Governments spend billions of dollars annually trying to address social problems. Most of these funds are not spent on prevention of such problems, and when they are spent on prevention, it can be challenging to find evidence that the goals of the programs have been met. In order to address these issues the social impact bond model has been introduced. The social impact bond is a bit of a misnomer because it is not bond debt in the traditional sense. Instead, the government contracts with a private sector intermediary to provide social services. The intermediary obtains funds for the services by raising capital from private commercial and/or philanthropic groups. The intermediary uses these funds to pay a service provider to deliver the social services. Over a set period of time, performance of the social services is measured, usually by a third party consultant, based upon up-front criteria. After the review period, the government only pays if the performance targets are met.
The first social impact bond in the United States was created in New York City where an initiative was funded to reduce recidivism by 10% for 16 to 18 year olds jailed at Rikers Island by providing intervention services over three years. The program was funded by a loan from Goldman Sachs. After the three year checkpoint, the independent evaluator found that the program did not reduce recidivism. Therefore, New York City did not pay anything.
There has now been a “success” in the investment of a social impact bond. Goldman Sachs and other investors invested in a preschool program in Utah that sought to reduce the demand for special education in grade school in Salt Lake County by providing high-quality pre-school for 3 and 4 year old children. The model provided for private investors to cover the upfront costs of the pre-school program and measured the success by the reduction of costs for future special education needs of at risk students. The program that began in 2013-2014 school year enrolled 595 children in the pre-school program and identified 110 of those students as at-risk to use special education in grade school. The results of the program were that only one child used special education services in kindergarten. Since the goal of the program was met, the investors will receive 95% of the annual savings from Salt Lake County and expect to be paid back over 7 years with a target base interest rate of 5%. The 110 students will be monitored through sixth grade and further annual success payments will based on the number who avoid use of special education.
The first success of a social impact bond might spark the interest of other investors. However, since most investment is market driven, new research is necessary to aid investors in predicting the next “success.”
