Social Impact Bonds: The Opposite of Private Prisons (Gawker)

By Hamilton Nolan.

One of the reasons that the private prison industry is one of the most disgusting manifestations of capitalism is that it creates an economic incentive to imprison more people. What if we did... the opposite of that?

In the Wall Street Journal today, John C. Williams writes about social impact bonds, a form of government financing that aligns the incentives towards doing things that are good for people (like helping them stay out of prison) rather than doing things that are bad for people (like imprisoning more of them and cutting every last penny from prison budgets so that prisons are even more hellish than usual). What a revolutionary idea!

The way it works, in essence, is that the government signs a deal with a private contractor to pay them if they accomplish some desirable social goal; if they don't accomplish it, they don't get paid. For example: in Massachusetts, the state government has created a social impact bond for a social service organization to work with high-risk juvenile offenders to help ensure that they do not get themselves incarcerated again. "If the project is a success, the intermediary and service provider receive deferred services fees and the loan providers are repaid their investment, plus a rate of return: 5% for the senior loan and 2% for the junior loan," Williams writes. "Payments begin at a 5% reduction in prison-bed days and lenders are fully repaid at 40%, with bonus payments for further reductions. If the project fails to deliver, the state pays nothing."

If everything goes well, these arrangements could be win-wins for both the government and the contractors. The state of Massachusetts saves millions of dollars that it would have spent to incarcerate young people; private industry makes money on incentive-based contracts. And those incentives aren't for something perverse like "cutting prison health care costs," for a change. Social impact bonds can be used outside of criminal justice, for almost any kind of contracted social program—Williams also cites a Utah program that uses a similar structure for a preschool program.

Of course, if the contractor fails, we might question the wisdom of hiring them in the first place. But contractors fail now, and at least with social impact bonds, they don't getpaid for failing. Hell, they're worth a shot. "Private sector"-worshiping free marketeers should love them. Liberals should love them, too, if they succeed in their social goals. The system (possibly) works!