You probably haven’t heard of “social-impact bonds,” but policymakers are already placing their bets on this complicated investment vehicle. Inspired by the market logic that can turn your risk into someone else’s reward, a social-impact bond is a financing mechanism that enables a private investor to front money to fund a government-led policy project, typically an experimental measure designed to shrink budgets. If it fails, it’s the investor, not taxpayers, who are on the hook, and if it hits the jackpot, the city stands to save millions. The city liberates public funds for more immediate needs; its investment partner gets a slim cut, based on the success rate.
This hot new scheme was recently introduced to New York City in a place that is conceptually about as far from Wall Street as you can get: Rikers Island. The city piloted a rehabilitative program for youth at the notorious jail with the goal of reducing recidivism through a treatment known as “moral reconation therapy.” Goldman Sachs, with financial backing from Bloomberg Philanthropies, fronted a loan of $9.6 million over four years. They did not directly control the program; the city contracted with social service providers, Osborne Association and Friends of Island Academy, much like many “public-private partnerships” between government and civil society. The main difference was a potential premium for the funder. Depending on how many future jail stays the therapy prevented, the city would repay Goldman with a modest return by funneling, through the intermediary organization MDRC, two future “Success Payments” of up to $11.7 million.
In July, the results from the independent 12-month evaluation were in: The intervention failed to cut recidivism rates by the desired 10 percent. Seems like a flop, right? And yet: The effort was hailed as a success. According to Wall Street’s spin, the real victory of the program was that despite the failure of intervention itself, the SIB model actually accomplished its central aim—piloting an unproven social program at no cost to taxpayers. The city—which launched the program as part of Mayor Michael Bloomberg’s initiative for “at risk” young black and Latino men—gained from learning what doesn’t work, and funders acquired valuable social-enterprise investment intelligence. This “failing up” sentiment was championed by Goldman and Bloomberg executives, hailing the venture as an “impactful” lesson learned about “implementing evidence-based approaches.”