More on Social Impact Bonds

At first, it seems too good to be true: A way for well-funded social innovations to start off with little financial risk to the government or non-profit organizations. However, that is exactly what Social Impact Bonds, or SIBs, do. Over the course of this class, we’ve learned about the obstacles for social innovation ventures in terms of funding. Is it possible that SIBs could solve many of these problems?

A couple of the readings for this class (McKinsey’s Social Impact Bonds Report, The Economist “Let’s Hear Those Ideas”) have mentioned the concept of Social Impact Bonds (SIBs), and the first implementation of such a strategy with Social Finance UK. The Social Finance UK SIB started in 2010, with the goal to rehabilitate prisoners to be released over a six-year period.  Under this contract, four different nonprofits have been implementing programs aimed at helping inmates increase educational levels, vocational skills, and confidence.

At the time the McKinsey report on Social Impact Bonds was released in May of 2012, the UK was the only country hosting a Social Impact bond. Now, the US is joining these ranks.

This past August, the City of New York announced that it would be partnering with Goldman Sachs in the first US Social Impact Bond. With a 9.6 million dollar loan from the investment banking firm, the city is trying to reduce recidivism among inmates in Rikers Island prison. The program will run for four years, and, like the Social Finance UK SIB, will be run by nonprofit organizations.

On August 12^th, Bloomberg featured this very informative article on the partnership between New York City and Goldman Sachs, and SIBs in general. According to the article, if recidivism does not drop at least 10%, Goldman Sachs will not earn a profit from the investment. The loss would amount to 2.4 million. In another outcome, the most Goldman Sachs can make is 2.1 million. For this to happen, recidivism would have to drop 20%, which would save the city more than 20 million in incarceration costs.

The goals of this bond serve as a perfect example of what McKinsey points out as one of the characteristics of a Social Impact Bond: it’s aim is the prevention, rather than management of social needs. If this program works at the levels the bond aims for and prevents at least 10% prisoners at Rikers Island from committing crimes again—a strong difference.

Earlier in August, the New York Times ran a story about the New York City/Goldman Sachs SIB.  Referring to the SIB, Mayor Bloomberg is quoted in the article, saying, “This promising financing model has potential to transform the way governments around the country fund social programs, and as first in the nation to launch it, we are anxious to see how this bold road map for innovation works…Social impact bonds have potential upside for investors, but citizens and taxpayers stand to be the biggest beneficiaries.”

Even though it is still too early to examine the effectiveness of the existing SIBs, this trend is taking off quickly. According to the Bloomberg article, a similar program is also being developed in Massachusetts, though it has yet to be officially announced. Deals are also in disucssion between the New York Industrial Development and Wisconsin’s Public Finance Authority, and the Los Angeles County Metropolitan Transportation Authority.

However, as with many new investments, there are still some risks associated with SIBs. In the New York Times article, Mark Rosenman, a professor emeritus at Union Institute and University, expresses the fear that brining money into the equation could taint the goals of nonprofit or public programs. He says, “I’m not saying that the market is evil…but I am saying when we get into a situation where we are encouraging investment in order to generate private profit as a substitute for government responsibility, we’re making a big mistake.”

I think that Rosenman’s fear that bringing money into the equation could affect the goals of nonprofit or public programs is justified. Social Impact Bonds do, after all, include introducing the financial market into the public and nonprofit sector and placing high stakes—at least for the private investors involved—on the success or failure of a program. As we discussed in class, measuring the results of social programs can be extremely difficult, so when it comes to evaluating which programs are truly having an impact, there is still much room for ambiguity. An added risk could be that a program that performs well but just misses the mark of the bonds’ requirement could be prematurely dismissed.

However, I would argue that while there may be a risk that Social Impact Bonds could introduce a change in the mission of an organization, this could be balanced out by the higher standards for evaluation/incentive to achieve goals that Social Impact Bonds provide—especially because, as is detailed in the McKinsey report, there is a system of evaluation by an independent assessor and evaluation adviser built into the bonds. In my own experience, I have seen that many inefficient nonprofit programs exist, and can often continue existing despite a failure to move forward. Of course, securing funding with grants requires an application process, but this does not necessarily mean the organization is being screened as a whole. Nonprofit boards are also supposed to function to make sure the organization stays on track, but many boards are not properly engaged, and board members’ lack of involvement can keep “checks” like this from happening.  In this sense, it would be much easier for an ineffective nonprofit program to exist that one financed through a Social Impact Bond.

Part of what I like so much about the SIB model is that even though it is very progressive in its financial design, it allows programs to put the emphasis on what matters. For instance, by allowing structures in which nonprofit organizations that have been working in crucial interest areas for years, SIBs are able to leverage long-standing community connections with new, results-focused funding models simultaneously.

Do the benefits of Social Impact Bonds outweigh the risks?

Are Social Impact Bonds likely to make nonprofit or public organizations stray from their missions?

Is it possible to fairly measure programs’ success through existing measurements, or will some programs financed through Social Impact bonds risk being prematurely dismissed?