May 07, 2013 4:34 PM GMT
Kind of brilliant conceptually... but the devil will be in the details.
Social impact bonds have been under development in a number of countries for several years. The idea is to find money to pay for social services that are badly needed, but can’t be provided by governments struggling to reduce deficits and pay for the services they already offer. Though approaches vary, under the basic model a private sector supporter finances a program to be run by a social agency or non-profit organization, that is structured with a firm set of performance targets. If the targets are met, the government agrees to return the cost, plus a profit, to the financing organization. The underlying doctrine is that successful social programs save the government money, so repaying the start-up costs is justified. At the same time, the government is freed from risking tax dollars on programs that sound good in theory, but might not work in practice.
They’re not real bonds, since there is no fixed rate of return, but the name reflects the fact they’re designed to return a profit. They have been adopted in several countries, including Britain, Australia, New Zealand and the U.S., where they’re commonly known as “pay for success” financing. In August, New York Mayor Michael Bloomberg announced the country’s first concrete program, which is aimed at reducing the rate at which young offenders return to crime after their release.
“Currently, nearly 50 percent of adolescents who leave the New York City Department of Correction return within one year,” according to the press release unveiling the plan. “The new program announced today, ABLE, aims to reduce the likelihood of reincarceration by providing education, training and counseling to improve personal responsibility skills, including decision-making and problem-solving.”
Goldman Sachs will finance the plan for four years, which will be operated by MDRC, a non-partisan New York non-profit organization. The loan will be partly guaranteed by a grant from Bloomberg Philanthropies, the mayor’s family foundation. To be judged a success, the program will have to reduce the number of youths returning to jail by 10%, as measured by an independent third party organization. If it works, the city will repay Goldman, plus a profit; if not, the city pays nothing.