Back in 2010, England’s Peterborough Prison faced a problem of repeat offenders. The prison, located 140 kilometers north of London, had proven that rehabilitation services could decrease this rate, but required broad public funding over an extended period of time. This time, instead of waiting for governmental grants, Peterborough initiated an unprecedented experiment and issued a Social Impact Bond (SIB) to pay for rehabilitation services.
Incarceration is an expensive undertaking that cost England nearly £3 billion in 2012 — roughly £35,000 per prisoner. Obviously fewer repeat offenders means a notable reduction in government expenditure.
The prison’s SIB bond, which was backed by the government, offered a simple tradeoff: Rehabilitation services would be covered by private investors, who receive subsequent dividend payments from accrued long term savings. Success is measured against a control group and services are provided by experienced third party organizations.
The ingenious idea was the brainchild of Sir Ronald Cohen, the founder of venture capital group Apax Partners, who is commonly referred to as the “Father of Social Investment.”
Cohen was born in Egypt in 1945 to Sephardic Jewish parents. Following the Suez Crisis in 1956, Cohen’s family was forced to flee the country basically penniless. In a rags to riches story, by 2007 the self-made multimillionaire had co-founded Social Finance UK with the goal of bridging the gap between private investors and public policies.
The SIB is the financial instrument Cohen, a Oxford and Harvard Business School graduate, invented to contractually tie the government with private investors on a measurable, outcome-based, public investment.
“Just as the formation of the venture capital industry ushered a new approach and mindset toward funding innovation within the private sector, impact investment has started to bring opportunities to harness entrepreneurship and capital markets to drive social improvement,” Cohen wrote in a January 2013 Harvard Business Review blog.
‘Impact investment has started to bring opportunities to harness entrepreneurship and capital markets to drive social improvement’
“Within the last two years, government agencies in the U.K., U.S., Australia, Canada and Israel at the national, state, or even county levels have begun exploring the potential of social impact bonds… If we can create instruments — like social impact bonds — that can deliver a financial return of about 7%, a high social return and limited downside risk, then we can meet two needs. We can provide reasonable returns that are uncorrelated with equity markets and attract capital to entrepreneurs who can develop innovative and effective ways of improving the fabric of our society,” wrote Cohen.
Since Peterborough prison, the SIB model has been imitated and implemented across the world, ranging from foster care in New South Wales to homelessness in Massachusetts. Currently over 50 SIBs are being pursued worldwide by Social Finance, or through various third party organizations.
While all of these SIBs follow the same general model – private investment to reduce public expenditure – none are as intricate as Cohen’s newest proposal in Israel.
Private investment to reduce public expenditure for Israel’s haredim
Through Social Finance Israel, where Cohen is co-founder and chairman, an SIB to encourage employment of ultra-Orthodox (haredi) men is currently being explored.
Although they make up 11 percent of the Israeli population, the economic status of haredi Jews in Israel is meager. According to the Central Bureau of Statistics, of the estimated 950,000 ultra-Orthodox, nearly 60% live below the poverty line.
Only about 45% of the adult haredi population works and their average salary is between half to two thirds of their secular counterparts
Only about 45% of the adult haredi population works and their average salary is between half to two thirds of their secular counterparts. The majority of haredi households subsist on monthly stipends from the government, around NIS 3,500, as well as additional contributions from private donors, religious groups, or other non-profit organizations.
The proposed haredi SIB would take a group of young men and give them a year of vocational training and job placement services. The “students” that subsequently join the workforce could benefit the greater economy in three ways: through a decrease in governmental subsidies, through additional income tax, and from spillover effects to GDP through an income multiplier.
Private investors would fund the training and placement services, and receive a return on their investments through a share of the governmental savings from decreased subsidies.
Shlomi Zidky, director of Social Finance Israel, believes the timing of such a venture is opportune since interest in haredi employment within the ultra-Orthodox community has grown substantially in the past five years. While consumer prices have increased by nearly 20% over the past five years, government stipends have remained flat, or even decreased in certain cases. In addition, donations that dried up after the 2008 economic collapse are far from returning to their previous levels.
However, the motivation to find a job is not just economic. Avigdor Rabinovitch, 23, represents a rapidly growing body of younger haredim who are interested in more than just Torah study. Rabinovitch grew up in a hard-line Haredi household — his father is a notable contributor to Yated Ne’Eman, the ultra-Orthodox daily newspaper known for its obstinate anti-secular stance.
In his late teens, Rabinovitch grew dissatisfied with the constraints of his yeshiva studies and eventually founded “Avodot LeHaredim” (Work for Haredim), a new organization that uses social networks like Facebook and WhatsApp to connect between unemployed Haredi men and potential employers.
The organization is part of a larger movement of the younger generation who are shifting away from “hard core” principles to something that is more connected to the outside world, yet still actively involved in strict religious observance.
Rabinovitch cites a few key reasons why younger ultra-Orthodox are interested in employment. Although they are devoutly religious, the Internet has permeated haredi homes, creating awareness of how the “other half” lives.
More importantly, a subtle shift toward more inclusionary policies has been brewing in the ultra-Orthodox communities such that whereas a decade ago seeking employment was strictly discouraged, today there is muted acquiescence. No leading rabbi has publicly approved of employment, but on an individual level, rabbis give a silent nod to those seeking extra income, particularly married men who need to support a family.
‘There is support under the surface. They [rabbinic leaders] won’t publicly state their support, but in private they will tell you to work if you want’
“There is support under the surface. They [rabbinic leaders] won’t publicly state their support, but in private they will tell you to work if you want,” says Rabinovitch.
The Israeli government backs the growing haredi workforce. Finance Minister Yair Lapid has asked business owners to hire haredim, especially those who served in the IDF, to quell long term economic concerns.
The Bank of Israel warns that, given the rapidly increasing birthrate of a largely unemployed population, failure to integrate haredim into the workforce could have seriously detrimental effects on the broader economy.
The threat of a potentially debilitating tax burden on the Israeli economy spurred Economy Minister Naftali Bennet to write an oped in The New York Times on the need for ultra-Orthodox men — and Arab women — to join the workforce.
Bypass bureaucracy to attain real results
However good the government’s intentions are, Israel Rosovski, director of the Darchei Chaim Education Center for ultra-Orthodox youth, is skeptical. Rosovski has been trying to increase funding for vocational schools in Jerusalem for nearly two decades.
“In reality, the government is not interested in the topic of [employment of] haredim,” he says. “It’s not a real thing,” he adds, saying these initiatives are never back by dollars and are merely political lip service.
An SIB would effectively bypass the bureaucratic dead end of scrounging for public funding, and could be a potential solution for Rosovski and others who share his interest.
As Zidky points out, private money means the government does not bare any risk or expense. On paper, the bond would be a win-win for all parties involved – ultra-Orthodox desperate to pull themselves out of poverty, private investors, and the government.
But even with all of the careful planning and brokering, there is one caveat that could make this potential SIB more intricate than Cohen’s previous ventures.
Up until now, every SIB has relied on the effort of recipients – inmates or foster children – to utilize the tools they are given by private investors to improve their circumstances. But in Israel, longstanding antagonism between the secular and religious camps means that the first batch of program graduates could face secular employers who may not be able to see the added value of a haredi employee beyond his black hat.
Social Finance Israel has a plan to mitigate this risk in two ways.
By focusing vocation training on sectors with a consistent labor shortage there is less possibility that a haredi job seeker will replace a secular counterpart, which makes a Haredi employee additive. For example, vocational training can be focused on “practical engineering,” a professional degree that is integral to the high tech industry.
Secondly, Zidky is planning on fostering and nurturing relationship with prospective employers to ensure a soft landing for students.
Overcoming lingering anti-haredi sentiment in the workplace
A founder of the Israeli National Service endeavor used by some in the Orthodox or Arab communities, Reuven Gal is currently head of the Ultra-Orthodox Integration Project at the Neamen Institute for Public Policy at the Technion (Israel Institute of Technology). He has advocated for haredi employment since 2009, but is dubious about the prospects.
Gal cites three reasons for lingering anti-haredi sentiment in the workplace. The most benign reasoning is employer’s concern about the practical aspects of hiring these workers, like new dress codes for female employees or restricted seating in the cafeteria.
There are concerns about the educational background and experience of haredi job seekers as compared to their secular counterparts
In addition, there are concerns about the educational background and experience of haredi job seekers as compared to their secular counterparts. Gal is quick to point out that this concern is legitimate because “largely, it’s true.”
The third reason for anti-haredi sentiment, as Gal puts it, is “simple racism” based on lingering animosity between the secular and religious populations of Israel.
Recent surveys have confirmed that overcoming negative perceptions has proven to be “labored” at best. In April, the Equal Opportunity Commission of the Ministry of Economy released survey results stating that 37% of employers prefer not to hire haredi men. A similar study conducted by Ono Academic College increases the statistic to 45%.
This past August, Social Finance UK officially released preliminary results from the Peterborough Prison experiment, announcing an 8.4% decrease in re-offenders. This surpassed the initial target of 7.5%, and bond investors are on course to receive their dividend payments in 2016.
Zidky and his staff are delighted with these results, as it will undoubtedly make the process of pursing a haredi SIB and raising capital significantly easier. But even with the positive results from Peterborough, Zidky knowns the success of a social impact bond to boost Haredi employment in Israel “will rise or fall based on employers.”