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Symposium 2012

Proposal - Fund early childhood social impact bond research and program development

The Challenge

Inequality has increased substantially in many countries in recent decades. Spectacular gains in the incomes and wealth of the richest fraction of the population often contrast with severe poverty in ...

Inequality has increased substantially in many countries in recent decades. Spectacular gains in the incomes and wealth of the richest fraction of the population often contrast with severe poverty in the same country. Inequality of outcomes often goes hand in hand with inequality of opportunities, as poor people endure various forms of social exclusion, including unequal access to education and health care, high rates of youth unemployment or precarious work and an absence of social recognition.

Social Impact Bond (SIB) “pay for success” financing approaches build on the overlap of for-profit and non-profit incentives and can be used to augment the resources available to an economy for human capital development.

In developing SIB programs the three most important questions are: (1) Can research satisfactorily affirm that a particular early childhood intervention with a clearly identified group of children yields government cost savings or revenue increases? (2) Can those cost savings or revenue increases be monetized via enforceable contracts between a social impact bond (SIB) issuing institution, a few government agencies, and the providers of the intervention services? And (3) Can the cost savings or revenue gains be monetized within timeframes and risk levels that investors find acceptable?

SIBs can be used to fund early childhood care and education programs if information uncertainties and operational challenges are effectively addressed. Major challenges include these seven:

  1. Unclear returns on the SIB investment project or intervention.
  2. Long delays between the SIB intervention investment and the return.
  3. Inability to link government cost reductions or revenue gains solely to the SIB investment intervention.
  4. Multiple government jurisdictions with mobile young families and irreconcilable differences.
  5. Resistance to paying SIB investors from public cost savings or revenue gains.
  6. Limited capacity to administer and evaluate SIB program performance.
  7. Incentive inconsistencies among the parties to the SIB financing.

To address the major challenges to early childhood SIB establishment and operation, the following are required:

  1. Strong business, philanthropic and government support to provide essential regional knowledge, marshal the capital needed to conduct necessary statistical studies, pay SIB set-up costs, overcome jurisdictional and political differences, and in some instances take first-loss positions in the SIB capital structure.
  2. Strong local child care and education community support and high-quality programs in the local area to provide expert guidance on child care and education economics, advocate for sector reforms such as quality ratings, and marshal youth human capital sector voter power to overcome jurisdictional and political opposition.  
  3. Rigorous statistical studies to demonstrate net benefits and serve as a foundation element of SIB contracts
  4. Sound legal foundations for SIB issuing organizations
  5. Clear enforceable contracts among SIB participating entities
  6. Familiar investor terms and other features of the bonds or other SIB assets
  7. Good investor relationships with the investment underwriting, institutional and foundation investor sectors

Investment returns to for-profit and non-profit investors

The returns to for-profit investors are simply the interest rate paid on the SIBs and any intangible sense that their capital is being allocated to sound economic activities. The returns to philanthropic investors are more complex.

Non-profit investments in SIBs have three bottom lines. The first is economic -- the improvement in school readiness and all its implications for the life success of SIB scholars – lower costs associated with post-partum health and abuse and neglect, lower special education costs, lower grade retention, lower English language learning costs, higher third-grade reading and math scores, higher graduation rates, lower involvement in crime, fewer teen pregnancies, less drug use, higher rates of employment and future earnings, improved parent productivity, and stronger regional economic and per capita income growth. These benefits cumulate at the local and regional levels and strengthen national aggregate growth and job creation. To paraphrase Jim Heckman, “Benefits beget benefits.”

A second bottom line is financial -- the reductions in post-partum health expenses and later special education costs provide the basis for savings large enough to service and repay bond purchasers. Investor purchases  of SIBs is just a way business leaders and philanthropists get outside for-profit capital to pay for what is needed to reduce local early care and education costs and increase local and regional school readiness and cut special-ed costs.

The third is societal. The process of building early childhood SIB organizations knits together local and national business leaders and philanthropic institutions into networks of people locally and nationally who understand the importance of youth human capital development, have built effective investment frameworks that can attract capital from many sources, and have the capacity to act at the levels of local, state and federal policymaking. SIBs and arrangements like them can overcome some of the market obstacles to effective youth human capital investment, but only state and federal policymaking can address the major obstacles. One of the returns to philanthropic investment returns from establishing SIB issuing institutions is the creation of coalitions of hundreds of business leaders in every state that have the knowledge of what works and doesn’t work in early child development and education. These are the people who can and ultimately will affect state and federal policy.

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