The voices of Urban Institute's researchers and staff
August 10, 2012

Private financing of public anti-crime efforts

August 10, 2012

Over the last three years, an innovative idea has gained some steam in policy circles. Social impact bonds take private capital and inject it into traditionally public sector activities leading to more cost-effective practices. Private investors put up capital to fund interventions that are too big or too risky for the public sector. Performance targets are established and if the private sector delivers, investors are rewarded with profits. If the performance targets are not hit, the government does not have to pay for the services delivered.

This big idea is being tested in the United Kingdom today. Private investors have put up five million pounds to deliver services that would help prisoners returning from Peterborough prison integrate into mainstream society and avoid reoffending. If the rate at which those returning prisoners are re-arrested and returned to prison falls below the performance targets (which are 10 percent below typical rates of return), then investors will see a profit. If not, the government pays nothing but still benefits from having received those services for returning prisoners.

Everybody wins. Philanthropically oriented investors get a chance to leverage their gifts with the potential to receive a profit, allowing them to reinvest those same dollars in another worthy cause. If they do not earn a profit, they still accomplish their initial intention to make a socially beneficial investment. The government gets private-sector investment for a risky intervention that otherwise may not have been delivered (to the detriment of society). If the services are effective and successful, government gladly pays for them. If they’re not, public dollars can be reallocated to something else or returned to taxpayers.

Now, New York City is bringing the idea—rebranded as pay for success bonds—to the United States, raising almost $10 million from Goldman Sachs for prisoner programs designed to reduce recidivism. Other cities and states may soon follow.

Somewhat lost in all this momentum is the big picture goal of getting the private sector to invest in projects that improve social welfare. While the social impact and pay for success bonds are excellent ideas, they are only two of many that should be considered. Take the Benefit Corporation, or B-Corp as it is more commonly known. Most for-profit private corporations are organized as C corporations or S corporations (which determines their tax status), with the simple goal of returning as much profit as possible to investors. B-Corps are different. They are organized with a broader purpose than a profit-making responsibility to their investors. They explicitly define other corporation goals that involve providing a public benefit. In return for this broader mission, some state and local governments are granting B-Corps favorable tax status, which makes them more competitive in a market filled with C and S corporations.

How could this idea be translated more broadly into public policy in the manner of the social impact bond?

Imagine that a state government is struggling to pay for its expanding prison population but political realities do not allow changes to sentencing guidelines that would decrease the flow of prisoners into the system. B-Corps provide the perfect response. The state could pass a law giving tax advantages to private prisons chartered as B-Corps. And it could require its corrections agency to only contract with B-Corps that meet certain criteria. These B-Corps would seek to make a profit, of course. But they would also have a responsibility to their charges—the prisoners—to provide an array of services designed to help those individuals make a better transition back to their communities and live more productive, and less criminal, lives. And the B-Corps would be judged on how effectively they met these goals.

B-Corps solve several problems. They solve the problem of government running prisons that cost too much and do little to prepare prisoners for their return. And they solve the problem of private prisons that cost less than public prisons but do even less to prepare prisoners for release.

B-Corps could potentially fund all sorts of public activities. For instance, following yesterday’s post [link] about the need for massive investments in our forensic sciences, forensic labs could be established as B-Corps, merging the efficiency of the private sector along with the accountability of public labs.

Social impact bonds and Benefit Corporations are just two of many innovations that could be tapped to infuse private capital into the public sector. Given the realities of the current fiscal situation, states and local governments would be wise to consider them.

Tomorrow: A Roadmap for a Safer Society

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