A Bond between Capital and Impact.

Over the last few years the United States local state and federal governments have been working to incorporate a new approach called Pay for Success. Pay for success is an innovative approach to financing social programs. Through this method government agencies pay for concrete and measurable social outcomes, but only after they are achieved. A promising mechanism that has been at the forefront of this new approach is Social Impact Bonds (SIBs).  The way SIBs work is by leveraging private and philanthropic resources to finance social interventions upfront in exchange for a modest return on investments if the program is successful.[i] In many ways SIBs are a new way to have taxpayer dollars spent on services/programs that work. Ultimately, these bonds provide ways to develop effective public-private partnerships, and delivers low cost to the government over time.

The Social Impact Bond idea first came to life and was tested in the United Kingdom in 2010. Three years ago, the United Kingdom, announced a $13 million deal to bring down recidivism rates[ii] among inmates released from Peterborough Prison. Since 2010, the United Kingdom has launched 14 deals[iii] ranging from foster care to job training. In August 2012, the United States launched its first Social bond in New York City, where Mayor Bloomberg’s administration brought in Goldman Sachs to reduce recidivism among adolescent males imprisoned at Rikers Island. This launch was backed by a $7.2 million[iv] guarantee from the mayor’s personal foundation and Goldman invested $9.6 million.[v] This project is being run by MDRC, which is a local social services provider. The rules of this bond agreement are, if there is a 10 percent cut in reoffenders then Goldman gets all its money back and if there are any further cuts they can make a profit of $2.1 million.[vi] However, worst case scenario, if the program fails the most the Goldman can lose is $2.4 million[vii], thanks to the guaranteed 7.2 million from Mayor Bloomberg. Goldman Sachs’ involvement is the first of its kind and a significant landmark for what the future can bring.

A word from Mckinsey…..[viii]

A word from GoldmanSachs….[ix]

Along with New York, there are a slew of states- Massachusetts, Illinois, Texas, Maryland, and New Jersey- at various stages of exploring how they can use these programs. In Massachusetts, the Harvard Social Impact Bond Technical Assistance Lab (SIB Lab) has been established, as a hands on think tank for helping governments foster innovation and improve the results of their social-service spending. Recently, the Obama administration increased support for Pay for Success programs, requesting nearly $500 million as well as proposed that $300 million in funds be designated to incentivize state and local governments to develop Social Impact Bonds that would be administered by the Treasury Department.[x] The proposed incentive fund would be great for the US for two reasons. First, the fund would help create a federal budget to partially finance outcome payments for Social Impact Bond deals created by cities and states, which will mitigate the complicated accounting challenges of these agreements. Second, the fund would provide credit enhancements for philanthropic organizations, offering partial guarantees that reduce investor organizations risk, if the deal fails. 

    

Although SIBs are expected to be promising, they are not without their own sets of challenges. Three of the most prominent challenges are that in order to receive funds there must be measurable sets of outcomes that must be achieved by social service agencies in order to trigger payment, there is potential for accounting complications across different budgets and levels of government, and different levels of government are best suited for different types of social impact programs. These three challenges highlight that when it comes to Pay for Success programs and SIBs one method or approach does not fits all or yield the same levels of impact. But with all that being said, these contracts are good for nonprofits as they provide more flexible, multiyear funding streams focused on outcomes and not processes. They are also opportunities to align the interests and financing of philanthropic causes and the private sector.

More and more I am amazed at the power of capitalism and its abilities to create good in this world. Social Impact Bonds have left me with the question, is it possible to have a “Social Stock Market”, where the investment in social good may have the potential to rival strictly capitalist-profit seeking investments?

What do you think, is the idea of a Social Stock Market possible, and if it is, how would it function?

---

[i] Social Impact Bonds: White House Budget Drives Pay for Success and Social Impact Bonds Forward. 2013. Shah, Sonal and Costa, Kristina. Center for American Progress. 

[ii] Social Impact Bonds: White House Budget Drives Pay for Success and Social Impact Bonds Forward. 2013. Shah, Sonal and Costa, Kristina. Center for American Progress. 

[iii] Social Impact Bonds: White House Budget Drives Pay for Success and Social Impact Bonds Forward. 2013. Shah, Sonal and Costa, Kristina. Center for American Progress. 

[iv] Public Spirit. 2013. Marsh, Virginia. Financial Times.

[v] Public Spirit. 2013. Marsh, Virginia. Financial Times.

[vi] Public Spirit. 2013. Marsh, Virginia. Financial Times.

[vii] Public Spirit. 2013. Marsh, Virginia. Financial Times.

[viii] An Introduction to Social Impact Bonds. MckinseyonSociety. Youtube Video.  http://www.youtube.com/watch?v=E6GrQtCh83w.

[ix] Goldman Sachs 2013 Annual Report: Social Impact Bonds. Published 2013. Goldman Sachs. Youtube Video. http://www.youtube.com/watch?v=YwqEvAgBlqY

[x] Social Impact Bonds: White House Budget Drives Pay for Success and Social Impact Bonds Forward. 2013. Shah, Sonal and Costa, Kristina. Center for American Progress.