Despite all the criticism, negativity and reports of failure, the Peterborough social impact bond may prove to be a disrupter in the way we fund social services and invest in impact. Plenty has been written and said about the Peterborough prison social impact bond, so there is no need to go into detail here.
Why is this program unique?
This deal represents the first social impact bond in the world, one designed to leverage private dollars for use toward public services. Private investors provide cash up front to service providers—nonprofits, for example, who may have difficulty accessing traditional capital—and receive repayment of principal and possibly interest from a government based on the service’s outcomes. The final return to investors is based solely on the outcomes delivered and may amount to zero repayment if the programs are unsuccessful.
Complex investor motives
Being a participant in the first deal in the world (and actually, any of the first several deals in the world) offers a number of opportunities for interested “investors.” Beyond merely hoping for positive outcomes from the services and reaping a financial reward on the backend, early investors may be noted donors or fundraisers who normally fund programs such as these in the first place on a grant or unrestricted donation basis. The attachment to a social impact bond allows them more notoriety by way of appearing on every short list of active social impact bonds in these critical early years of their formation, while continuing to allow them to fund programs meaningful to them.
The reason for skepticism on the part of early investors is the lack of any substantive data proving these upstream programs work to influence outcomes in a financially tangible way. Early investors may as well just be donors at this point, and any additional return on their investments may help to build a case for future real profit-driven investments.
What does measuring outcomes mean?
Investment and repayment in the Peterborough deal were based solely on reducing recidivism rates among the cohorts compared to a national baseline. If reoffending rates in the first year after release dropped by at least 7.5% for all cohorts the investors would receive a return on their investment—if not, then they would receive nothing.
The OneService program gets funded in the beginning, regardless, via private dollars from investors. Meanwhile, the British government is on the hook for repayment only if this recidivism goal is reached. Governments can agree to deals like these because the outcomes desired—in this case, lower recidivism—theoretically provide some sort of financial value for them, either through lower costs or increased tax revenues. But looking at the Peterborough deal, there is no concrete dollar calculation tied to 7.5% recidivism reduction.
It could be argued that lower recidivism is not even an outcome at all, but merely an output of the service. Outcomes are the net results of activities, whose results are measured by outputs. For lower recidivism to impact the U.K. government in some tangible way, we would expect cost of prison operations to decrease, tax receipts to increase from having a higher tax-paying (i.e., non-institutionalized) population, damages from crime to decrease, etc. Simply reducing recidivism does nothing financially for the government if these greater impacts are not achieved.
Further disconnect between program and outcomes
The Peterborough program, as designed, rewards investors with taxpayer dollars based not on a net return on taxpayer investment, but rather based on a specific number of short-term offenders not reoffending within a one year period. This means, that the program may work wonders in the first year of contact with inmates, but after that, who cares? Several publications document the drop-off in contact between case workers and inmates after the first few months anyway. Add to this, the fact that while a good indicator of future behavior, initial behavior after walking out the doors does not adequately equate to long-term financial value for a government.
The one-year post-release measurement period should tie to outcomes received in the first year of repayment. Assume recidivism does drop 10% or so against a national baseline—what does this mean?
How many incremental taxpayers are added to the system? Are any prison wings shut down? How many fewer staff are required after that first year? What is the resulting drop in crime rate? And most importantly, what do these dollar amounts equal?
These are much more tangible results that should be looked at, or at least mentioned in any of the write-ups of this program.
Is this such a bad thing?
Even if the government entered into this arrangement without having even the roughest of estimates for these real types of outcomes, the deal still adds value.
First, the programs are clearly good ones. OneService has achieved some success and seemingly the more dollars thrown at it, the greater the scale the impact could be. At the very least, this deal serves as a public initiative to improve the system (which, ironically, that’s all it was, as proven by the fold-up into the criminal justice initiative Transforming Rehabilitation.
Second, and more importantly, this potentially paves the way for future deals around the world—and this certainly has been the case. It serves as a template of sorts and proof that private dollars can be brought into public services. Ignoring the fact that payments weren’t made back to investors (kinks that still need to be worked out in these systems), we have something to learn from and move forward with.
Moving forward
There are certain things to take away to make better deals in the future. Most critical is having a concrete understanding of the outcomes desired. Outputs such as recidivism are great for tracking progress, but broader measures of societal impact need to be measured and improved. If there is any disconnect between the two, then these types of programs will not ever achieve what they were intended to: bring in private capital.
As more of these deals are created, it is critical to track the progress of the programs. If these programs can start to prove outcome results that tie to real dollars on the government side, investors will naturally take notice that there is money to be made. And once this starts to happen, donors will be supplemented, but not replaced, by profit-driven investors—adding volume to the social impact investing marketplace.
If that is the primary result of the world’s first social impact bond in 2010, then that would be a tremendous success, no matter what the analysts say.
