Could private investments improve social programs? The world watches as New York City takes a new tack on reducing youth recidivism rates

Government social programs are doomed to inefficiency, so a common criticism goes. That’s because the genuinely good intentions of policymakers, administrators and frontline employees can never breed success the way a market-based penalty for failure can.

But what if social programs were structured like private business ventures? Instead of funding good ideas, why doesn’t society fund good execution?

That’s the idea behind Social Impact Bonds (SIBs), an experimental financing system for human services programs. The great benefit of SIBs is that they provide upfront money for prevention programs that cash-strapped governments don’t want to take a chance on. Instead, the financial risk is transferred to an appropriate third party – investors, who calculate risk for a living.

First implemented successfully at Britain’s Peterborough Prison to lower rates of recidivism, SIBs are at various stages of study and implementation in Canada, Britain, Australia, Israel and the US. In New York City, finance giant Goldman Sachs is putting up $9.6 million to fund a four-year program at Rikers Island prison to lower repeat-offence rates among teenage boys. The money will go to MDRC, an evidence-based social services provider hired to design and implement the program. How much of the loan the City pays back depends on measured rates of recidivism.

SIBs embody two recent trends in social services. First, rather than measuring outputs, or easily countable costs, they measure outcomes. They also pay only for success: If a program’s outcomes don’t meet a minimum agreed-upon level, the government doesn’t repay investors, thereby costing taxpayers nothing. For these reasons, most pilot SIB projects have focused on preventing crime and homelessness, two issues where social programs tend to save society money through success that is easily measured in the medium term, a key to determining whether, and how much, investors get paid back. But if pilot programs are successful, Massachusetts’ Secretary of Administration and Finance Jay Gonzalez thinks SIBs may next be applied to higher education and healthcare.

Well over 30 US jurisdictions have already talked to Social Finance US, a pioneer in the field, about SIBs. With such intense interest shown in an approach still in its infancy, the need for affordable social-program solutions couldn’t be clearer.

For more on New York City’s pilot program, read the New York Times article here and the Economist article here.

Click here for a short introductory video on social impact bonds.