Social entrepreneurs or community groups are loaned money by private investors to try out solutions to social problems. If the solution works, the government pays whoever invested in the solution a share of whatever spending is saved. In other words, as one writer put it, "It’s a way of transferring public sector savings to private investors who are willing to put money into preventative initiatives early on."
This first use of the technique is to cut recidivism of those doing short-term prison sentences at Peterborough Prison, about two hours north of London. Right now about 60 percent of prisoners in that category re-offend, costing the state lots of money in policing, court costs, and prison operations. Simply put: If that recidivism figure drops, the government saves significantly.
To address this, investors pooled $8 million to fund three local charity groups, which will offer mentoring and drug counseling, among other things. If they meet their target of a 10 percent reduction in recidivism, investors will get their money back at between 7.5 and 13.5 percent.
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