Social impact bonds: The goose and the golden eggs at risk

Abstract

Public goods and services such as prisons are often underfunded compared with private goods and services. Social impact bonds (SIBs) are a new financial vehicle to increase the use of private funds for public good. SIBs use a paid-for-success, performance-based structure to reallocate risk and reward. In the current case, the SIB changes a critical reinforcing loop from a vicious cycle of decay to a virtuous cycle of improvement that can perpetuate SIB benefits far after the bond has been repaid. A simulation model of recidivism at Her Majesty's Prison (HMP) Peterborough and the related SIB is developed to identify high-leverage parameters and dominant feedback loops. These are used to explain SIB success or failure for two primary participants (HMP system and SIB investors). Model analysis also reveals a tipping point structure that puts the Peterborough programme at risk. Contributions include a formal SIB model, improved understanding of SIB structure and behaviour, an example of tipping point structures in a social system and recommendations concerning SIB design and management.