June 8, 2014 | Read Time: 2 minutes
Social-impact bonds, an emerging and controversial way to finance programs run by nonprofits and government, are examined in a new report by the Urban Institute.
The in-depth study offers advice on how juvenile and criminal-justice systems can develop such deals. Later this year the think tank will release a tool to help government agencies and investors determine whether a project is right for such financing.
Sometimes referred to as pay-for-success contracts, social-impact bonds allow private investors to pay for a social program that has performance goals, such as reducing the number of ex-offenders who return to jail. If an independent evaluator certifies that the program meets the goals, the government returns the investors’ capital and pays them a return on their investment.
The first social-impact bond in the United States started in 2012, when Goldman Sachs invested $9.6-million to provide services to young offenders in New York City to help them stay in school, find and keep a job, and avoid future incarceration. Since then, other states and cities have developed similar financing deals.
Complex and Expensive
Social-impact bonds have the potential to expand proven approaches to tough problems, says John Roman, a senior fellow at the Urban Institute and lead author of the new report.
“We find that an intervention works with a difficult population, and then we never get beyond serving 2 percent of that population,” he says. “What social-impact bonds and pay-for-success do is potentially unlock the capital that’s necessary to make that big leap from the pilot stage to the business-as-usual stage.”
Despite all the attention, social-impact bonds are still in their early days, says Mr. Roman.
The deals are extremely complex, and governments, investors, and nonprofits are still trying to figure out the best way to use them, he says. As a result, each project is time-consuming and expensive to negotiate.
“That’s what happens with early innovations,” says Mr. Roman. “There’s this pioneering stage where there’s a lot of risk, and we just need to get through that stage as quickly as possible.”
