Buried deep within this year's fiscal federal budget is a $100 million line item that may be the best bridge between public and private investing ever invented.
The U.S. federal budget has set aside $100 million for seven pilot programs under the broader heading of "social impact bonds." It may seem like a teeny, tiny amount of money compared with the rest of the budget, which ends in a trillion. But these seven programs may lay the ground work for a New America. From job training to rehabilitation and family care programs, they incentivize the private sector to invest and profit at which point the government can take over.
The United Kingdom is largely credited with creating and offering these alternative securities. The bonds use a portion of the government savings that accrues from improved social outcomes to reward non-government investors that fund the intervention activities.
Social Finance, a sort of investment bank for the social sector, which designed the Social Impact Bond in Britain, launched a sister organization here in the U.S. to find suitable candidates for Pay for Success Bonds. Pay for Success Bonds are the formal names of the U.S. programs.
In Britain, one such program worked like this: Social Finance raised money from private investors to fund the expansion of schemes run by charities to reduce the recidivism rates of criminals. If the rate fell, investors earned up to a 13.5% annual rate of return. If there is no improvement, investors could lose all their money.
The bonds are a test for the future--ours.
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