Do­ing well by do­ing good

Financial Mirror (Cyprus) - - FRONT PAGE -

If you get most of your ideas about govern­ment from speeches by Amer­ica’s Repub­li­can pres­i­den­tial can­di­dates, it’s easy to be­lieve that the US fed­eral govern­ment is in­ca­pable of do­ing any­thing right. But not even the Repub­li­cans ac­tu­ally be­lieve it.

The proof is just be­neath the sur­face, where a re­mark­able bi­par­ti­san con­sen­sus is emerg­ing around an ap­proach to Amer­ica’s most se­ri­ous so­cial prob­lems – in­clud­ing homelessness, crim­i­nal re­cidi­vism, preschool education, and chronic ill­ness – that com­bines the best prin­ci­ples of con­ser­vatism and pro­gres­sivism. It is a strat­egy that is play­ing out in Repub­li­can states such as Utah and Ken­tucky and Demo­cratic ones like Mas­sachusetts and Cal­i­for­nia.

This na­tion­wide trend is be­ing cat­alyzed in part by the fed­eral govern­ment. But it is be­ing im­ple­mented mainly at the com­mu­nity level through part­ner­ships among lo­cal gov­ern­ments, com­mu­nity groups, phil­an­thropic or­gan­i­sa­tions, and for-profit in­vestors.

Th­ese are, in a sense, pay-for-suc­cess projects, some­times struc­tured as so­cial im­pact bonds – for­mal con­tracts that tie pay­ments to ac­tual re­sults. Pri­vate in­vestors and phil­an­thropic or­gan­i­sa­tions fi­nance the up­front costs of the pi­lot projects, and lo­cal or state gov­ern­ments (some­times sup­ple­mented with fed­eral money) pay the in­vestors only if the pro­ject pro­duces the promised re­sults.

Though the pay-for-suc­cess model is still in its in­fancy, dozens of projects are now un­der­way. In­deed, the United States is al­ready the largest pay-for-suc­cess mar­ket in the world, with over $100 mln in­vested in such trans­ac­tions. Utah was an early pi­o­neer, launch­ing a novel pi­lot pro­ject in preschool education that is funded by $7 mln from Gold­man Sachs and the Pritzker Foun­da­tion. The city of Chicago has launched a sim­i­lar but larger pro­ject for $17 mln, with up­front fund­ing from some of the same in­vestors as in Utah. Mas­sachusetts has a $27 mln pro­ject to test a pro­gramme for re­duc­ing re­cidi­vism among young men on pro­ba­tion.

Pay-for-suc­cess projects mark a rad­i­cal de­par­ture from tra­di­tional ap­proaches to fund­ing so­lu­tions to com­plex so­cial chal­lenges. The most ob­vi­ous dif­fer­ence is that tax­pay­ers avoid the up­front fi­nan­cial cost of try­ing an un­proven strat­egy.

Santa Clara County, Cal­i­for­nia is in­tro­duc­ing a pi­lot pro­ject aimed at re­duc­ing the cost of sup­port­ing peo­ple with acute men­tal ill­ness. At least 250 peo­ple will re­ceive tem­po­rary hous­ing along with “wrap-around” sup­port and psy­chi­atric ser­vices. The goal is to lower pub­lic costs by re­duc­ing re­liance on ex­pen­sive acute-care hospi­tals, min­imis­ing the num­ber of emer­gency-room vis­its, and avoid­ing jail sen­tences. The pro­gramme’s ef­fec­tive­ness will be eval­u­ated by a ran­domised con­trol trial com­par­ing the data of pa­tients who par­tic­i­pated with those who did not.

The key to suc­cess is that the in­cen­tives are based on out­comes, not the out­flow of money. A tra­di­tional so­cial pro­gramme is usu­ally judged by the vol­ume of ser­vices pro­vided, such as the num­ber of peo­ple trained or home­less peo­ple shel­tered. Pres­i­dent Barack Obama’s ad­min­is­tra­tion has been ex­tremely ac­tive in this area, and it is now dou­bling down. The White House Of­fice of So­cial In­no­va­tion and Civic Par­tic­i­pa­tion (SICP) has been work­ing with agen­cies across the fed­eral govern­ment to spur pay-for-suc­cess ef­forts around the coun­try.

The So­cial In­no­va­tion Fund has pro­vided match­ing grants to dozens of com­mu­ni­ties, which are work­ing closely with or­gan­i­sa­tions such as Har­vard’s So­cial Im­pact Bond Lab and Third Sec­tor Cap­i­tal, to iden­tify and struc­ture promis­ing pay­for-suc­cess ven­tures. The SICP just launched a com­pe­ti­tion for a new $10.6 mln round of match­ing grants. If the broad so­cial goals sound “Demo­cratic,” the method and strat­egy are in many ways “Repub­li­can.” They rely heav­ily on the pri­vate sec­tor, re­quire tough quan­ti­ta­tive eval­u­a­tion, and de­volve most of the ac­tual work to states and lo­cal­i­ties.

Call this “pro­gres­sive fed­er­al­ism.” The “pro­gres­sive” com­po­nent is in tak­ing on ma­jor so­cial prob­lems. The “fed­er­al­ism” con­sists in the recog­ni­tion that states and lo­cal com­mu­ni­ties are the pri­mary sources of bold and ef­fec­tive new strate­gies.

Law­mak­ers in both par­ties have teamed up to in­tro­duce a va­ri­ety of bills that would en­cour­age and fund pay-for­suc­cess projects. Mean­while, the Obama ad­min­is­tra­tion has pushed through two im­por­tant reg­u­la­tory changes that could free up bil­lions of dol­lars in pri­vate cap­i­tal for so­cialimpact in­vest­ing, in­clud­ing pay-for-suc­cess schemes.

In Septem­ber, the Trea­sury Depart­ment pro­vided new reg­u­la­tions to phil­an­thropic foun­da­tions that re­laxed the per­ceived bar­ri­ers to “mis­sion-re­lated in­vest­ments.” It was an im­por­tant move: Foun­da­tions over­see some $600 bln, but had long wor­ried that cer­tain so­cial-im­pact in­vest­ments might jeop­ar­dize their tax-free sta­tus. In Oc­to­ber, the Depart­ment of La­bor fol­lowed up with a “clar­i­fi­ca­tion’’ that eased wor­ries at pen­sion funds about in­vest­ing in ven­tures that pro­duce so­cial as well as eco­nomic re­turns.

Of course, though th­ese changes open the way for phil­an­thropic foun­da­tions and pen­sion funds to be­come ma­jor in­vestors in pay-for-suc­cess projects, suc­cess is not guar­an­teed. For ex­am­ple, a pro­ject to re­duce re­cidi­vism among ju­ve­nile in­mates at Rik­ers Is­land in New York City pro­duced dis­ap­point­ing re­sults. But that is ex­actly how the ap­proach is sup­posed to work: risk-con­scious in­vestors, rather than tax­pay­ers, as­sume the up­front fi­nan­cial costs of in­no­vat­ing. Failed ef­forts are not only in­evitable; they are es­sen­tial to find­ing real so­lu­tions.

Amer­i­cans are gen­er­ally wary of “big govern­ment,” but they do want so­lu­tions to their coun­try’s big­gest so­cial prob­lems. A re­sults-ori­ented pay-for-suc­cess ap­proach, based on what we know works well in the pri­vate sec­tor, pro­vides an ideal op­por­tu­nity to test bold and in­no­va­tive so­lu­tions, learn from scores of com­pet­ing projects about which work, and ramp up those that do.

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