Last month, the state of Massachusetts launched a program to offer social impact bonds. These bonds, which are also called “Pay for Success Bonds” have been very successful in the UK, providing vital funding for social programs as well as handsome returns for investors.
In fact, the UK had so much success, other countries, including Australia, Canada, Israel and now the United States, are launching their own versions of the program.
But what’s the potential impact for communities and investors? Here’s a quick guide to understanding more about this new and interesting investment.
How Do Social Impact Bonds Work?
In a nut shell, social bonds use private financing for public initiatives, the government wouldn’t otherwise be able to afford. An arrangement is then made between the two parties on desired results of the program. If the results are met, the investors are paid their pre-determined sum, if desired results are not met, the investors walk away with a loss.
Social impact bonds also operate differently than conventional bonds. They operate over a fixed period of time, but don’t offer a fixed rate of return. Like we mentioned above, repayment to investors is solely contingent upon a specific social outcome being achieved.
Real life example – Massachusetts, the first state in the U.S. to offer this type of bond, is hoping to generate $50 million in bonds for two projects, including:
1) Helping people transition from the juvenile justice system into adult life
2) Housing the chronically homeless
Other states, including New York, are watching closely at the performance of the bonds in Massachusetts. If successful, social impact bonds might extend to health programs, such as reducing re-hospitalizations, diabetes prevention and helping the elderly stay in their homes as they age.
Potential Gains and Losses
Potential gains and losses will vary, based on the individual state’s agreements. However, here’s an example of what to expect.
Goldman Sachs Group, Inc. (NYSE:GS) just bought $9.6 million dollars in social impact bonds. The funds were allocated to a program focused on assisting people who served time at Rikers Island prison.
If the program reduced recidivism by 10 percent, which is an undesirable behavior, Goldman Sachs Group, Inc. (NYSE:GS)was repaid the initial $9.6 million investment. However, if recidivism dropped more than 10 percent, the company could earn $2.1 million in profit.
If the program failed, Goldman Sachs Group, Inc. (NYSE:GS) could lose a large chunk of their investment. For example, for this situation, if recidivism doesn’t drop at least 10 percent, the company will lose $2.4 million.
Getting the Big Picture
Right now, investing is limited to major businesses. However, this might change in the future.
Individuals could potentially invest on a mass scale if these instruments prove effective. Think of the impact this could have on government spending if social projects were first implemented with public financing.
Imagine sitting at your computer choosing from hundreds of social initiatives throughout the country all while weighing in on their projected success rates and potential returns. Making an investment in improving a community or social problem, all while garnering financial returns is something the early adopters of these programs think all Americans can get on board with.
By Bank Vibe
References
The New York Times. The Promise of Social Impact Bonds. Retrieved 8/14/12 from HYPERLINK “http://opinionator.blogs.nytimes.com/2012/06/20/the-promise-of-social-impact-bonds/” http://opinionator.blogs.nytimes.com/2012/06/20/the-promise-of-social-impact-bonds/
The Business Insider. Goldman Sachs is Making a Bizarre Investment in New York City’s Jails. Retrieved 8/14/12 from
HYPERLINK “http://www.businessinsider.com/goldman-sachs-social-impact-bond-2012-8” http://www.businessinsider.com/goldman-sachs-social-impact-bond-2012-8
The Economist. I’ll put 2.4m on recidivism to fall. Retrieved 8/16/12 from HYPERLINK “http://www.economist.com/blogs/democracyinamerica/2012/08/social-impact-bonds” http://www.economist.com/blogs/democracyinamerica/2012/08/social-impact-bonds
