We suggest an alternative way of dealing with poverty which is a “Poverty prevention social bond”. We aim to act as an intermediary between different parties involved in poverty prevention and facilitate better cooperation between them than exists today. These collaborations usually contain 3 parts:
- Organizations that specializes in poverty prevention.
- The government, which needs to agree to a “pay per success” model with pre-determined standards.
- The financing part, which is comprised of investors willing to make a risky investment that generates return dependent on the relative savings generated for the government.
We cooperate with SFI, an Israeli financial intermediary with a proven success record in executing social bonds. We cannot start raising money on our own because it can damage the financial model we suggest. The details about our business plan are represented below.
Poverty is a huge problem that affects hundreds of millions of people worldwide and is expressed in different forms in different types of countries.
One of the largest challenges in fighting poverty is lack of resources, that’s true for all countries. But even in countries that spend a big amount of money in programs which fight poverty, poverty is still a major issue in which improvement has not been sufficient. Existing programs tend to have the following significant problems:
Governmental programs tend to be ineffective because they don’t address the various underlying causes of poverty.
Non-profit programs are financed through charity and volunteer work, which leaves them reliant on external sources and unsustainable in the long run.
Finally, the biggest problem that we found is that existing programs intervene too late. The “Poverty Trap” states that the more time people remain in the poverty situation, it gets harder and harder for them to get out of it.
A study of the “Center of Poverty Research” in the US shows that only 7% of people were born into poverty. The rest of them fell into poverty due to different life events such as divorce or loss of incomes.
This is why our vision is to establish a new type of social programs that aims to intervene early, as soon a red flag for poverty has been identified.
In order to achieve this, we want to establish a social impact bond dedicated to early intervention of people in risk of falling into the poverty circle.
The model of this prevention social impact bond is putting together three major players: Investors that privately fund the social impact bond and make an investment, organizations (for profit or non-profits) that implement the intervention with the investor’s money and the government that obligates to repay the investors some of its savings (first investment+ ROI) if the program works based on agrees upon milestones. This model is also called “pay for success” model.
In this way, as “Social Finance Israel” (SFI) mentions in their website, five direct benefits are created: the investor may earn an acceptable rate of capital return; the not-for-profit is financed using new, sustainable capital which enables it to scale-up successful social interventions; the government enjoys a cost-saving (with no upfront investment); financial risk is transferred to the private investor; and the “underlying” social-issue is ameliorated.
These are the practical steps in building this prevention social impact bond:
- Approaching organizations that have experience in poverty treatment and ask them to propose us a program that will intervene whenever a red flag for poverty (such as divorce, illness of a family member or decrees in earning) is reported.
- Evaluating the cost of the proposed programs compared to the money they save, and evaluating prospects for success based on past experience, for choosing the best intervention program.
- Quantifying the amount of investment we need and the amount of money the government will pay for success.
- Creating indices and measurements for success.
After this research steps we will be able to approach impact investors, using our partner “SFI”, an organization with past experience in recruiting money for social impact bonds in various subjects in Israel (such as reducing development of type 2 diabetes in high-risk pre-diabetics and reducing dropout rates from higher education), and ask for investments.
Then, we aim to execute a pilot plan with number of families in under the poverty line who participate in the Ministry of social affairs and social services program that will allow us to determine the effectivity of our model, and if results will be discovered as efficacious, we will be able to perform it in a larger scale.
Social impact bonds are relatively new. The first one was established in 2010 in England by Social Finance Ltd. It attempted to reduce short term prisoner recidivism in Peterborough prison, England. The first round of the program have so far showed positive results, reducing recidivism by 8.4% for the first 1,000 prisoners cohort, with 7.5% being the minimum success rate required in the project.
Since then, more than 60 social impact bonds have been established in 15 countries in different fields. However non has set the goal of identifying red flags for poverty and engaging in early intervention in order to save the taxpayer welfare payments, in addition to other direct and indirect costs of poverty.