12 points of interest in the New York (Rikers) Social Impact Bond

  1. There was no hype before the Social Impact Bond (SIB) was announced – this is in contrast to other Governments who have announced their intention well before finalising details. Perhaps the deal was developed quickly, which may well be the case with Bloomberg controlling both the philanthropic guarantee and political appetite. Or perhaps the parties didn’t want to announce before they had signed the contracts, avoiding the pressure of having to live up to an announcement of intention.
  2. In addition to a press release, the City of New York released a briefing pack outlining the justification, partners, program and payment terms of the SIB. The terms of Government payment are clearly set out, unlike in the Peterborough SIB. For a new funding mechanism, this certainly promotes understanding.
  3. It’s called a Social Impact Bond- Obama’s administration announced funding for “pay for success” bonds and the NSW Government has branded them Social Benefit Bonds. Using the same term as Peterborough makes it clear that they follow the same model and helps keep related literature together.
  4. Bloomberg Philanthropies guarantees it – they’ve only guaranteed $7.2m of the $9.6m Goldman Sachs investment, but having the guarantee reduces investor risk and may be one of the key factors in getting this deal finalised. It’s not clear under what terms the guarantee is paid or what happens to it if it’s not required. The fact that it’s a grant seems to suggest that MDRC would repurpose it. This also means that like Peterborough, if outcomes are not achieved, there is no payment of public monies.
  5. The Goldman Sachs payment to MDRC is described as a loan – people often ask of SIBs “Are they debt or equity?”. In fact, they are neither, they are multi-party contracts. Payments from Government are due to an outcomes-based contract. The private investor is really buying a futures option. Classification as debt sheds light on how Goldman Sachs will account for this investment. It also may suggest that Goldman Sachs will take a hands-off approach. If this is so, the benefit of investor skills and incentive are not transferred through to the service providers. This transfer has historically been referred to as one of the reasons for involving external investors, but we’ve yet to see a SIB where investors have a relationship with service providers.
  6. Similar to Peterborough, there is a third-party, independent evaluator. This may prove to be an essential feature of all SIBs as they emerge.
  7. The intermediary is MDRC, a research centre – the strengths of MDRC are in program evaluation and design. Intermediaries in other SIBs bring financial investment or service delivery experience to the SIB. In NSW, the intermediary role will be played in part by banks and not-for-profits, as well as by the intermediary Social Finance (no relation to the UK or US Social Finance).
  8. The payment terms state that a 10% reduction in recidivism is the threshold for investors to break even, although when cost of capital is factored in, this will represent a loss. It is not clear what the 10% reduction is in relation to i.e. what the comparison group is. The SIB also uses stepped payment terms, rather than a sliding scale, which is simple and unambiguous.
  9. There is value in being a first mover – the press releases announces the “Nation’s First Social Impact Bond Program”. There is a conflict between the kudos received for being a first-mover and the confidence gained by waiting to see how other SIBs turn out. It will be interesting to see whether SIBs become more popular and mainstream, or whether development of this model will slow once its novelty wears off.
  10. Benefits to nonprofit providers are described in the briefing pack as “a committed funding stream not subject to budget cuts”. The literature that exists on SIBs describes the major benefit to be providers being the flexibility afforded by focusing on outcome, rather than current prescriptive Government contracts. This could be a sign that MDRC will be prescriptive in what it asks of the two providers, or that prescriptive contracts are less of an issue in this jurisdiction.
  11. Is there conflict between innovation and evidence? The briefing pack justifies the SIB as “encouraging innovation in a time of fiscal constraints”. The idea that SIBs encourage innovation by allowing Government to pay only if outcomes are achieved might be one for the long-term market only. At the moment, the reputational risk of failure to all parties and intense media scrutiny has resulted in SIBs providing services with a strong history and evidence-base that may require strict adherence to service models. These services are so safe they would be ideal candidates for a direct outcomes-based contract with a provider. The real innovation occurring here might be in how the delivery partners have to work together towards agreed outcomes.
  12. They’re creating a pipeline – the press release refers to an August 2 request for expression of interest for additional social impact investment projects by the City of New York. This would suggest that a pipeline of proposals will be established, but I haven’t been able to find the request anywhere. It would be interesting to see whether outcomes are suggested and priced, in the manner of the NSW Government, or whether this will be up to the market.

One thought on “12 points of interest in the New York (Rikers) Social Impact Bond

  1. Thanks Emma for an excellent review and critical analysis of the NY SIB.
    My overarching interest is understanding the point of incentive optimisation for each of the participants. I sense Goldman Sachs role has been pervasive – GS is a sophisticated analyst of risk and I am certain that they have brokered the “deal” and therefore defined the nature of involvement for all participants. GS has therefore been instrumental in achieving a point of incentive optimisation
    I am also interested in how Government transfers risk to other parties – I have stated elsewhere – quoting the eminent Harvard Professor Jeffry Lieberman – that transferring all the risk to investors is unlikely to be optimal – and that shared risk is preferable. The NY SIB structure is particularly interesting as a philanthropic body is providing a “credit guarantee” and thus sharing the risk with the investors. My understanding is that the Bloomberg Philanthropies grant will only be drawn down if the outcomes are not achieved – and will therefore appear as a liability on the Foundation’s balance sheet.
    The involvement of a research centre as an intermediary body is also fascinating!!
    It will be interesting to see if this model is emulated in the next wave of SIBs (and I am confident that there will be a next wave!!

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