Transparency in Private/Public Partnerships

Social impact bonds are a new way to address social problems. By financing public projects through such bonds, local governments can receive funding to support social initiatives. This partnership between the private sector and the public has been billed as a mutually beneficial situation: governments can have access to money to fund their projects, investors can get payouts on their investments.

This idea is still relatively new for the US, and making predictions about the long-term success of such programs are difficult. I began looking for social bond-based initiatives to see how they actually played out, and found one described in a New York Times article.

In 2015, Goldman Sachs pledge to invest money in a Utah school program that was aimed to help at-risk kindergarteners avoid special education. Goldman Sachs received a return on each child they invested in, totaling a $260,000 payout. Goldman Sachs billed the investment as a success: According to the bank, the “investment had helped almost 99 percent of the Utah children it was tracking avoid special education in kindergarten.

Soon, the truth about the investment unraveled. Impact evaluation revealed that the program might not have been the success that Goldman Sachs claimed, raising concerns about how to properly structure public-private partnerships such as this. Finding these kinds of measurements is crucial, and cross-sector efforts are being made to ensure that measuring success for goals can be implemented to ensure that programs like these are done in the best interest of everyone involved. “You have to be sure you have very rigorous ways of measuring the impact to make sure that it’s legitimate in terms of the outcome you get. That didn’t happen here.” a senior scientist at the Frank Porter Graham Child Development Institute.

Often times, schools and nonprofits do not have the capacity to implement these measurement skills and often the responsibility, such as in this case, falls on the social service provider is blamed for the bad outcome. According to the article, “When Goldman negotiated its investment, it adopted the school district’s methodology as the basis for its payments. It also gave itself a generous leeway to be paid pack. As long as 50 percent of the children in the program avoid special education, Goldman will earn back its money and 5 percent interest — more than Utah would have paid if it had borrowed the money through the bond market. If the current rate of success continues, it will easily make more than that.”

The school’s methodology was flawed, and the way they were measuring impact was as well. However—and Goldman Sachs still took advantage of that. When schools, nonprofits and other social program rely on outside investors with a wealth of power and resources, they often put themselves at risk and trust the financial decisions of these investors.

It is now recognized that Goldman Sachs is earning a return on a flawed system of measuring at-risk kids, how can it be fixed? The fact that Goldman Sachs continues to receive returns is a bit unnerving—and could possibly make other skeptical about investing with them. How can large corporations like Goldman Sachs build public trust to ensure their social initiatives are valid? I think this is also an important part of measuring impact: transparency.