The New York Times broke the latest philanthropy story yesterday. The Wall Street Journal, NPR and USA Today all followed with their own versions today. What’s all the hype about? How did a “bond” story make the mainstream news? It’s not just Goldman Sachs’ PR machine or a “Wall Street Does Good” story, though the idea of Goldman Sachs investing in young men coming out of Rikers Island does catch your attention.
As a business person who’s spent the last 12 years in the social sector, I’ll tell you why I’m excited about social impact bonds:
1. Social Impact Bonds pay for results, not for services which may or may not work
There’s a reason Social Impacts Bonds are also called “Pay for Performance” bonds. Instead of paying a nonprofit or private provider to carry out a service, the government only pays for the results actually achieved, based on targets agreed upon beforehand. Because the government doesn’t prescribe how accomplish the goal, nonprofits’ aren’t stuck doing things that don’t work. They can, and must, constantly adjust what they are doing and the mix of services they are providing to make sure they’re going to reach their goals. Goldman Sachs will break even on New York City’s first Social Impact Bond only if least 10% fewer of the 3,400 young men they serve each don’t return to Rikers Island. Today 50% are back in jail within a year. The nonprofit providers need to ensure at least 170 more adolescents each year get their lives back on track.
2. More total dollars will go to programs that can demonstrate results.
To quote George Overholser, “the Social Impact Bond shines a spotlight on what works.” (Read more from Third Sector Capital Founder and successful VC in our interview, here.). The Bond holders take the risks so the government can figure out what actually works and allocate its billions of dollars to the best programs. As George summarizes, “Magically, we may end of spending less money but getting more good stuff happening.”
3. Nonprofits can get the cash they need upfront and negotiate for enough money to do the job right.
By being able to achieve costs savings for the government greater that are greater than their program costs, nonprofits can avoid having to live hand to mouth in ways undermine the effectiveness of their programs. And nonprofits don’t have to float the government. Private investors who have other ways to hedge their risks can do it.
4. We open up the door for huge new sources of capital to makes investments that pay off for us all, but we haven’t been able to afford
Because the bond structure offers a return to investors willing to take the risk, government and nonprofits can potentially access a much, much greater pool of capital to finance programs which benefit society AND save the public money at the same time. With Rikers Island Goldman Sachs could earn as much as $2.1 million in profit on its $9.6M loan. And to sweeten the deal, Bloomberg Philanthropies, Michael Bloomberg’s foundation, has put up a loan guarantee so that Goldman can’t lose more than $2.4 million on its investment. Why? Mayor Bloomberg describes it as “an innovative way to fund promising new programs at no cost to taxpayers.” For the Foundation, it’s an investment that will simply turn into a grant it things go south.
Are Social Impact Bonds complicated, maybe even convoluted? Yes Will the first social impact bonds be very expensive to pull off, as a recent McKinsey study argued? Yes.
Are they an experiment that’s worth carrying out? Absolutely. And we’ll be tracking the results. Stay tuned.by Kristin Majeska