Social impact bonds (SIBs) are a type of impact investing — investing for results. A community service provider (or any other kind of service provider) who wants to pilot or scale up a program can use SIBs to finance their projects.
A bond issuer (either a government, or a third party on behalf of a government) makes the SIBs available to private investors, who will receive the principal with interest if the program attains a predetermined success rate (interest usually reflects the savings to government from alleviating the problem). If the program is unsuccessful however, the investors lose their money.
Modified versions of this model are being trialled in NSW, and three more were announced in the 2015 Queensland budget.
Not everyone agrees that SIBs are the way to go. Critics of the model wonder, if the project is likely to get positive results, why not just let the government fund it? Why even deal with private investors?
Season 4 of the HBO crime procedural drama The Wire can shed some light on this [SPOILERS AHEAD]. One storyline concerns the efforts of former western district police commander Howard 'Bunny' Colvin to develop a special program for the students of a local Baltimore public school.
The series is, in a word, heartbreaking. Heartbreaking that the mistakes of the kids it depicts have such dire consequences for their future — more so than kids from other (read: better) socioeconomic backgrounds. Heartbreaking, too, that so many of the adult characters try to do the right thing yet time and time again come up against an unforgiving and immovable 'system'.
It got me thinking: how could good policy help? How might recent policy innovation help the plight of the characters depicted in the show?
In the series, Colvin and his academic research partner, sociology professor Dr David Parenti, observe a grade 8 class who have returned from school break.
They notice that there are two types of students with distinct traits and propensities to disrupt the classroom, and that these behavioural traits correlate with their roles on the street.
There are the 'corner' kids, who are small time drug dealers and have aspirations of being gangsters in a few years — they are the classroom disruptors. The other group is the 'stoop' kids, who stay on the stoop of their houses as their parents told them.
The corner kids are placed into a special class under Colvin and Parenti's program. Colvin and the researchers give them a variety of tasks including team building and trust exercises to enable them to work together towards a common goal.
The aim is to quell their disruptive behaviour and socialise them in a classroom setting. Furthermore, removing the disruptive 'corner' kids from the classroom would aid the education of the 'stoop' kids in the regular classrooms.
[BIG SPOILERS COMING]
Sadly, later in the season, Colvin's project gets axed in part due to budget cuts (THANKS CARCETTI) and a sizeable financial deficit in the preceding year (THANKS ROYCE).
Enter social impact bonds. In an alternative universe where these were available Colvin could have kept the research project running.
If the program meets its goal and a pre-decided proportion of cases have better outcomes — in Colvin's class, if some proportion of students are successfully integrated into a regular classroom — then the principal is paid back to investors along with a return corresponding to the level of success.
If the program fails, and does not meet any of its targets, the investors lose their money.
The best part of this set-up is that if the program does not succeed over the course of four or five years the government does not lose money; if it does succeed, the government coughs up the money for repayment with interest years later.
In Australia's less than perfect scenario of fiscal sustainability and budget cuts, we must think more broadly about how we can collectively solve our problems; drawing temporarily on the resources of private investors if we must, rather than depending excessively on government funding for risky projects. That well can run dry. And when it does, it hurts those most in need of help.
Gabriela D'Souza is an economist based in Melbourne.