Scale Finance: Industrial-Strength Social Impact Bonds for Mainstream Investors

Social Impact Bonds (SIBs) have demonstrated significant growth potential within their defined boundaries, but the standard model has not yet developed “mainstream” investment transactions capable of expanding certified evidence-based programs (CEBPs) commensurate with unmet population needs. This paper proposes an enhanced SIB model called “Scale Finance” in which asset owners and fund managers would work with CEBP developers to expand these proprietary programs at their maximum feasible growth rates. Repayment of principal plus risk-adjusted, market-rate returns would be predicated upon the achievement of agreed social impacts and governmental savings that substantially exceed program and financing costs. The paper then applies the framework to show how Scale Finance SIBs could dramatically reduce the mass incarceration of juvenile offenders, which dispatches some 60,000 at-risk youth into the “school-to- prison pipeline” every year at an annual cost of approximately $5.7 billion. A SIB pro forma is presented for a prototypical state that currently spends $100 million annually on juvenile detention and other custodial placements. In this example, by raising $65.6 million from mainstream investors, a Scale Finance SIB could replicate the successful Florida Redirection project to provide Multisystemic Therapy and other CEBPs to 5,000 at-risk families over five years, cut placements in half, pay investors a 10% annualized return, and return net savings of nearly $91 million to the state. If successful, Scale Finance would offer a financially self-sustaining way to effectively solve certain pervasive social problems we already know how to fix. Special thanks to Tamar Bauer, Erica Brown, Roger Bullen, Laura Callanan, Paul Carttar, Lori Cohen, Dan Edwards, Jed Emerson, Ian Galloway, Steven Godeke, Megan Golden, Isabel Gregory, Andrew Levitt, Alex Nicholls, James Perry, Neil Powling, Karl Richter, John Roman, Karla Sainz, Marya Stark, Keller Strother, Teri Weathers, and Clay Yeager for their spirited comments and obliging feedback, without which this paper would have been much shorter. An earlier draft of this paper was partially funded by MST Services, Inc., to which the author has also provided nominal consulting services. The author has also developed unavailing business proposals with MST Services, Inc. and Evidence-Based Associates, and has provided formal and informal advice to some of the other organizations referenced in this paper. The author does not speak on their behalf.