A Venture Capital Approach to Fixing the Criminal Justice System

The failure of the UK prison system has been well publicised for several years. Prisons provide a significant cost to the taxpayer (of about £35,000 per year, per inmate), and often fail to prevent re-offending.

Yet there are many stories of former criminals providing valuable services for companies and business and effective charitable and commercial activities that help re-offending but struggle for funding.

A solution could be a pay-for-outcomes probation, but with a difference – instead of a fixed payment per success, the payment comes form the income tax paid by reformed prisoners for the rest of their lives.

The concept is this; an organisation takes on some of the financial risk of paying for the prison sentences for repeat offenders (10k per year of imprisonment), but in exchange it is guaranteed all income tax revenues paid by those criminals who are reformed into society for their lifetime (or 20% of pre-tax income should they move abroad).

The government makes a guaranteed saving of at least £10k per prisoner in the scheme, and more if they are kept out of prison, without having to spend any money, as all the cost of the scheme is borne from future income of former inmates.

With fixed payments per individual for success, the risks for an organisation are high and the rewards are low, so you tend to get low-quality programmes. When the rewards are variable and sustained over the longer term, however, the maths changes.

Suddenly there is an incentive to get better people, processes and support in place, because the potential gains are so lucrative.

By way of example, let’s say you have 10 offenders. The risk of loss is £100k per year if they all go onto re-offend. But if they reform and pay an average of £4k income tax per year, the yield is £40k per year for, say, an average of 30 years each, so that’s a lifetime value of £1.2 million.

Not amazing, but not bad.

But let’s say 1 of the individuals goes onto earn the big bucks, and pays income tax of £350,000 per year for 30 years. The lifetime value is now closer to £10 million.

Getting financial entities to insure the risk of re-offenders in exchange for receipt of all future income tax creates an economic incentive to expend resources on these offenders to turn their lives around and get them earning as much money as possible through legal means (so that it is taxed).

It alleviates cost to the state and creates a space for innovation in the social sector, justifying spending more resources and offering better support than stretched councils and other public bodies can afford.

So, we get fewer people going back to prison and the taxpayer saves money – all the financial risk is borne by private sector financial institutions.

Such an idea could see, for example, a venture capital fund raising money to insure the risk and fund the reform programmes, which offers dividends to investors from the gains received.

A powerful way to make private capital solve societies problems, all at no cost or risk to the taxpayer.