Blog

Creating a new generation of data to solve social problems.

Earlier this month, Mayor Michael Bloomberg announced that New York City will issue the first social impact bond in the United States. Since announcing that Goldman Sachs would finance a social impact bond to decrease recidivism for incarcerated adolescents at Rikers Island, Mayor Bloomberg has energized the social finance community and left it to ponder the limits of what social good can be created by this nascent tool.

The HMP Peterborough prison in the United Kingdom first introduced the world to Social Impact Bonds (SIBs) in 2010 when it provided social programming to prisoners with short sentences in an effort to reduce reconviction rates. Since then, a few states in the U.S.—including New York, Massachusetts, and Minnesota—have explored using similar tactics to remove public risk from financing socially motivated service organizations.

But SIBs have potentially game-changing implications for the next generation of finance outside of the U.S. and Europe. Now, others are exploring the application of this finance innovation in the development space, resulting in what the Center for Global Development (in cooperation with Social Finance) has coined development impact bonds (DIBs). DIBs take the same constructs of a social impact bond and apply them to issues facing international development.

Although there are no proven models of effective SIBs (Peterborough is still inconclusive), their promise has won them the praise of social finance gurus because they offer social benefits, government accountability and theoretically harness market powered pricing efficiency all at once. This appeal originates from the structure of the contract between the government, the service providing organization, and the private investors. The private investors front the capital for the service organization to operate. If the service organization achieves targets agreed upon by the investors and the government, the government will pay the investors back the principal amount with the possibility of interest. If the service organization fails to deliver results, the government has no obligation to pay—saving taxpayer dollars from supporting an ineffective program.

Media covering New York’s SIB announcement have described Impact Bonds as a “win-win-win,” while others have taken to borrowing Benjamin Franklin’s statement that  “an ounce of prevention is worth a pound of cure” to describe the projected benefits of these new financial instruments—so, what value can social and development impact bonds generate?

This blog post originally ran in NextBillion. Read the full post at NextBillion.com.