Social Finance funded prisoner rehab with investor money, repaid only if reoffending fell

Prisoners released after serving under 12 months in the UK received almost no statutory support at all, and national reoffending among that group ran around 60%. Everyone involved could name programs likely to help — intensive, personalized support through the first months after release — but government wouldn't commission them: an unproven intervention is a budget risk no official wants to own, and a normal grant or service contract pays out whether or not the program actually reduces reoffending.

Social Finance, a UK nonprofit, proposed breaking the deadlock by moving the risk off the public budget entirely rather than trying to argue government into taking it on. In March 2010 it signed a contract for what became known as the world's first Social Impact Bond: private investors, not the state, would supply the working capital, and the state would only pay if an independent evaluator confirmed the program actually worked against a real counterfactual.

Investors fronted the capital and got repaid only if reoffending fell, so government paid for a verified outcome without betting on it in advance.

Investor capital, not public budget, is at risk during delivery, so government can authorize an unproven program without owning the downside.

Repayment is contingent on an independently measured result against a control group, so the payer buys a verified outcome, not an intention.

Investors could tolerate losing money on an experiment, while government could commit to paying for a result it never had to bet on in advance.

When a program's value is real but unproven, shift the risk to investors who can tolerate loss, and pay them only from verified outcomes.

The program ran two of its three planned cohorts before a separate national policy overhaul, Transforming Rehabilitation, extended payment-by-results contracting to all short-term prisoners nationally and eliminated the ability to hold a clean control group, ending the SIB early. On the results actually measured, the Ministry of Justice's independent evaluation found a 9% reduction in reoffending against the control group, beating the 7.5% target, and in 2017 investors were repaid their full capital plus a return of roughly 3% a year.