A new financing mechanism is emerging that may help government and nonprofits that are struggling to adequately fund social services for the most vulnerable.
Social Impact Bonds, also known as the Pay for Success model, offer a unique opportunity for government agencies to fund preventive programs that save taxpayer dollars. Examples include improving health care, increasing graduation rates, reducing homelessness and lowering prison recidivism rates.
In this model, a third party organization raises capital from private investors to fund multi-year delivery of preventive or early intervention social service programs that are traditionally funded by government agencies.
One of these is Third Sector Capital Partners, Inc., a nonprofit advisory firm which specializes in the Pay for Success model, bringing together government agencies, investors and service providers. Recent projects led by Third Sector have focused on child welfare, health and housing.
If the service providers are successful in achieving contractually agreed on outcome targets, the government pays the investors a return on their investment. This return on investment is funded from the savings produced by the preventive or early intervention services. If the outcome targets are not achieved, the government does not pay.
Let’s look at an example. Say your nonprofit has a program that reduces recidivism within the state prison population. Your data shows that prisoners who go through your program are far less likely to return after they’re released.
Based on the cost per person of our prison system, you calculate the current savings to taxpayers at $5 million each year. Sounds good so far. The problem is, you can only reach a small percentage of prisoners with your limited budget. If you had $3 million so you could offer the program to every prison and prisoner in the state, you could save taxpayers as much as $35 million annually.
If the state was assured of those savings, they would happily fund the $3 million operating cost of your program. However, government isn’t known for risk taking.
That’s where socially minded investors come to the rescue. They provide the upfront money to get your nonprofit to scale. Once the results have been confirmed with rigorous data collection and analysis, the investors get paid back with interest. The state then takes over the funding of your program at a net annual savings of $32 million to taxpayers. Everyone wins. Partnering to Solve Problems
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