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(Reuters) - Goldman Sachs will invest nearly $10 million in a New York City jails program, using an innovative financial instrument in which private investments fund public social services, Mayor Michael Bloomberg said on Thursday.
Goldman will create one of the nation's first "social service bonds" to help fund a New York City program that aims to lower the 50 percent recidivism rate among youthful offenders jailed at the Rikers Island correctional facility.
Unlike similar proposals being developed elsewhere, most of Goldman's ‘Rikers bond' will be guaranteed by Bloomberg Philanthropies, the mayor's philanthropic group, which will back $7.2 million of the $9.6 million investment the bank plans.
The four-year program, in which private non-profit groups will provide education and intensive training and counseling to at-risk incarcerated youths, must reduce the recidivism rate by at least 10 percent for Goldman to recoup the investment.
If the recidivism rate drops further, Goldman could profit up to $2.1 million beyond its original investment, according to Samantha Levine, a spokeswoman for the city. If the program fails to reduce recidivism by 10 percent, Goldman could lose $2.4 million.
"We believe this investment paves the way for a new type of instrument that enables the public sector to leverage upfront funding from the private sector," Blankfein said in a statement issued on Thursday.
The notion of social impact bonds was first tested two years ago in Peterborough, England. In 2010, the British government agreed to pay 5 million pounds, about $8 million, to a non-profit organization to reduce the recidivism rate at Peterborough's city prison.
http://www.reuters.com/article/2012/...20802?irpc=932
from the Peterborough SIB prospectus:
A Social Impact Bond (“SIB”) is a contract with the public sector in which it
commits to pay for improved social outcomes.
On the basis of this contract, investment is raised from socially-motivated
investors.
This investment is used to pay for a range of interventions to improve social
outcomes.
If social outcomes improve, investors will receive payments from government.
These payments repay the initial investment plus a financial return.
The financial return is dependent on the degree to which outcomes improve.
The SIB is not a traditional ‘bond’ because all of the investors’ capital is at risk.
It offers investors the opportunity to have a significant social impact and
generate a fi nancial return provided some social impact is achieved.
Investors in the fi rst Social Impact Bond have tended to be those with a strong
focus on the social cause and an understanding of the interventions proposed.
The investors in the Peterborough SIB pilot are mostly charitable trusts
and foundations, some of which are the giving vehicles of High Net Worth
individuals or Private banks.
Some charitable trusts have invested as a program-related investment in
which they use part of their endowment to achieve their social mission and a
financial return.
We are already seeing interest from a broader range of investors.
Once SIBs have developed a track record, the aim is to attract a range of
impact investors, including retail customers, broadening the available pool of
capital.
The Ministry of Justice and the Big Lottery Fund will pay investors so long
as there is a measured reduction in re-conviction events of 7.5% relative to
the experience with a control group of short-sentence prisoners in the UK.
Goldman will create one of the nation's first "social service bonds" to help fund a New York City program that aims to lower the 50 percent recidivism rate among youthful offenders jailed at the Rikers Island correctional facility.
Unlike similar proposals being developed elsewhere, most of Goldman's ‘Rikers bond' will be guaranteed by Bloomberg Philanthropies, the mayor's philanthropic group, which will back $7.2 million of the $9.6 million investment the bank plans.
The four-year program, in which private non-profit groups will provide education and intensive training and counseling to at-risk incarcerated youths, must reduce the recidivism rate by at least 10 percent for Goldman to recoup the investment.
If the recidivism rate drops further, Goldman could profit up to $2.1 million beyond its original investment, according to Samantha Levine, a spokeswoman for the city. If the program fails to reduce recidivism by 10 percent, Goldman could lose $2.4 million.
"We believe this investment paves the way for a new type of instrument that enables the public sector to leverage upfront funding from the private sector," Blankfein said in a statement issued on Thursday.
The notion of social impact bonds was first tested two years ago in Peterborough, England. In 2010, the British government agreed to pay 5 million pounds, about $8 million, to a non-profit organization to reduce the recidivism rate at Peterborough's city prison.
http://www.reuters.com/article/2012/...20802?irpc=932
from the Peterborough SIB prospectus:
A Social Impact Bond (“SIB”) is a contract with the public sector in which it
commits to pay for improved social outcomes.
On the basis of this contract, investment is raised from socially-motivated
investors.
This investment is used to pay for a range of interventions to improve social
outcomes.
If social outcomes improve, investors will receive payments from government.
These payments repay the initial investment plus a financial return.
The financial return is dependent on the degree to which outcomes improve.
The SIB is not a traditional ‘bond’ because all of the investors’ capital is at risk.
It offers investors the opportunity to have a significant social impact and
generate a fi nancial return provided some social impact is achieved.
Investors in the fi rst Social Impact Bond have tended to be those with a strong
focus on the social cause and an understanding of the interventions proposed.
The investors in the Peterborough SIB pilot are mostly charitable trusts
and foundations, some of which are the giving vehicles of High Net Worth
individuals or Private banks.
Some charitable trusts have invested as a program-related investment in
which they use part of their endowment to achieve their social mission and a
financial return.
We are already seeing interest from a broader range of investors.
Once SIBs have developed a track record, the aim is to attract a range of
impact investors, including retail customers, broadening the available pool of
capital.
The Ministry of Justice and the Big Lottery Fund will pay investors so long
as there is a measured reduction in re-conviction events of 7.5% relative to
the experience with a control group of short-sentence prisoners in the UK.