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Aug 2, 2012

Social Impact Bonds Arrive in New York City

A major new social impact bond initiative was announced in the New York Times.  Goldman is buying a social impact bond tied to reduction of New York City jail recidivism. Social impact bonds (SIBs) are a type of bond that pays a variable dollar return that is tied to achievement of a social metric.  If the project is a failure, the investor would get no income nor possibly return of principal.  The idea is to create an incentive to achieve a social end by putting capital into projects that are likely to be effective and productive.  It is the logical next step in the movement to use metrics to evaluate the merits of a nonprofit’s work.

Specifically, Goldman is lending $9.6 million for four years.  As the article states, “The Goldman money will be used to pay MDRC, a social services provider, to design and oversee the program. If the program reduces recidivism by 10 percent, Goldman would be repaid the full $9.6 million; if recidivism drops more, Goldman could make as much as $2.1 million in profit; if recidivism does not drop by at least 10 percent, Goldman would lose as much as $2.4 million.

SIBs began in Great Britain and have been very successful.  So far, I believe, SIBs have been issued only by government.  The U.S. federal government is looking into issuing SIBs on behalf of the United States.

SIBs are good for those nonprofit efforts which are amenable to measurement, but they bring the same dilemmas that the entire metrics movement brings to social efforts:  cherry picking.  I wrote about this problem in the Chapter “Blurring the Lines Between Donor and Manager”, pages 161-164 in More Than Just Money.  If I need to reduce homelessness by meeting a metric to place adult men in permanent housing, will I choose men who have the least chance of succeeding or those that have the most chance?  Certainly efficiency argues to help those with the greatest likelihood of success.  What does that mean for society’s obligation to help those who are doomed to fail repeatedly?  Similarly, if a truancy program must meet a certain level of improvement in attendance, am I going to admit to the program the kid who just needs counseling and adult attention or the kid from a dysfunctional family that places no value on school?  I will get better metrics if I choose the former kid.  But isn’t society served best by helping both kids?

SIBs are a good idea if they attract money to nonprofits from people or institutions that would not otherwise be supporting nonprofits.  So the real questions are:  would Goldman have donated money to jail recidivism programs anyway?  Did the $9.6 million Goldman is investing in the jail SIB come from its investment pool or from its corporate philanthropy pool?  Did the prospect of a positive investment return attract Goldman or was it the opportunity to help ex-offenders?  Did basing the financial return on reduction of recidivism make a difference to Goldman or to the NYC jail system’s managers compared with a more typical “impact investment” that paid a fixed but low interest rate?

What do you think?