The Economist reports on the creation of an innovative social impact bond which will help fund education and support for ex-offenders. The bond was created through a partnership between the UK Ministry of Justice and Social Finance, whose Development Director is GIIN board member Toby Eccles.

From original article:

Britain's current, Labour government hopes that history will repeat itself with a new approach to public finance, for which it launched a pilot scheme on March 18th. Its big idea, which the opposition Conservatives are also keen on, is that the state issues "social-impact bonds" whose proceeds are applied to schemes to solve social problems. If they succeed they will save the taxpayer large amounts of money, a slice of which will be shared with the bond's investors. Doing something like this has long been a holy grail for financially-literate social engineers and socially-minded financial engineers, but this is thought to be the first time it has been piloted in national government.

In the pilot scheme the bond will raise up to GBP 5m ($7.5m) to finance various private-sector organisations to work closely for six years with 3,000 short-term prisoners jailed in Peterborough, both inside prison and after their release, to help them resettle into the community. At present, prisoners like these have a tendency to reoffend and end up back in jail, costing government and society a fortune.

The bond gives its investors a powerful incentive to finance organisations that will turn these ex-jailbirds into upright citizens. If they can reduce the rate of reoffending by at least 10%, the investors will be paid, the amount rising as the recidivism rate falls. If the payout is triggered - a 10% decline representing proof that the improvement is due to more than chance - the investors will earn a minimum internal rate of return of 7.5%, rising to a maximum of 13%, with payments made during years six and eight.

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