The Promise and Potential of Social Impact Bonds

By Michele Jolin & George Overholser

Deciding which social-services programs to cut and which to save shouldn’t grind government to a halt. By only paying for success, a new funding tool known as “social impact bonds” (SIBs) that is gaining traction across the country shows real promise for moving the needle on longstanding social problems. This funding model gets better results with existing resources, minimizes risk to taxpayers and ends programs that are not working.

A social impact bond is a partnership between government and philanthropies, nonprofits and private-sector investors. Government first identifies a desired goal, then contracts with private investors who raise money to fund a project designed to achieve that goal. A philanthropy or nonprofit manages the project. After the project ends, it undergoes rigorous independent evaluation to determine if it achieved predetermined outcomes. Since the private-sector partners don’t get paid if they don’t produce, the taxpayers’ risk associated with potential failure is minimal.

Two of the nation’s first SIBs were conceptualized in Massachusetts to address youth criminal recidivism and chronic homelessness. Colorado, New York, Ohio, South Carolina and other states also are pursuing this innovative approach to tackle problems that have plagued local communities for decades.

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