This post is part one in a new series for ImpactSpace as a part of their inaugural 2015 fellowship. I will be writing about current issues in the impact field throughout the summer. Join the discussion by commenting here or on Twitter, @hongkonghaiti.

ImpactSpace

Update: recent reports have found that once-promising SIBs have failed to deliver results. Read “The Prison Reform #Fail That is Shaking the Social-Impact Bond Market” on ImpactSpace.

Introduction

Soaring prison populations, rising inequality and ballooning costs have come to define the American justice system. The problems have become so severe that the issue receives broad bipartisan support in the notoriously deadlocked U.S. Congress. Last week, a new bill called the Safe, Accountable, Fair, Effective (SAFE) Justice Act was introduced in the House of Representatives with support from the NAACP, the Police Foundation and the American Conservative Union. With justice reform becoming increasingly popular, some U.S. states have already taken matters into their own hands. Social impact bonds, which successfully brought down recidivism rates in the UK, are now the “hottest” tool available to states looking for results.

What’s the Problem?

The U.S. has 5% of the world’s population and 25% of the world’s prison population. The Department of Corrections costs the U.S. over $80 billion dollars annually and rarely are people truly “corrected.” Instead, the Bureau of Justice Statistics finds that over half of prisoners are arrested by the end of the first year and more than three quarters of prisoners are rearrested within five years of release.

U.S. State and Federal Prison Population, 1925-2013

In addition to the $80 billion annual price tag, indirect costs add up. As prison sentences increase and prisoners age, work years are lost. Jail reduces the work time of young people 25-30% compared to youth who are never incarcerated.

Finally, mass incarceration disproportionately affects the African American community. An African American man has a one in three chance of going to prison in his lifetime compared to a one in 17 chance for a white man. As a result, African American men are incarcerated at six times the rate of white men. (See infographic)

Why Social Impact Bonds (SIBs)?

Social Impact Bonds (SIBs), also known as “Pay for Success Bonds,” have been decreed “the hottest idea in social-service provision” by The New York Times. SIBs are contracts between the public sector and the private sector. Unlike most bonds, investors are only guaranteed a return if a target outcome is reached. The first SIB was created by Social Finance UK in 2009 to reduce recidivism. The Center for Global Development and Social Finance explain it this way:

“Investors provide funds to implement social interventions, service providers work to deliver outcomes, and outcomes funders, primarily public sector agencies, repay investors their principal plus a financial return if – and only if – independently verified evidence shows that outcomes have been achieved.”

Forbes has a useful diagram to understand the process: If the target outcome is not reached, then the investors assume the costs and the government is no longer in debt. If outcome is reached, then investors’ return is paid by the government.

SIBs diagram

SIBs have taken off, with more than 40 in design or implementation around the world as of last year. The idea is now being tried in development aid and foreign assistance by donor countries and foundations as Development Impact Bonds (DIBs). Since most have yet to mature, the verdict is still out on lessons learned and long-term effectiveness of the model. The pros and cons are an ongoing debate, and include:

Pros and Cons of SIBs

Can SIBs End Mass Incarceration?

SIBs have been tackling recidivism since the first bond issued by the British Ministry of Justice and executed by Social Finance. Since then, new SIBs to reduce recidivism have been launched in Israel, the United Kingdom, and the U.S. The structures of the bonds vary. The Rikers Island SIB payment schedule, for example, scales investor returns according to the amount that recidivism is reduced. A recidivism reduction of 12% yields 5% returns while a 17% reduction yields14% returns.

Recidivism rates

As of last year, the initial SIB launched by Social Finance was declared a success. Recidivism in the pilot program decreased by 8.4% – exceeding the 7.5% target – while recidivism nationally rose by 10%. Social Finance noted additional benefits, writing, “Engagement and uptake of services in prison increased from 74 to 86 percent since services began.”

In the U.S., a 10% reduction in the current recidivism rate would translate to approximately 15% of current prisoners not being jailed within five years of their release. As the new SAFE Justice Act shows, the end goal is widely agreed upon. The challenge of how to do this is the question. In addition to legislation and policy, SIBs offer one model to reward results from preventive and rehabilitative programs to cut recidivism rates and the U.S.’s high prison population. SIBs are not the only answer to this problem, but they’re a promising new way to incentivize investors, the government and program providers to make progress on the issue together.

The verdict on SIBs is still out. What do you think?

We want you to weigh in! Comment here, join us on Twitter, and let us know your thoughts on social impact bonds, criminal justice reform, and other impact trends on the rise. Check back here for a new post about big news in the impact world.

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