2015-03-21

Social Impact Bonds ?

Recently I was made aware of a finacial instrument that has been around for a while, but that I had not heard of:  The Social Impact Bond.  It is not surprising that I have not heard of it, I am not all that aware of the world of finance.  But when this was described to me by my wife, an economist and professor of economics, I was rather sceptically intrugued.  My first impression was "well, it sounds a lot more friendly that a credit default swap".  Therein lies a good indicator of my financial accumen.

Never-the-less, I thought I would take a look.  The first place I found was Goldmann Sachs, a firm that instills an impression of almost anything but social awareness not to mention investment in anything socially healthy.  However, the graphic they display shows a nice overview of how this is supposed to work.  Do take a look...

http://www.goldmansachs.com/our-thinking/trends-in-our-business/social-impact-bonds.html?cid=PS_01_47_07_00_00_00_01

And of course Wikipedia:

http://en.m.wikipedia.org/wiki/Social_impact_bond

Digging into this a bit I found that this concept, or its current description, originated in the UK.  Apparently, the UK faces a prison space shortage.  Recidivism is thus a major problem.  It isn't so bad if a person screws up, does their time, and moves on. But when that person keeps running through that cycle, needless to say it gets expensive for the tax payer.  Housing prisoners is expensive, processing through the courts is expensive, a police force that has to keep dealing with the same problem coming from the same individual is expensive, and on and on.

Of course, this all boils down to money.  Expensive programs that don't work are still expensive, and this does not just apply to jail-flys either.  Emergency rooms end up in the same basic situation when they are used as clinics so folks who can't afford health care can get some care.  That drives up cost for everyone.

So, enter the Social Impact Bond, known by slight name variations depending on which country you look at.  The basic idea is that the risk of the performance, or lack thereof, of a service traditionally provided by the governmnet to address some issue is shifted from the taxpayer to the investor.  If the service performs, the government kicks back money to the investors out of the savings of not having to provide the service.  If the service does not perform, the investors take it in the wallet and the taxpayer walks away supposedly not having to pay for something that did not produce.

I can see some uses for such an arrangement here in the US.  Lets say that community A in State A faces a big problem that just seems to go on and on.  Current services simply have not changed the trend and they cost State A a fair amount of money.  The state could go to the Fed, but lets face it, the Fed really is not all that good at dealing with local or regional issues.  And they shouldn't.  They are too big and clumsy to recoginize let alone handle such problems.  So usually a bunch of money gets tossed to State A, much of which get diverted to ...well... wherever.  Community A ends up with some cookie-cutter service which ignores the cause of the issue and simply provides a means of disbursing whatever funds that the state didn't abuse to implement solutions that don't fit the problem.  So, that does not work.  What then?

Well, what if Community A goes to State A and says "Hey, we have this problem that is costing us a lot of money, and here is a solution tuned to address the causes of our problem while helping those that are affected by the problem. We think that if we to (list of things), the result will be that the cause of the problem is addressed, those affected by the problem will no longer require assistance(because the cause of the problem has been addressed), and this will be accomplished in X amount of time. The savings to the taxpayer will be Y.  How about issueing bonds?"

Now, a solution that is more likely to fit the problem and address both the causes and the immediate impacts of it has been proposed by the folks who know the problem first hand.  If the solution seems reasonable, bonds are issued and investors buy the bonds which provides the initial investment to get things going.  The project is monitored regularily and measured against performance goals.  If the project is showing results as expected, good deal.  If not, it adjusts or is closed out.

This leaves one of two likely outcomes, the project fails and the bond-holders are out thier money.  The project succeeds and the bond holders are paid by the tax payer out of savings that come from the issue having been resolved.  The only way the tax payer pays is if there is measurable success.

Sounds easy right?  Well, not so much.  How does one establish measurements of success, of progress toward success?  Some of the issues like health-care for those that can't afford it are not well suited to this.  They are too big, and too pervasive.  But what about regional social issues like pockets of drug abuse, poverty-driven crime or even something like poaching?  For issues that are regional and/or local, where a cause-effect might be stated fairly clearly, this might work very well indeed.

No need for huge programs which don't address the cause of the problem.  The tax payer pays for what works and does not pay for what does not.  And, most importantly from my point of view, it is defined as a project: that means it has an end.  And that is it's most attractive aspect to me.  There is a reduced risk of it becoming a program, something that goes on and on, and costs and costs.

I like that.


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