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Investors cash in by keeping former convicts out of jail

Posted August 9
Updated August 11

Funding a program to keep former convicts out of jail has paid off for one group of investors.

In 2010, 17 foundations and trusts -- including the Rockefeller Foundation -- committed -5 million ($6.6 million) to a rehabilitation service for criminals released after serving less than a year at a prison in the U.K.

The program worked, and so did the bond. Investors were told in late July that they will be repaid in full, receiving the equivalent of a 3% annual return over the investment period.

Social Finance, the nonprofit behind the initiative, described it as the world's first "social impact bond."

The U.K. Ministry of Justice was required to repay investors only if the rehabilitation project reduced the share of ex-convicts committing another crime by at least 7.5%, compared to a control group.

If the threshold was not met the backers would lose their investment.

Caught in the crime loop

The rehabilitation was provided by a group called the One Service.

They faced a real challenge: In 2010, when the scheme began, the recidivism rate among U.K. prisoners who had served less than 12 months in jail was 60%, according to Social Finance.

Over five years, the One Service offered support to 2,000 male prisoners for a year following their release from Peterborough prison to help them settle back into the community and turn their lives around.

Many of the men were repeat offenders, and some suffered from mental health problems or substance abuse. The group offered them support to address those issues, as well as help finding a job and a place to live.

An independent evaluation found the Peterborough Social Impact Bond succeeded in reducing new convictions by an average of 9%.

David Hutchison, the chief executive of Social Finance, said the program was vital because there had been no statutory support for prisoners who served sentences of less than a year.

"There was a clear measurable failure in the system," said Hutchison. "We were looking to create an investment solution to that failure."

'Unambiguously positive'

The bond's supporters describe it as a win-win: prisoners received the support they need, taxpayers avoided paying for additional jail time and investors made a return.

Hutchison described the program as "unambiguously positive for everyone concerned." Investors were attracted to the program because unlike traditional grants, they were able to earn a return.

"They're drawn to the fact that they could re-use the funds," he said. "Over a period of 15 or 20 years they might recycle a fund three or four times."

A $1.3 billion market?

The Peterborough Social Impact Bond was terminated two years early, in 2015, when the government introduced statutory supervision for offenders serving shorter sentences.

A Ministry of Justice spokesperson said that the Peterborough pilot had "played a valuable role in informing our current approach to probation."

Social Finance now has 89 social impact bonds in 18 countries, with investments totaling more than $322 million.

Other organizations have issued their own social impact bonds, or similar "payment by results" social investments. In the U.S., the Nonprofit Finance Fund has helped build the field by providing training to interest parties.

But the bonds have proved particularly popular in the U.K.

Rob Wilson, the former minister for civil society, wrote in 2016 that the U.K. had more social impact bonds than the rest of the world put together. He said investments in the bonds could hit -1 billion ($1.3 billion) by 2020.

-- An earlier version of this story incorrectly stated that the Nonprofit Finance Fund had issued its own bonds.

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