Research Report #34 April 2017

Social Impact Bonds: A Potential Innovative and Effective

Solution for Social Problems

Blair Donner

Chien-Chung Huang

Within the past decade, there has been an increased interest in utilizing social impact bonds

(SIBs) to finance social service initiatives. SIBs are essentially a public-private partnership that re- ly on private investor capital to deliver a public service. While some SIBs have successfully gener- ated investor returns, others have been terminated in earlier project stages. This paper contributes to the growing literature and understanding SIB models by analyzing their development and struc- tures as well as three significant case studies in Peterborough UK, and New York and Chicago,

USA. It also considers the potential for SIB models in the China context. The findings ascertain the effectiveness of SIBs, highlight its innovative features, and suggest areas for further development.

Keywords: Social Impact, Bonds, Innovative, investment, private, capital. 1 Introduction advantage of the SIB financing model tolerance, a successful program can In the past, service organizations, is that it harmonizes the incentives of lead to generous repayment from the or organizations that aim to make pro- all three entities involved (donors or involved donor or government. Advo- gress within a critical social issue, have governments, service organizations, cates of SIBs argue that they empower followed a traditional financing frame- and investors) (Bridges Impact+, 2014). outcome payers and service organiza- work. Under this framework, the ser- Figure 1 demonstrates this dynamic. tions to channel the majority of their vice organization first secures funding SIBs accordingly follow a performance resources toward solving critical social from individual donors, foundations, -based or pay-for-results (PFS) model, issues and encourage less operational or federal and state governments and meaning that only social programs distractions (Bridges Impact+, 2014). then implements a program to tackle a which achieved a desired result are In short, SIBs solutions approach critical social issue of interest. The rewarded. Given the Pay for Success critical social issues through a unique problem with this method is that in- component of SIBs, they are sometimes public-private partnership. Unlike a herit structural obstacles and strained referred to as Pay for Success initia- traditional model, SIBs funding often lead to inadequate pub- tives. Evaluation of the SIB project is introduce the investor component. In- lic services. More specifically, political critical because it determines how re- vestor capital is more flexible and can pressures to meet in-demand issues turns are allocated (Bridges Impact+, overcome structural barriers that deter also prevent decision makers from 2014). governments and service organiza- bringing effective public services to SIBs also unlock the opportunity tions from investing in critically need- marginalized population segments for achieving better outcomes and, as a ed social projects. Since investor re- (Dear et al., 2016). Social impact bonds result, a better social system (Bridges turns are contingent on project success, (SIBs) are a potential solution to the Impact+, 2014). Freer allocation of re- a results-oriented approach is empha- problems embedded in traditional so- sources and larger program scopes are sized during SIB projects. Given its cial financing. On the most basic level, a cornerstone of SIB success in these advantages, SIBs have become an in- SIBs are a three-way public-private areas. Through the SIB model, donors creasingly appealing option in the U.S., partnership between a donor, investor, and governments are enabled to allo- especially due to current budget defi- and service organization. It is through cate their limited financial resources in cits. SIBs have been a hot topic in Chi- the added element of an investor that ways that focus on project outcomes na recently, and have potential to help SIBs induce results-oriented service instead of project funding. Simultane- marginalized Chinese population seg- programs (Bridges Impact+, 2014, p. ously, involved donors and govern- ments. With the progression of the 15). ment entities can also pursue related twenty-first century, China has em- SIB arrangements follow similar innovative preventative services be- braced an increasing number of privat- core operating structures, though cause they not immediately pay for the ized business practices. This along slight variations exist. The flow of cap- SIB project (Bridges Impact+, 2014). with the rise of China’s nouveau rich ital usually begins with a financial pro- Service organizations are likewise ena- class enable SIBs to serve as a potential vision to a service organization by an bled by SIBs to expand the focus of outlet for private capital to be invested investor entity, which is particularly their efforts beyond the existing focus. in ways that promote domestic devel- important as service organizations of- In other words, the capital provided by opment of China. ten lack adequate funds. The investor’s investors enables the service organiza- A Brief History: Development capital enables the service organization tion to channel the maximum amount of the SIB Over Time (2010 – of time and finances towards con- to focus on delivering a social service 2016) that targets a specific cause, communi- structing innovative, results-oriented SIBs were born out of the need to ty, or population segment instead of programs and solutions. Likewise, in- overcome structural barriers that pre- on fundraising. If the service organiza- vestor participants are enabled to wit- vent important social services from tion is successful, the donor or govern- ness progress on a social cause of their reaching marginalized populations ment entity enjoys an improved social liking and obtain a return on invest- and communities. SIBs are still a rela- environment and thus makes a return ment. The payment-by-results compo- tively new concept; the first SIB was payment to the investors. In full circle, nent of the SIB incentivizes the inves- implemented less than a decade ago in the investors benefit from the initial tor to seek out the most promising so- September of 2010 (Dear et al., 2016). investment in the social project lution to a pressing social issue The first entity to introduce the SIB (Nicholls & Tomkinson, 2013). The key (Nicholls & Tomkinson, 2013). While financing model was Social Finance SIB investors must have a high risk

2

UK, an organization established in forced to follow strict austerity pro- mented, methodologies to analyze 2007 with the goal of exploiting un- grams, and so the effectiveness of lim- their social impact and evaluate relat- tapped opportunities that lie in the ited government expenditure became ed data are becoming increasingly so- relationship between social progress increasingly paramount. SIB models, phisticated. SIBs are essentially play- and capital markets. Social Finance UK under this context, are an appealing ing a leading role in forging the useful initiated the very first SIB in response option because the results-based SIB connections between data, research, to the discovery that scarce resources structure unlocks drastic savings for and decision making. Readily available prevent governments from funding financially strained governing institu- databases are being developed as a innovative social programs and from tions (Nicholls & Tomkinson, 2014). In direct result of SIB needs so that policy evaluating the methodologies and out- the less advantaged areas of China, makers can access key statistical indi- comes of their previous programs especially western regions, attractive cators during the decision-making pro- (Dear et al., 2016). This pioneer SIB SIB models might help expand the cess. One example of this is the UK was launched in Peterborough, UK scope of social services when govern- government’s Unit Cost Database, an during September of 2010 and was ment budgets leave gaps. As of June online resource which aims to support designed to reduce local cyclical recidi- 2016, a total of 60 SIBs have been the SIB movement and provides over vism patterns. It was planned for a launched in 15 different countries. Da- 600 estimates of social issue costs total of 3,000 short-sentenced ex- ta is available for the first 22 SIB pro- (Dear et al., 2016). In the future, it is offenders of Peterborough to be pro- jects, and of these, 21 projects (95%) hoped that entities and organizations vided with rehabilitation services report that the SIB yielded positive interested in implementing social pro- through investors’ private funding (see social outcomes, 12 projects (54%) re- jects can utilize the data and evaluative below case study for detailed design of port that they have made outcome techniques developed from SIB models the SIB). Currently, the case of the Pe- payments, and 4 projects (18%) claim in assessing the potential of their own terborough SIB continues to inspire to have fully repaid investor capita programs (Dear et al., 2016). countries worldwide to experiment (Dear et al., 2016). As for the remaining Despite the early successes of first with SIB financing. Shortly after the 38 projects, recall that since many of SIBs, there is still more to ascertain implementation of this first SIB, a se- these were just recently implemented about their operations, functions, im- ries of other SIBs were launched they will not reach maturity for anoth- pact, and optimal applications. Cur- throughout the UK in 2012 covering a er few years. Evaluative data and re- rently, a major SIB trend is operational range of topics from the education of sults will therefore not be available for designs that maximize investor capital disadvantaged young people to home- another few years. Since investor re- turnover rates. Already, in just the past lessness. Social Finance US was subse- turn is dependent on evaluative data, half-decade or so, there has been tre- quently founded in 2011 and Social SIB project returns cannot be allocated mendous progress in bringing returns Finance Israel was founded in 2013, until these results are made available. as quickly as possible to investors. The both of which aim to provide social In some cases, data may be available very first SIB project in Peterborough and financial returns by linking inves- for an on-going project and so inves- required that investors wait four years tors with service organizations and tors must still wait until full repay- before possible repayment, but subse- governments. Following this, the first ment. As data for existing SIB projects quent SIB projects have provided in- SIB was launched in the United States are made available, these statistics will vestors with pay as soon as the project in 2013 and the first Israeli SIB in 2015. reflect a more accurate depiction of SIB exhibited signs of early success Other countries that have adopted SIB financing (Dear et al., 2016). through measurable statistics. Moreo- solutions include Germany (2013), Recent SIB Developments ver, the scope of areas covered by SIB Canada (2014), India (2015), Switzer- Evaluation techniques are among projects has expanded over the years. land (2015), and Sweden (2016) (Dear the most critical components of the While the first SIB focused on recidi- et al., 2016). SIB. Without properly measuring the vism, later SIB projects have tackled In the grand context of social re- results of the programs, it is not only critical social issues like homelessness form, SIBs fit into recent shift away challenging to determine the investors’ and education for the disadvantaged. from centralized, neo-Keynesian social returns but also it is challenging to de- Certainly, there is ample room for re- welfare solutions and towards market- termine the effectiveness of the SIB- searching the most impactful and cost- based approaches. In the aftermath of funded project. Consequently, as an effective areas to implement SIB fi- the global Great Recession of 2008 to increasing number of SIBs are imple- nancing. It would also be useful to as- 2010, a number of key countries were certain which social issues SIB financ-

3 ing alleviates most effectively. As framework (Bridges Impact+, 2014). antors towards a contracted service knowledge and understanding of SIB Figure 2 illustrates the direct contract provider or any sub-contracted service programs and their specific impact framework. One unique feature of the providers. Just as in other SIB models, expands, it can be expected that SIB- direct impact structure is that the ser- the outcome payer forwards return to financed social programs will cater to vice provider adopts a leading role. the prime contractor based on the suc- upcoming discoveries and evaluations For instance, under this framework, cess of the SIB project. Unlike the di- (Dear et al., 2016). performance management is conduct- rect framework, the intermediary Types of SIBs ed in-house by the service provider agency intercepts return capital flows An SIB financing scheme is a pub- (Gustafsson-Wright et al., 2015). from the outcomes payer to the inves- lic-sector contract that attempts to Intermediated SIB framework is tors and guarantors (Bridges Impact+, yield improved social outcomes and the second type of SIB contract and 2014). Figure 4 concisely portrays the also repays investors with a portion of also constitutes the most common type complications of this particular financ- the saved funds (Gustafsson-Wright et of SIB. Approximately 42% of all SIB ing process. Managed SIB framework al., 2015; Ramsden, 2016). At the time frameworks are classified as interme- is unique in that performance manage- of writing, several SIB contract designs diate. Unlike a direct contract model, ment is led by the prime contractor are used more often than others, the intermediated contract involves an and that the is orig- though variations do exist. In terms of investor-owned special purpose vehi- inated with the prime contractor rather development models, the two most cle whose function is to intercept the than the service provider and inves- widespread frameworks are the indi- direct relationship between the out- tors. Accordingly, investors working vidual transaction impact bond and comes payer and service provider under a managed framework back the the impact bond fund. The individual (Ramsden, 2016). Capital flows begin prime contractor instead of the service transaction impact bond provides one with an investor group, which can con- provider. For outcome payers interest- outcome payment contract to an inves- stitute of both lead and co-investors, ed in out-sourcing as much of the SIB tor or special purpose vehicle who can who then contribute contract funding performance management as possible, direct capital flows to investors. The to the special purpose vehicle. The spe- the managed contract framework is the impact bond fund, in contrast, pro- cial purpose vehicle then directs the optimal route (Bridges Impact+, 2014). vides for a series of outcome payment capital to both a performance manager Case Studies contracts. Service providers and inter- and a prime service provider. The out- Case Study 1 – UK Peterborough, Ex- mediaries can bid on a rate card that comes payer directs capital flows to offenders Project determines discounted outcome pay- the special purpose vehicle contingent The idea for the first SIB pilot, ments rates. Afterwards the outcome on project evaluation, which in turn is which would eventually become the payer selects the winners. Unlike an directed to the investors (Bridges Im- Peterborough SIB, was engendered individual transaction impact bond, an pact+, 2014). Figure 3 demonstrates an from discussions among the Council impact bond fund enables an outcome intermediated SIB framework. Inter- on Social Action, a committee orga- funder to set a multitude of SIBs in mediates SIB contracts are similar to nized by the UK Labour government place (Gustafsson-Wright et al., 2015). that of direct SIB contracts in that both to spearhead social action initiatives. In addition to these two develop- allow service providers and investors Alongside policy-makers, a multitude ment frameworks, outcome funders to originate the social impact bond. of organizations were invited to par- usually pick from one of three SIB con- The main difference is that in the inter- take in the discussions, including So- tract management frameworks: direct, mediated contract framework this en- cial Finance UK. Among the topics intermediated, or managed. First, the tire process is intermediated by a spe- discussed by government and organi- direct contract framework is a direct cial purpose vehicle (Bridges Impact+, zational representatives, financing so- contract between the outcome payer 2014). cial action became an increasingly im- and the service provider wherein con- The final most common style of portant issue (Nicholls & Tomkinson, tract funding is provided by an inves- SIB design is a managed contract 2013). By 2008, the Council on Social tor. Capital flows from the investor to framework. In this case, an outcomes Action initiated a conversation with the service provider and investment payer hires a prime contractor, like an two of the participating directors of returns are contingent on the evalua- intermediary, which is responsible for Social Finance UK. Topics discussed tion of the SIB program. Approximate- contracting service providers. The concerned the feasibility of a social ly 33% of SIBs utilize a direct contract prime contractor also mobilizes con- finance model funded via government tract funding from investors and guar-

4 savings and derived from measurable conditional on at least a 7.5% reduction create agencies focused on prisoner outcomes. Through over 300 hours of in rates among male, short- accommodation, mental health, and pro bono legal discussions with profes- sentenced prisoners from Her Majes- job search (Social Finance, 2014). These sional advisors, Social Finance UK co- ty’s Prison in Peterborough (Nicholls services were modeled via through the operated with government contacts to & Tomkinson, 2013; Social Finance gate support, or an intervention pro- develop the early frameworks of what Limited, 2014). Social Finance UK also cess that begins within prison and con- would later become the world’s first created One Service to manage sup- tinues upon release. One Service em- SIB (Nicholls & Tomkinson, 2013). port services for prisoners both within ployed four main agencies to obtain One of the first challenges faced by the Peterborough prison and within through the gate support: St. Giles Social Finance UK was to locate a so- the communities upon release (Bridges Trust, Sova, Ormiston, and Mind. St. cial issue that not only imposed high Impact+, 2014). Through financial re- Giles Trust provided knowledge, di- costs on society, but was also open to sources contributed by a total of 17 rection, advice and support, and pris- innovative preventative programs. Per investors and foundations, One Service oner risk-assessment, Soya offered vol- the research of UK experts, criminal provided living, health, employment, unteer mentor services, Ormiston pro- justice was presented as an optimal and drug rehabilitation services to vided services focusing on maintaining choice; 2008 statistics showed that just offenders throughout the life of the SIB family ties for prisoners and their fam- after one year, around 60% of released pilot (Social Finance Limited, 2014). In ilies, and Mind provided therapeutic UK prisoners were guilty of com- particular, 3,000 male ex-offenders sessions to prisoners (Disley & Rubin, mitting another offense. Social Finance over the age of 21 who had been sen- 2014; Nicholls & Tomkinson, 2013). UK addressed this issue through close tenced for less than a year were the Over the course of each segment, en- collaboration with not only with the target of One Service’s programs (Dear gagement levels in cohort 1 rose from UK Ministry of Justice and Her Majes- et al., 2016; Nicholls & Tomkinson, 37% to 74% and engagement levels in ty’s Treasury, but also with criminal 2013). The group of 3,000 offenders cohort 2 rose from 71% to 86% (Social justice experts, relevant organizations, was separated into three segments: the Finance, 2014). Innovative develop- prison personnel, and even investors first took place after two years or upon ments were also introduced into the (Nicholls & Tomkinson, 2013). These the discharge of 1,000 prisoners, the SIB services after the initial project im- early conversations and referrals second took place after the first ended, plementation. A flagging system in helped engage target communities and and the third would have taken place collaboration with the police, for in- build connections that were critical to after the second. In total, the project stance, aided One Service to keep ex- the Peterborough project’s success was expected to last an approximate offenders engaged. Through the flag- (Bridges Impact+, 2014). As the pilot seven years (Nicholls & Tomkinson, ging system, if a police officer encoun- SIB continued to develop, public enti- 2013; Social Finance Limited, 2014). tered an ex-offender, the phone num- ties such as the Justice Committee and In September of 2010, the SIB pro- ber of One Service would automatical- the Labour government garnered legal ject was officially launched. As ex- ly appear next to the ex-offender’s support. In 2010, Peterborough was pected, the first cohort of 1,000 lasted name on the Police National Computer announced by the UK Ministry of Jus- two years from September 2010 until database. The Peterborough SIB lead- tice as the SIB’s target location. The Big May 2012 (Social Finance Limited, ership also found that regular conver- Lottery Fund, a non-departmental 2014). At the start of the Peterborough sations with prison staff further en- public body, following the UK Minis- SIB, only 100 prisoners were qualified sured high engagement levels and the try of Justice’s lead, allocated a 5 mil- for the SIB services and One Service overall effectiveness of One Service’s lion euro budget to the project initially aimed to interact with approx- programs (Nicholls & Tomkinson, (Nicholls & Tomkinson, 2013; Big imately 30% of them (Nicholls and 2013). Lottery, n.d.). Tomkinson, 2013, pg. 14). As the pro- Concerning cohort 1, the Peterbor- As seen through Figure 5, the first ject evolved, its leaders, enabled by ough SIB achieved an 8.4% reduction SIB in Peterborough involved outcome flexible investor funding, steadily in- in the frequency of reconviction payers, service providers, and inves- creased engagement levels, or the rates among the prisoners (Dear et al., 2016). tors. According to its structure, Social of offenders who voluntarily utilized Although this reduction was below the Impact Partnership, a special purpose One Service support and resources. 10% target required for triggering an vehicle created for the new SIB, would They also adapted the program outcome payment for the first cohort, receive payments from the UK Minis- design’s shortcomings by working it was above the 7.5% target required try of Justice and the Big Lottery Fund with One Service and its partners to for an outcome payment for the final

5 combined cohort (Disley, Giacomanto- In the United States, the Obama 16 and 18 years old. The number of nio, & Kruithof, 2015). Cohort 2 administration considered SIBs as a days this group was held in jail was achieved a recidivism rate among potential PFS public services financing then compared to data from 2006 until offenders that was 3.3% lower than the solution. For American politicians and 2010 for groups of youths with similar 2009 baseline year recidivism rates, but government entities, SIBs are a useful backgrounds. Unlike the breadth of since this figure did not pass the 5% tool that can be used to understand voluntary engagement services incor- requirement needed to instigate out- which social programs and services are porated into the Peterborough SIB pi- come payments the project was discon- effective without risking resources lot, the Rikers Island SIB focused main- tinued (Ministry of Justice, 2015). Due (Costa, 2014). The Adolescent Behav- ly on the ABLE program (Vera Insti- to this failure as well as a UK Ministry ioral Learning Experience (ABLE) pro- tute of Justice, 2015). of Justice decision to restructure na- gram funded by the Rikers Island 2013 Understanding the basic financing tional probation services, the remain- SIB, the very first SIB in the United structure of the Rikers Island SIB be- ing funding costs of cohort 2 were States, served as a pilot that helped gins with ’ Urban In- transferred to public accounts as well investors and policy makers under- vestment Group (UIG), which provid- as the Big Lottery Fund. Service provi- stand the impacts of SIB financing ed a $9.6 million loan in support of the sion for cohort 3 was to be continued within the American context (Porter, SIB services. The Goldman Sachs’ UIG on the UK Ministry of Justice’s dime 2015). Both the design and purpose of loan was to be repaid based on both until the implementation of statutory the Rikers Island SIB was inspired by the forecasted and realized savings of provision services for short sentence earlier SIB projects throughout Europe. the New York City Department of Cor- offenders (Social Finance Limited, In particular, its financing scheme was rection, that is the savings that directly 2014). The transition of cohort 2’s ser- modeled after the Peterborough SIB, resulted from the MRT of intervention vices from a public-private partnership the same project explored in the previ- services (Olson & Phillips, 2013). Fig- to a public entity explains why the for- ous case study (City of New York, ure 6 provides a clearer depiction of mat of its statistical measurements 2012). Just as the Peterborough SIB involved parties and their place in the differ from that of cohort 1. According aimed to reduce recidivism rates Rikers Island SIB design. Essentially, to statistics from cohort 1 and cohort 2 among inmates of Her Majesty’s Pris- the Goldman Sachs UIG loan was giv- while still under the control of Social on, the Rikers Island SIB aimed to re- en to an intermediary organization, Finance UK, the most important need duce recidivism rates among young Manpower Demonstration Research of prisoners met by One Service and its inmates of New York City’s Rikers Is- Corporation (MDRC), and was guaran- partners was accommodation (40 per- land jail through ABLE. Under the teed by a $7.2 million grant from cent), followed by finance and debt ABLE program, an experimental group Bloomberg Philanthropies also given services (39 percent), education and was treated with Moral Reconation to MDRC (City of New York, 2012). In job search (36 percent), addiction (25 Therapy (MRT), or an intervention turn, MDRC directed the Goldman percent), health (19 percent), and fami- strategy that aims to improve social Sachs funds to the Osborne Associa- ly (15 percent) (Disley et al., 2015). skills, responsibility, and decision- tion, which specializes in providing This first SIB pilot of Peterborough making (Vera Institute of Justice, 2015). services to incarcerated youths. Vera serves as an exemplary model in the The ABLE program and its MRT inter- Institute of Justice then evaluated and history of SIB financing. Flexible fund- vention strategy was chosen due to measured the treatment impact. The ing and adaptive service models are prior academic research showing its amount of return acquired by Gold- two important contributions to social ability to reduce recidivism rates at man Sachs’ UIG depended on the sav- finance designs that have stemmed statistically significant levels. In fact, a ings realized by the New York City from the Peterborough experiment 2005 study from the Cognitive- Department of Correction. These re- (Disley et al., 2015). So while the Peter- Behavioral Treatment Review reviewed turns were projected to range widely, borough SIB pilot was not completed nine published MRT studies and found from as little as nothing to as much as as originally intended, it is generally consistent statistically significant re- $11.7 million depending level of actual perceived as an example among the ductions in recidivism. In total, 7 stud- reduction (Porter, 2015; Olsan & Phil- social finance community and has ies tested adults and only 2 tested juve- lips, 2013). served as a foundation for subsequent nile individuals (Little, 2005). With this In order to achieve a break-even worldwide SIB projects. in mind, the Rikers Island SIB experi- point, the Rikers Island SIB needed to Case Study 2 – USA Rikers Island, mental group consisted of a total of achieve at least a 10% reduction in re- Recidivism Project 1,470 male youths between the ages of cidivism among youths in the experi-

6 mental group, or among those that details. As a result, Goldman Sachs all educational programs. Not only has received MRT treatment. New York UIG only lost $1.2 million and Bloom- it been shown to yield a 41% decrease City would then enjoy at least $1 mil- berg saved $1.2 million because they in the need for special education pro- lion in long-term savings, instigating a were not required to pay out the full grams, but also it has been shown that city payment of $9.6 million to MDCR $7.2 million guarantee (Dear et al., society receives an $11 dollar return and a subsequent transfer payment to 2016; Porter, 2015). Furthermore, while for each dollar invested over the life- Goldman Sachs. In the best case sce- Rikers Island SIB project did not time of each child that participates in nario, a 20% reduction in recidivism achieve its desired goal, policymakers the CPC program (Blum et al., 2015). would have been realized, which can still learn from studying the pro- Currently, results are available for the would have led New York City to en- ject itself. Even if recidivism levels first cohort of students who participat- joy long-term savings of at least $20 were not reduced on Rikers Island, ed in the Chicago PFS initiative during million and accordingly would have data collected from the SIB project can the years of 2014 and 2015 (Gaylor et instigated a maximum $11.7 million still be utilized later in other public al., 2016). payment to MDCR and a transfer to policy analyses. Moreover, since the The first stage of this SIB financing Goldman Sachs. If the program only SIB proved that the MRT intervention structure begins with the funding part- achieved an 8.5% reduction in recidi- plan does not help reduce recidivism ners, or investors, who in total gave vism, the New York City government rates among incarcerated males aged $17 million. Senior lenders include the would pay only $4.8 million to Gold- between 16 and 18 years old in Rikers Goldman Sachs Social Impact Fund man Sachs. Ultimately, the evaluation Island, it is unlikely that taxpayer or and Northern Trust whereas subordi- from Vera Institute of Justice revealed government resources will be wasted nate lenders include the J.B. and M.K. that in comparing the incarcerated on implementing the ABLE program Pritzker Family Foundation (Mayor’s youths with previous years’ data, the in similar circumstances within the Press Office, 2014). According to the ABLE program yielded no statistically near future (Anderson & Phillips, contract of the Chicago PFS initiative, significant reductions in recidivism 2015). the latter subordinate lender, as an rates among the 16 and 18-year-old Case Study 3 – Chicago, Pay for Suc- experienced advocate of childhood participants. Engagement levels with cess education policy issues, is required to the experimental group seem not to The Chicago PFS initiative is the incur financial burden should the pro- have been the issue, as the evaluation fifth SIB project to be launched within ject fail (Blum et al., 2015). The funding also found that 87% of sample adoles- the United States. It was passed under partners’ resources are allocated to a cents of Rikers Island did participate in Chicago Mayor Rahm Emanuel who is project coordinator IFF, which acts a at least one ABLE intervention (VERA known for pushing a series of reforms liaison between the funders, the City Institute of Justice, 2015; Dear et al., to Chicago’s public school system, or of Chicago, the CPC classrooms, inde- 2016). the third largest public school system pendent evaluators, and Metropolitan Although the Rikers Island SIB in all of the United States (Dear et al., Family Services (MFS) (Mayor’s Press was terminated on August 31, 2015 2016; Blum et al., 2015). The Chicago Office, 2014). Metropolitan Family Ser- before the full program could be com- PFS initiative implemented the Child vices acts as a program intermediary to pleted, its implementation represented Parent Center (CPC) education pro- guide and advise leaders of the Chica- an important step in the evolution of gram, which supports the access of a go public school system in parental public service financing (Dear et al., total of 2,620 at-risk public school chil- support and training (Blum et al., 2016). On one hand, the Rikers Island dren to quality pre-kindergarten edu- 2015). Figure 7 demonstrates the part- SIB might be seen as a failure because cation (Mayor’s Press Office, 2014). nership dynamic of the Chicago PFS recidivism reduction rates were not The CPC program is financed through initiative. statistically significant. On the other an SIB financing scheme and provides The CPC model funded by this hand, the SIB financing model enabled services to the families of the enrolled financing scheme is an award-winning the New York City government to test children to encourage strong engage- educational model that was estab- a potential public service without in- ment and additional support. Just like lished in 1967 and is specifically de- vesting taxpayer’s money (Porter, the Rikers Island SIB, rationale behind signed for low-income families 2015). Goldman Sachs at that point had implementation is rooted in the find- (National Institute of Justice, 2012). invested $7.2 million into the project, ings of previous studies, which have Participating children will have access activating a $6 million guarantee from indicated that the CPC early-education to half and full day pre-school pro- Bloomberg Philanthropies per contract program is among the most effective of grams. Additionally, parents of these

7 children, whose participation is under- will be determined in two ways. First, in areas of literacy, language, mathe- stood as crucial, will have access to each student is to be examined at the matics, cognitive development, socio- support services (Blum et al., 2015). completion of kindergarten using the emotional, and physical health (Gaylor The CPC model follows the Creative Teaching Strategies Gold (TS Gold) et al., 2016; Eldridge & Kreefer, 2016). Curriculum, an award-winning curric- instrument, which ascertains a child’s Children who did not attend a CPC ulum based on 38 development and capabilities in literacy, language, math, pre-K classroom for at least two-thirds learning objectives, which fall under cognitive development, socio- of all school days and children with categories like language, cognitive emotional development, and physical severe disabilities were excluded from abilities, mathematics, and literacy health. A child’s kindergarten readi- the evaluation process (Gaylor et al., among others (Office of Early Child- ness is based on whether the child ex- 2016). Moreover, a total of 49% of chil- hood Education, 2016). Students are ceeds or meets a national average in at dren met the six of the TS Gold re- expected to attend school five days a least five of these areas. Second, at the quirement areas, 10% met five areas, week and for three hours each day completion of third grade, each stu- 9% met four areas, 11% met three are- (National Institute of Justice, 2012). dent must partake in the Partnership as, 7% met two areas, 3% met one area, Parents are required to engage in par- for Assessment of Readiness for Col- and 11% met no areas. Children of the ent involvement programs for at least lege and Careers (PARCC) exam. Scor- CPC program were most likely to excel two and a half hours each week (Office ing at the 25th percentile or above indi- in the area of cognitive development of Early Childhood Education, 2016). cates that the child is at a third-grade (80%), followed by math (78%), socio- Parent involvement programs include reading level while scoring at the 75th emotional development (77%), literacy opportunities to volunteer as a class- percentile or above indicates the child (72%), language (64%), and last physi- room aide, serve as a supervisor on is above a third-grade reading level cal development (58%) (Gaylor et al., field trips, partake in parent reading (SRI International, 2014). Repayment 2016). Based off these numbers, the groups, and aid teachers during library to the funding partners is thus based Chicago PFS initiative has reason to visits. Home visits, health services, and upon decreases in special education, continue. The following report in the parent training programs are also in- increases in kindergarten readiness, second year of the program will in- cluded in the parent services package. and increases in third grade literacy, clude special education enrollment The CPC programs also requires that compared to control group. For addi- statistics for cohort 1 as well as kinder- all classroom teachers possess both a tional student of the CPC program that garten readiness statistics for cohort 2 bachelor’s degree and a certification in does not use a special education facili- (Gaylor et al., 2016). Already, as of early childhood education (National ty, $9,100 is repaid per student com- 2016, investors have been repaid a Institute of Justice, 2012). Schools are pounded annually. For additional stu- $500,000 success payment due to the supervised by three leaders: a Head dent that is deemed ready for kinder- early achievements of the program. Teacher who manages teacher devel- garten under the TS Gold program, Discussion opment and curriculum implementa- $2,900 is repaid per student. Last, for SIB financing is innovative. It in- tion, a Parent Resource Teacher who additional student that scores above corporates financing and operational ensures the fulfillment of the afore- the national average on the PARCC structures that are not present in tradi- mentioned parent programs, and exam, $750 is repaid (Mayor’s Press tional public service financing. The School Community Representative Office, 2014). Peterborough SIB pilot, as the very who connects families with communi- By 2016, SRI International (SRI) first of its kind, is an innovative ty resources (Office of Early Childhood was selected by IFF to conduct inde- springboard delivery model. Since the Education, 2016). pendent evaluations of the Chicago funding for intervention services at The ultimate target of the Chicago PFS initiative. At the time of writing, Her Majesty’s Prison in Peterborough PFS initiative is to reduce the rates of results are only available for the first was derived from private investors children who depend on public special cohort of 328 preschoolers. So far it has rather than public resources, the struc- education services, including emotion- been found that 59% of the children ture of the SIB’s services was more al, mild learning, and speech delay who participated in the CPC program flexible; it adapted in accordance with services. In doing so, it is also hoped between 2014 and 2015 were ready for the shortcomings of the project design. that there will also be an increase in kindergarten. In other words, more Traditional sources of funding tend kindergarten readiness and third than half of the children in the first not to be as flexible, due to, for exam- grade literacy rates (Blum et al., 2015). cohort were performing at levels that ple, procurement rules and processes In the short term, success of the project exceeded or met the national average

8 or the need to spend funds within a Contracts for the Peterborough SIB ough SIB’s implementation, collective given time period. Under other financ- provided for frequent review and eval- databases were uncommon not only in ing models, limited government re- uation of the services provided as well Peterborough but also in most areas of sources along with political pressures as the flexibility to adapt the services UK criminal justice public services might also limit the applications and as needed. Throughout the pilot, needs (Disley et al., 2015). Additionally, just the allocation of public resources. reported by cohort members were like the Peterborough SIB, the Rikers Granted, the Peterborough SIB pilot, mapped against services, and steps Island SIB and Chicago PFS initiative like its successors, could be terminated were taken to fill gaps where the needs contributed and continue to contribute given certain conditions, but it was were not being met. Increased cooper- to data collection in the areas of recidi- ensured that investors were cognizant ation with prison staff and measures vism and early childhood education. of the termination risks. In an inter- like including One Service’s phone Conclusion view with two investors of the Peter- number on the Police National Com- SIBs are the combined result of borough SIB, both claimed that they puter database, for instance, were both constrained economic conditions and were indeed educated on the termina- important developments throughout the need for governments to solve crit- tion risks and yet would still be willing the process of the Peterborough SIB ically important social issues. Alt- to consider investment in future SIBs because their implementation was hough over 60 SIB projects have been (Disley et al., 2015). based on previous findings of the pro- implemented on an international scale Hiring a third party service to ject’s shortcomings. Moreover, even within the past decade, participating manage the implementation, opera- though the Rikers Island SIB did not governments, investors, and service tion, and relationships with key part- undergo this self-correction process, it partners still are constantly evolving ners is another innovative feature of did help the City of New York under- the SIB financing model and design. It the SIB model. In the Peterborough stand that the MRT methodology does is still not entirely clear which SIB type SIB, for instance, while the comprehen- not help lower recidivism among in- works optimally in which setting, sive through-the-gate intervention pro- carcerated youths in Rikers Island. In though a sizable amount of current vided by One Service is not completely this way, the Rikers Island and the Pe- models in place throughout the globe an original design, the structure of terborough both led to a self-correcting have experienced positive results communication channels between ser- process, just the former was instigated (Dear et al., 2016). Two of the SIB pro- vice users and local providers is more after the project’s termination and the jects explore in this paper, the Peter- unique, even in some ways on an in- latter during the project’s progress. borough SIB and the Chicago PFS SIB, ternational scale. Interviewees during Given the early successes of the Chica- have experienced some success and the Peterborough evaluation process go PFS SIB, it has yet to undergo such provide a series of comprehensive ser- commended One Service for orches- self-correcting processes. vices that deeply engage community trating the connections between rele- Finally, the SIBs model promotes segments rather than one program fo- vant recidivism services, such as be- the collection and use of management cus like the Rikers Island SIB. That is, tween St. Giles Trust, Sova, Ormiston, information collated into a specially while the Rikers Island SIB concentrat- and Mind (Disley et al., 2015). While developed database, which can be ed on providing a single MRT-based the Rikers Island SIB and the Chicago used for project evaluation and future service to the incarcerated youths, the PFS initiative did not employ a service analysis. In fact, interviews with those Peterborough SIB provided through- provider that served the same connect- involved in the very first Peterborough the-gate services in and out of prison ing function as One Service, it is im- SIB suggest that a universally accessi- and actively engaged prison staff, po- portant to note that their respective ble case management database enabled lice officers, offender families, and job designs outsourced various processes them to identify early indications of training services. The Chicago PFS ini- of implementing a public service. That success, support caseworkers in day-to tiative likewise requires parent en- is, the investment process, evaluation -day activities, and to monitor provid- gagement as well as high quality process, and program implementation ers (Disley et al., 2015). While shared teachers; it does not just hand out free process were all outsourced in each databases are not a feature unique to pre-school education vouchers. In the case study. In a traditional public ser- public services financed by SIBs, SIBs future, as an increasing number of vice, all of these functions would be are important because they facilitate countries adopt SIB models, it would handled by a government entity. the creation of collective databases for be important to ascertain the im- A third innovative feature of the social issues were no previous data portance of employing broad and com- SIB model is its self-corrective nature. existed. At the time of the Peterbor-

9 prehensive services when investing in an SIB model. Following current trends, it also likely that the SIB initia- tive will continue to proliferate in use on an international scale. Should the SIB model be adopted in China, it would aid developing regions in the West and in cities that are not yet fully helped by public finances. Additional- ly, the SIB model provides a way for China’s nouveau rich class to invest their money in ways that have high potential for investor returns and also benefit their country’s development. While the functions of China’s econo- my are traditionally centralized, there have been current shifts towards pri- vatization, meaning there is a much larger selection of potential investment banks with available investment capi- tal. The SIB model indeed has potential to be the next component of China’s trends.

10

Figure 1

Figure 2

11 Figure 3

Figure 4

12

Figure 5

Source: The Peterborough Pilot Social Impact Bond (p. 14) by Nicholls and Tomkinson, 2013, London, UK: Oxford Univer- sity.

13

Figure 6

Source: Rikers Island: The First Social Impact Bond in the United States (p. 99) by Olson and Phillips, 2013, San Francis- co, CA: Federal Reserve Bank of San Francisco

14

Figure 7

Source: Mayor Emanuel Announces Expansion of Pre_K to More than 2,600 Chicago Public School Children (p. 6), by Mayor’s Press Office, 2014, Chicago, IL.

15 References Disley, E., Giacomantonio, C., cago Public School Children [Press Anderson, J., and Phillips, A. (2016). Kruithof, K., & Sim, M. (2015). The release]. Chicago, IL. What We Learned From the Na- payment by results Social Impact Ministry of Justice. (2015a, July 30). tion’s First Social Impact Bond. Bond pilot at HMP Peterborough: Payment by Results pilot: Final re- The Huffington Post. Retrieved on Final process evaluation report. conviction results for cohort 2. Lon- March 18, 2017 from http:// Santa Monica, CA: RAND Corpo- don, UK: Ministry of Justice. www.huffingtonpost.com/james- ration. Office of Early Childhood Education. anderson/what-we-learned-from- Eldridge, M., and Kreeger, A. (2016). (2016). Child Parent Center. Chicago, the-_1_b_7710272.html Early results in Chicago’s PFS pro- IL: Chicago Public Schools. Big Lottery Fund. (n.d.) About. Re- ject indicate initial success. Re- Olson, J., and Phillips, A. (2013). Rikers trieved on March 9, 2017 from trieved on March 25, 2017 from Island: The First Social Impact https://www.biglotteryfund.com/ http://pfs.urban.org/pay-success/ Bond in the United States. In Com- about-big pfs-perspectives/early-results- munity Development Investment Re- Bridges Impact+. (2014). Choosing So- chicago-s-pfs-project-indicate- view. (p. 97 – 101). San Francisco, cial Impact Bonds: A Practitioner’s initial-success CA: Federal Reserve Bank of San Guide. London, UK: Bridges Ven- Gaylor, E., Kutaka, T., Ferguson, K., Francisco tures LLP. Williamson, C., Wei, X., and Spik- National Institute of Justice. (2012). Blum, J., Ciurea, M., Levin, M., Mo- er, D. (2016 April). Evaluation of Program Profile: Child-Parent azed, T., Porowski, A., and Sparks, Kindergarten Readiness in Five Child- Center Program (Chicago, III). Re- A. (2015, April). State of the Pay Parent Centers: Report for 2014 – 15. trieved on March 30, 2017 from for Success Field: Opportunities, Chicago, IL: SRI Education. https://www.crimesolutions.gov/ Trends, and Recommendations. Wash- Gustafsson-Wright, E., Gardiner, S., ProgramDetails.aspx?ID=292 ington, D.C.: Corporation for Na- and V. Putcha. (2015). Potential Porter, E. (2015). Wall St. Money Meets tional & Community Service. and Limitations of Impact Bonds: Les- Social Policy at Rikers Island. Wall City of New York. (2012). Fact Sheet: sons from the First Five Years of Ex- Street Journal. Retrieved on March The NYC ABLE Project for Incarcer- perience Worldwide, Global Economy 17, 2017 from https:// ated Youth. Retrieved on March 25, and Development Program. Washing- www.nytimes.com/2015/07/29/ 2017 from http://www.nyc.gov/ ton, D.C.: Brookings Institution. business/economy/wall-st-money- html/om/pdf/2012/ http://www.brookings.edu/~/ meets-social-policy-at-rikers- sib_fact_sheet.pdf media/Research/Files/ island.html Costa, K. (2014). Fact Sheet: Social Im- Reports/2015/07/social-impact- Ramsden, P. (2016). Social Impact pact Bonds in the United States. bonds-potentiallimitations/Impact- Bonds: State of Play & Lessons Washington, D.C.: Center for Bondsweb.pdf?la=en Learnt. (OECD). Paris, France: American Progress. Jeram, J., and Wilkinson, B. (2015). In- OECD Dear, A., Helbitz A., Khare, R., Lotan, vesting for Success: Social Impact Social Finance Limited. (2014, August R., Newman, J., Sims, G.C., and Bonds and the Future of Public Ser- 7). Peterborough Social Impact Bond Zaroulis, A. (2016). Social Impact vices. Wellington, New Zealand: The Reduces Reoffending by 8.4%; Inves- Bonds: The Early Years. Social Fi- New Zealand Initiative. tors on Course for Payment in 2016 nance. Little, G. (2005). Meta-Analysis of Mor- [Press release]. London, UK. Disley, E. Giacomantonio, C., and al Reconation Therapy Recidivism SRI International. (2014). Chicago Kruithof, K. (2015). The payment Results From Probation and Parole Child-Parent Center Social Impact by results Social Impact Bond pilot at Implementations. Cognitive- Bond Evaluation Plan. Chicago, IL. HMP Peterborough: final process Behavioral Treatment Review, 14 Vera Institute of Justice. (2015). Impact evaluation report. London, UK: UK (1/2), 14 – 16. Evaluation of the Adolescent Behav- Ministry of Justice. Nicholls, A., and Tomkinson, E. (2013). ioral Learning Experience (ABLE) Disley, E., and Rubin J. (2014). Phase 2 The Peterborough Pilot Social Impact Program at Rikers Island. New York, report from the payment by results Bond. London, UK: University of Ox- NY. Social Impact Bond pilot at HMP Pe- ford, Said Business School. terborough. London, UK: UK Minis- Mayor’s Press Office. (2014, October 7). try of Justice. Mayor Emanuel Announces Expan- sion of Pre-K to More than 2,600 Chi-

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