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Thursday, August 2, 2012

Social Impact Bonds: “The most interesting government contract written anywhere in the world this year”….

…. And the award goes to… Goldman Sachs and New York City. According to the ABA Journal, Goldman Sachs has loaned $9.6M to New York City to fund a new social services program with the aim of “reducing recidivism among young men at Rikers Island.” Details are to be provided later today (Thursday). The loans are being described as “social impact bonds” and they carry a nice return ($2.1 million) if there is a “significant reduction” in recidivism. If not, Goldman could lose up to $2.4 million (though, we know, Goldman won’t lose the money because, as a “market maker,” it will just turn around and sell the “shitty” bonds to an unwary client).

About the contracts that lie at the heart of the deal, the ABA Journal provides:

“This will get attention as perhaps the most interesting government contract written anywhere in the world this year,” said Jeffrey B. Liebman, a public policy professor at Harvard University. “People will study the contract terms, and the New York City deal will become a model for other jurisdictions.”

Similar programs have been tried in Great Britain and Australia and currently are being considered in Massachusetts.

But the New York Times reports that this program is different because Mayor Bloomberg’s foundation is a guarantor on the loan:

In a twist that differentiates New York’s plan from other governments’ experiments with social impact bonds, Mr. Bloomberg’s personal foundation, Bloomberg Philanthropies, will provide a $7.2 million loan guarantee to MDRC. If the jail program does not succeed, MDRC can use the Bloomberg money to repay Goldman a portion of its loan; if the program does succeed, Goldman will be paid by the city’s Department of Correction, and MDRC may use the Bloomberg money for other social impact bonds, said James Anderson, director of the foundation’s government innovation program.

The social impact bonds are not without critics:

But social impact bonds have also worried some people in the nonprofit and philanthropy field, who say monetary incentives could distort the programs or their evaluations. “I’m not saying that the market is evil,” said Mark Rosenman, a professor emeritus at Union Institute and University in Cincinnati, “but I am saying when we get into a situation where we are encouraging investment in order to generate private profit as a substitute for government responsibility, we’re making a big mistake.”

The proponents argue that this financing model is a transformative way to fund social programs, with benefits to both taxpayers and private investors.  They argue that it is a way for government to pay to achieve outcomes.

[Meredith R. Miller] 

http://lawprofessors.typepad.com/contractsprof_blog/2012/08/social-impact-bonds-the-most-interesting-government-contract-written-anywhere-in-the-world-this-year.html

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