You may have thought of bonds simply as a means for companies and governments to gain access to capital and for investors to garner steady income.
But they can be used for much more than that, says San Francisco Federal Reserve Bank President John Williams.
"What if there were a way to solve the country's most intractable social problems — homelessness, crime or inequities in education — without putting taxpayer money at risk? There might be," he writes in
The Wall Street Journal.
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The answer is "social impact bond" (SIB) financing, Williams proclaims. He cites an example from Massachusetts to show how it works.
To reduce re-incarceration and improve the employment prospects of those released from the juvenile justice system, the state began a $27 million SIB this year.
"The project follows a basic SIB model: an intermediary organization is awarded the contract and functions as project manager," Williams writes. The working capital comes from private investors, such as banks or foundations.
In Massachusetts, the nonprofit Roca will deliver two years of intensive behavioral and workforce services and two years of follow-up services to 929 at-risk young men.
"An independent organization in the Bay State will verify outcomes over the next seven years and evaluate the project based on reduction in incarceration time and increases in employment," Williams notes.
"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. . . . If the project fails to deliver, the state pays nothing," he explains.
"There is no panacea in public policy, and there are some caveats. SIBs are still new to the U.S., though they have seen some initial success in the United Kingdom and Australia. Governments must structure the contracts in a way that best achieves their goals without allowing anyone to game the system," Williams adds.
"Still, SIBs may have the potential to help governments address some of our nation's most obstinate problems and score wins for everyone: the private sector, nonprofits, government at the local, state and federal level and, most important, citizens across the country."
Elsewhere on the social ills front, former President Bill Clinton says that companies are too much concerned with their profits and too little concerned with their employees and the greater good of society.
He thinks that's going to change at some point, but not at the government's behest, Clinton told the annual Clinton Global Initiative meeting Tuesday,
CNBC reports.
"I think the government can have incentives that will encourage it, but I think by and large it will happen, if it does, because of proof that markets work better that way," Clinton said.
"We're going to share inequality, misery and conflict, or we're going to share prosperity, responsibilities and a sense of community."
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