For a financial return, would you invest in Alabama's prison reform? Social impact bonds would let you: opinion (Alabama Media Group)

By Wesley Vaughn

If the state of Alabama presented a plan to reduce the rate of former inmates returning to prison, would you invest in it for a return pending the state's success? As an investor, you would have an incentive to demand the best plan possible oversee the state's implementation. If the state were to fail, you would receive nothing.

That setup is how a social impact bond works. A social impact bond is defined as "a set of contracts, the basis of which is an agreement by government to pay investors for an improvement in a specific social outcome once it has been achieved." The policy has also been called a "pay for success" bond.

Case Studies

Governments have started using social impact bonds to address their prison populations.

A Peterborough, England, prison and the UK Ministry of Justice received £5 million from investors in 2010 that would pay out up to £7 million if the government reduced recidivism by 7.5 percent or more by 2016. The initiative is on pace to reward investors, despite failing to trigger pay outs after its first of two phases.

Massachusetts has a $27 million social impact bond for reducing recidivism among juveniles in three communities. The commonwealth's plan hinges on a nonprofit that educates and trains ex-offenders. A nonprofit advisory firm arranged funding and is responsible for oversight over the bond's seven-year lifespan.

New York City created a similar social impact bond in 2012. Investment firm Goldman Sachs has invested in both projects.  

Challenges and Opportunities

The Rand Corporation has been studying social impact bonds and offers advice for interested governments and investors.

The first challenge is how to select outcomes for measurement. Clear metrics, such as reduced reconviction, allow the government to determine whether a SIB-funded service has been successful.

However, there is a risk that SIBs will encourage a focus on outcomes that can be most readily measured, missing others that may be important to the individuals benefiting from the services.

For this reason, outcome measures require careful consideration. They must be practical, but not incentivize service providers to focus on a single problem in isolation, potentially harming the wider provision of effective services.

A second challenge with SIBs is the time it takes for a return on investment. Many of the services with the greatest return on investment take a long time to accrue benefits.

Would This Work in Alabama?

I'm intrigued by social impact bonds, and would be even more so if the three projects discussed end up succeeding. At the least, it's something that the state should consider when tackling its overcapacity prisons during the next session.

What do you think? Would you invest in a social impact bond with Alabama? Or do you think the risks outweigh the rewards?