Social Impact Bonds: A creative new strategy for economic development?

By Michael W. Aube, Special to the BDN
Posted Oct. 16, 2012, at 9:22 p.m.

Federal and state governments soon will be developing budgets for fiscal year 2014 and beyond. With the economy “flat” at best, discretionary spending by either level of government will come under additional scrutiny and review. The federal government must deal with the rising costs of entitlement spending that are significantly affected by continued high under-employment and unemployment. They also must consider the increase of retirees from the baby boom generation. Those retirees are beginning their next chapter in the “Valley of Social Security and Medicare” and are no longer paying payroll taxes, thus reducing the pool of available funds.

Our state government is utilizing zero-based budgeting as a more appropriate way to analyze and develop our biannual program appropriations. This process will require performance results from state government expenditures.

Historically, Maine has relied almost exclusively on federal government programs for economic, community and workforce development. This reliance places Maine in a minority of states that do not fund economic development initiatives through their own resources — a sometimes risky model. But, while economic development initiatives are important, they are not the only contributing factor for generating economic growth and opportunities.

To succeed, we must consider new and creative funding mechanisms. A couple of weeks ago, Erik Pages, president of EntreWorks Consulting in Arlington, Va., offered an interesting alternative for funding economic development efforts. Social Impact Bonds, or SIBs.

In his newsletter, EntreWorks Insights, he describes SIBs and their potential in the United States. SIBs provide private-sector funds to a non-profit and, if the specific activity or project succeeds, the government repays the investors, who earn a profit, and the affected community benefits through the expansion of jobs, growth of business and reduction of costs associated with social funding. SIBs work in a straightforward manner.

SIBs were developed in Great Britain and, according to Pages, were used in “2010 when the UK government opted to test the SIB model to cut recidivism rates at Peterborough prison.”

Learning from this model, New York City will apply SIBs in its efforts to reduce juvenile recidivism at the Rikers Island jail facility. Mayor Michael Bloomberg plans to work with investment bankers to fund a $9.6 million, four-year program that aims to “provide education and intensive training and counseling to at-risk incarcerated youths,” according to a recent Reuters report.

The result of this proposal for economic development? Social impact bonds are getting attention and several other states are creating their own pilot SIB projects.

Pages wonders whether SIBs will become “part of the public finance landscape,” and if they “can and should they be deployed to support community, workforce, and economic development projects?”

We should be asking the same questions and developing thoughtful answers and strategies.

Economic initiatives are needed now more than ever and we need to insure return on investments. As a nation, and as a state, we must consider SIBs’ potential to support economic development initiatives. Working with a private-sector investment mechanism may increase the success rate, which is point and purpose of those efforts. How we design, develop and deliver economic and workforce development programs in the future will change. SIBs may be one pathway to a more comprehensive, accountable manner that brings more meaningful results.

Michael W. Aube is president of Eastern Maine Development Corp. in Bangor. He is a past commissioner of Maine’s Department of Economic and Community Development and former state director of Maine USDA Rural Development.

http://bangordailynews.com/2012/10/16/business/social-impact-bonds-a-creative-new-strategy-for-economic-development/ printed on September 23, 2014