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What Are Social-Impact Bonds? - NYTimes.com                                               Page 1 of 2




  FEBRUARY 8, 2011, 9:35 PM

  What Are Social-Impact Bonds?
  By DAVID LEONHARDT

  My column this week describes a new strategy for improving the performance of
  government programs. In short, private investors — typically foundations — pay the costs
  of a new program in its early years, and the government later repays the investors, often
  with a bonus, as long as the program meets its goals. If it fails, taxpayers pay nothing.

  In his budget next week, President Obama will propose seven pilot programs, costing up
  to $100 million, along these lines. He will refer to the financing mechanism as pay-for-
  success bonds. The British government is already testing such a program, under the name
  social-impact bonds. (Gordon Brown’s Labour government started the program, and
  David Cameron’s Conservative government has aggressively adopted it.) The New York
  City, the state of Massachusetts and other local governments are also considering the
  idea.

  On Wednesday, the Center for American Progress, the Democratic-leaning Washington
  research group, will release a paper on these bonds. It’s written by Jeffrey Liebman, a
  Harvard economist and former official in the Obama administration’s budget office.

  The paper includes a good description of the problems with the way most government
  programs are now run:

  The traditional approach to government funding of social programs constrains
  innovation by prescribing the delivery model to be used rather than the objective to be
  met. For example, job training and education are areas of the federal budget where
  dozens of narrowly purposed programs have proliferated.

  Other social service programs are funded through block grants to states, under the theory
  that “states know best” and are the “laboratories of democracy.” But, like the federal
  government, most states pay insufficient attention to program results and performance in
  administering social services.

  This insufficient attention to objectives and performance measurement means that
  unsuccessful programs can persist for years. As demonstrated by the recent Head Start
  evaluation, which found that few program benefits persisted to the end of first grade,
  even large important programs can receive funding for decades without the kind of
  rigorous evaluation necessary to reveal that the program delivery model needs to be




http://economix.blogs.nytimes.com/2011/02/08/what-are-social-impact-bonds/?pagemode=...     2/9/2011
What Are Social-Impact Bonds? - NYTimes.com                                                                       Page 2 of 2




  reformed.

  Meanwhile, innovative programs with promising results have a hard time securing
  government funding because the proof-of-concept process is slow and innovation
  necessarily entails a risk of failure.

  The full report has more, including a useful diagram on page 11.



  Copyright 2011 The New York Times Company   Privacy Policy   NYTimes.com 620 Eighth Avenue New York, NY 10018




http://economix.blogs.nytimes.com/2011/02/08/what-are-social-impact-bonds/?pagemode=...                             2/9/2011

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What Are Social-Impact Bonds?

  • 1. What Are Social-Impact Bonds? - NYTimes.com Page 1 of 2 FEBRUARY 8, 2011, 9:35 PM What Are Social-Impact Bonds? By DAVID LEONHARDT My column this week describes a new strategy for improving the performance of government programs. In short, private investors — typically foundations — pay the costs of a new program in its early years, and the government later repays the investors, often with a bonus, as long as the program meets its goals. If it fails, taxpayers pay nothing. In his budget next week, President Obama will propose seven pilot programs, costing up to $100 million, along these lines. He will refer to the financing mechanism as pay-for- success bonds. The British government is already testing such a program, under the name social-impact bonds. (Gordon Brown’s Labour government started the program, and David Cameron’s Conservative government has aggressively adopted it.) The New York City, the state of Massachusetts and other local governments are also considering the idea. On Wednesday, the Center for American Progress, the Democratic-leaning Washington research group, will release a paper on these bonds. It’s written by Jeffrey Liebman, a Harvard economist and former official in the Obama administration’s budget office. The paper includes a good description of the problems with the way most government programs are now run: The traditional approach to government funding of social programs constrains innovation by prescribing the delivery model to be used rather than the objective to be met. For example, job training and education are areas of the federal budget where dozens of narrowly purposed programs have proliferated. Other social service programs are funded through block grants to states, under the theory that “states know best” and are the “laboratories of democracy.” But, like the federal government, most states pay insufficient attention to program results and performance in administering social services. This insufficient attention to objectives and performance measurement means that unsuccessful programs can persist for years. As demonstrated by the recent Head Start evaluation, which found that few program benefits persisted to the end of first grade, even large important programs can receive funding for decades without the kind of rigorous evaluation necessary to reveal that the program delivery model needs to be http://economix.blogs.nytimes.com/2011/02/08/what-are-social-impact-bonds/?pagemode=... 2/9/2011
  • 2. What Are Social-Impact Bonds? - NYTimes.com Page 2 of 2 reformed. Meanwhile, innovative programs with promising results have a hard time securing government funding because the proof-of-concept process is slow and innovation necessarily entails a risk of failure. The full report has more, including a useful diagram on page 11. Copyright 2011 The New York Times Company Privacy Policy NYTimes.com 620 Eighth Avenue New York, NY 10018 http://economix.blogs.nytimes.com/2011/02/08/what-are-social-impact-bonds/?pagemode=... 2/9/2011