be calculated as a function of government cost-savings attributable to the program’s success.
The bond issuer obtains operating funds by issuing bonds to private investors who provide up front capital in exchange for payment of the bonds when the performance targets are met. The bond issuer uses these operating funds to contract with service providers to deliver the services necessary to meet the performance targets.
Illinois will soon join the state of Massachusetts as the second state to have a SIB program. Illinois will work with the Harvard Kennedy School’s Social Impact Bond Technical Assistance Lab to establish the program, with funding assistance from the Rockefeller Foundation and the Dunham Fund. New York City is also developing an SIB program to fund cognitive behavioral therapy for juveniles detained at Rikers Island, with the goal of reducing recidivism.
The social impact bond model uses private financing to overcome existing barriers to performance-based pay for social service providers. Today, most providers would be hard-pressed to come up with sufficient capital to provide services up front and only receive payments after performance targets were met. And most social service providers would be unable to absorb the risk of failing to meet performance targets. But in a social impact bond scheme, private investors provide the upfront capital and absorb most of t he risk.
The private investors also perform an important form of quality control. That’s because service providers must convince the private investors that their program model and management team are likely to achieve the performance targets. The investors and bond-issuing organizations also have strong incentives to rigorously monitor and improve program performance; if performance targets are missed, they will lose the money they invested. Overall the social impact bond model offers the following three main benefits:
- Improved performance costs: The model focuses government agencies and social service providers on achieving program objectives and improving performance in a way that is transparent to taxpayers. Programs that fail to achieve results would not continue to receive funding year after year, as they do today.
- Accelerating adoption of new solutions: Government agencies, which might otherwise continue to fund the same old approaches they have funded in the past , would have an incentive to invest in promising new strategies, including preventive services. That’s because the risk of wasting taxpayer dollars if the new approaches fail is transferred to the private sector.
- More rapid learning about what works: The social impact bond approach embeds rigorous ongoing evaluation of program impacts into program operations, accelerating the rate of learning about which approaches work and which do not.
Social impact bonds are potentially a tool that would be very effective in reforming criminal justice in Oklahoma.
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