USC logo

Social Impact Bonds

Published by USC Bedrosian Center on

by Jeremy Loudenback

At the next Goldman Sachs shareholder meeting, the usual discussions about shareholder value and adjusted leverage ratio will be joined by a seemingly unlikely topic: recidivism strategies. The unlikely confluence of corrections strategies and investment banking concerns one of the first examples of social-impact bonds in this country, part of a growing nexus between for-profit investment, philanthropy, and government. Also known as pay for success or pay for performance financing, social-impact bonds promise returns to private investors if goals are achieved, which are usually related to a social or environmental objectives. These new financial instruments have forged a new model of public-private partnership that is currently being tested in places like the Rikers Island jail.

Goldman Sachs and the Rockefeller Foundation invested in the Osborne Association’s cognitive behavioral therapy program for young offenders at Rikers Island, with the hopes of breaking the cycle of recidivism and keeping young people from returning to jail. Reducing repeated incarceration should save the city money, and so it’s with that money that the city would be expected to pay back the investors’ loan.

It’s no surprise that one of the first and most widely watched examples of social-impact bonds is related to recidivism. In the U.K., a group of investment bankers first conceived of the idea to link payouts to the outcome and performance of social programs in the form of a bond. After lending money to an established social-service organization via an interest-paying bond, the investors would be repaid by the government if objectives had been met and money had been made through cost savings due to the application of the program. In 2010, the investors tested the idea with a prisoner-rehabilitation program in Peterborough, outside of London, and its success has prompted wider use in the U.K. as well as in the U.S.

A Maryland study evaluating the effect of social-impact bonds found strong promise in areas like re-entry programming where reductions in corrections populations can have significant financial incentives, but proponents are predicting a broad variety of applications, including poverty reduction programs, climate change, homelessness initiatives, health care, and early-schooling programs. In the context of constrained budgets at the local and state level, social impact bonds are gaining steam among many policymakers as well as being championed by a coalition of business leaders, policy thinkers, and entrepreneurial philanthropists. From Washington state to Massachusetts and New York, the innovative possibilities of social-impact bonds are being implemented or explored in many different states across the country.

But while many innovation experts are keen to extol the opportunities for efficiency for social programs with social-impact bonds, other critics are wary of the new role of private investment in government social services. The Los Angeles Times announced its support for social-impact bonds in an editorial last month, but other voices are more cautious, worried that public and democratic accountability may be diluted by the growth of social impact bonds, cash-strapped governments could be exposed to too much risk, and claims about creating more resources and better results might be more well intentioned than actually effective.

While exceptional amount of enthusiasm surrounding social-impact bonds does not seem to be waning, 2014 will mark an important point in thinking about the relatively new instruments. Later this year, a report about the results of the Peterborough prison is expected from an independent assessor, though mid-term returns have already sparked lively discussions about the program’s impact and the need for proper evaluation. Outcomes for the Rikers Island experiment will not in until 2015, though some outcomes of the Osborne program—including a 36 percent decrease in the number of fights among adolescents at Rikers Island through December — have already left many thinking that such successes may be worth paying for.

Bedrosian Center