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Social Impact Bonds: Something Republicans And Democrats Agree On

Anne Field | March 3, 2016

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Democrats and Republicans don’t seem to agree on much in this fractious campaign season. The exception may be Social Impact Bonds (SIBs), an innovative new financing model that is being welcomed with a warm bipartisan embrace.

Also known as pay for success, SIBs are a new mechanism for financing initiatives aimed at addressing social ills, such as recidivism and substance abuse. They involve public-private partnerships in which investors get paid back only if the program meets agreed-upon, measurable outcomes—and savings.

Recently, the governors of South Carolina and Connecticut independently announced plans for pay for success programs in their states. Usually on opposite sides of the political spectrum, South Carolina’s Republican chief Nikki Haley and Connecticut’s Democratic head Dannel Malloy both spoke optimistically about the potential for each effort.

Last spring, Senators Orrin Hatch (R-UT) and Michael Bennet (D-CO) introduced legislation to form a 10-year, $300 million federal program for state and local pay for success initiatives. A similar bill was introduced earlier in the House.

“Social bonds address social issues in a way where there’s common ground,” says Chris Geczy, adjunct professor of finance at the Wharton School and an expert in impact investing.

Says Tracy Palandjian, CEO of Social Finance, which developed the two projects, “The value proposition for the public sector is really attractive. That’s why it’s getting bipartisan support.”

Specifically, SIBs involve a partnership between government, philanthropies, nonprofits and private investors. A third party evaluates whether the initiative meets certain metrics—say, a specific decrease in the rate of recidivism. The government then pays back investors with a small profit if the goal is reached. Otherwise, there’s no return. In other words, a program that isn’t accomplishing anything won’t be continued and government only pays if there are measurable results. (If you’re thinking the approach isn’t really a bond, you’d be right).

Successful programs save the government money over the long term–for example, by reducing the number of prisoners the government must house. The South Carolina program targets low-income women expecting their first child. Teaming up with Nurse-Family Partnership (pictured above), a home-visiting program that pairs nurses and first-time mothers, the initiative will expand services to 3,200 women over six years. The $30 million effort will be financed by national and local foundations and investors, as well as federal funds from a Medicaid waiver. Metrics include reductions in pre-term birth and child injury over the first two years of each baby’s life.

Connecticut’s program, called the Connecticut Family Stability Pay for Success Project, taps Family-Based Recovery, which provides an intensive, in-home parent-child attachment program for families where parents are struggling with substance abuse problems. It’s raising $11.5 million from financial institutions and foundations. Goals will be measured through toxicology screenings and success in keeping families together and out of the foster-care system.

So far, the record for pay for success in the U.S. has been mixed. For example, the first SIB in the U.S., launched in 2012 and funded by Goldman Sachs, with a guarantee provided by Bloomberg Philanthropies, didn’t meet its goal of reducing recidivism among 16-to-18-year-olds at Riker’s Island by 10%; the project was discontinued.

Still, advocates call the experience a success. “The social impact bond was structured to maximize the ability of government, investors and most importantly, nonprofit service providers, to understand what was and wasn’t working,” wrote James Anderson in a Huffington Post op-ed last year. He heads the Bloomberg Philanthropies Government Innovation Programs. “In this case, an approach that had a strong evidence base of successfully reducing recidivism in other settings didn’t work for the young people at Rikers.”

The South Carolina and Connecticut initiatives bring the total number of pay for success programs in the U.S. to 11, according to Palandjian.

Anne Field is a New York-based journalist who writes about social enterprise and impact investing. This article originally appeared on her Not Only For Profit blog on Forbes.com.

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