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Do Social Impact Bonds Still Have Promise?

The government’s new experimental program seeks to encourage investors to finance social programs in a manner similar to they way they finance a business venture. These new “Pay for Success” programs, also known as social impact bonds, encourage private sector investors to finance social programs they believe will be successful. If the program achieves measurable milestones set in the program’s design, the investors will receive a return on their investment.

Social impact bonds are a welcome innovation for a government struggling to finance all the social programs it wishes to implement. For one, the program allows the government to secure private investment for social programs. In addition, the programs minimize the amount of risk the government has to take on, instead shifting the burden of risk to private investors providing the capital.1 Finally, the social impact bonds provide a way to “impose discipline on government programs.”2

A pay for success program implemented in a kindergarten school in Utah is beginning to show success and allowing both the government and private investors to realize its intended benefits.3 The program provided free kindergarten to 4-year-old children who had scored poorly on a vocabulary test and were presumed to have an elevated risk for being placed in a special education program in the future.4 The deal with the government allowed investors to receive a financial bonus for every one of the children in the program who matriculated from elementary school without being placed in a special education program.5 Recently, investors began to receive payouts from the program’s success.6

However, all programs have not been so successful. The first pay for success program implemented in the U.S. was at Rikers Island Prison in New York. The Adolescent Behavioral Learning Experience was designed to reduce teenage recidivism by at least ten percent.7 However, the program failed to make an impact on the recidivism rate.8

Despite its failure, commentators have still stressed the positive impacts the Rikers program achieved. Firstly, although it might have not reduced the recidivism rate as expected, it made an impact on individuals’ lives.9 For some of the young men involved in the program, it served as a beginning step in the start of their new lives free of crime and prison.10 In addition, private funding and oversight allowed a greater level of clarity as to why the program failed as it did. The rigorous evaluation that resulted allowed the government to avoid mistaken conclusions based on lackluster data.11

In addition to their benefits, these programs have also received a fair share of criticism. The first critique stems from the incentive system that fuels the program. The root of the funding for a social impact bond comes from the incentive to receive a payout if the program is successful.12 This could lead to a skewed policy for the program if investors get heavily involved in its design to ensure the program’s success.13 Additionally, this could create an environment where investors are more likely to select programs that already have a proven rate of success and evaluation techniques that will most likely provide a positive outcome.14 Second, these programs rely on the ability to objectively measure success in order to trigger payouts.15 This requirement can restrict the type of program that the government will be able to provide.16 If they are unable to determine a measure of success, then the government will be unable to obtain the capital necessary to fund the program. Similarly, if the government’s primary objective becomes to save money, they are likely to steer such investors towards expensive programs.17 These programs may or may not be the best use of such funds or the most impactful. Thirdly, although the impact bonds are supposed to create new capital to fund social programs, reality shows that the government would be required to set aside a matching amount of funds in their budget.18 This is because states are restricted from creating liabilities in the operating budget without providing for matching funds.19 In addition to matching the initial capital investment required, governments will have to aside money for the associated legal and evaluation measures anticipated.20






  1. Kenneth A Dodge, Why Social Impact Bonds Still Have Promise, The N.Y. Times, at 1 (Nov. 13, 2015), 

  2. Eduardo Porter, Wall St. Money Meets Social Policy at Rikers Island, The N.Y. Times, at 6 (Jul. 28, 2015), 

  3. Dodge, supra note 1, at 2. 

  4. Id. 

  5. Id. 

  6. Id. at 1. 

  7. Porter, supra note 2, at 2. 

  8. Id. 

  9. Id. at 3. 

  10. Id. 

  11. Id. at 2; see Dodge, supra note 1, at 3. 

  12. Andrew Palmer, Playing with fire, The Economist, at 2 (Feb. 25, 2012), 

  13. Porter, supra note 2, at 4. 

  14. Kyle McKay, Debunking the Myths Behind Social Impact Bond Speculation, Stanford Social Innovation Review, at 3 (Apr. 8, 2013), 

  15. Palmer, supra note 3, at 3. 

  16. Porter, supra note 2, at 4. 

  17. Id. 

  18. McKay, supra note 4, at 2. 

  19. Id. 

  20. Id.