Social Impact Bonds, Goldman Sachs & the Business of Shelters

Human trafficking, both sex and labour, youth crime, drug abuse and domestic violence are major social problems that undermine the fabric of a healthy society. The problems often run deep, are multi- faceted and have multiple causes. How do we tackle them? None of these issues make for profitable ventures. On the other hand, they drain the public purse which mostly funds band-aid solutions. Or so we believe.  But that’s only because the incentives to address and eliminate these problems have not been properly aligned.

Let me explain.  I start a non-profit to deal with domestic violence. I approach the government for a grant. The government turns around and says I can give you xx dollars a year to operate your shelter and maybe even a capital fund. I am ecstatic and go about setting up the shelter. Soon I realize what the government gives me to operate is not enough and cannot pay for me to expand to meet a growing need for shelter beds  . What do I do? I go for fundraising activities which sap me of the resources I need to run the programs that will move women into self-sufficiency with safety planning, vocational training, legal help, job and housing search. I create an excellent project plan and apply for a grant – once again from government, maybe another level, branch or department? But none is forthcoming. What do I do now? Just have the shelter be a conduit for the money the government gives me, bringing no value addition, where the same women keep coming back to the shelter to seek refuge because I have not offered them permanent solutions? What good will that do?

Now let’s imagine Goldman Sachs wants to invest in my shelter. Notice I used the word “invest” not donate. What would their return be?

Well they would get a good name for sure and the satisfaction (maybe?) that they are doing good. Now imagine they pose a challenge to my shelter to double the number of women moved to permanent housing, over the course of 1 year for an investment of $100,000 – just to keep the math simple. Say it costs $10,000 a month for 10 women at $1000 per woman per month. Now say the average stay at the shelter is 2 months. With programming I have cut the stay in half and doubled the shelter’s capacity now housing 120 women over 12 months where I had previously housed 60. In essence I have achieved a cost savings for the government of $120,000 by doubling the shelter’s capacity over the 12 month period. Now, the government will pay back Goldman its investment and the additional cost savings it achieved. The government and tax payer will get away without having assumed the risk of the investment and my shelter will have doubled its capacity and can now invite more investment from Goldman and others to repeat the feat and engage in more innovative programming that achieves similar cost savings! Of course if I had not achieved what I had set out to do and the status quo had continued then the government would have saved nothing and well Goldman would have lost its investment (partly or in whole and thus may have chosen to leave the money in till such time as things turned) and collected just a percentage of interest on its bond – nothing else.

I did not pick the Goldman name at random. It actually has recently invested 9 million into the Massachusetts Juvenile Justice Pay for Success Initiative which is helping Roca, a local nonprofit, do aggressive outreach, offer education, cognitive therapy and job training to young men involved in crime. Participants leave the two year program with a job, career plan and get two years of follow up. The state has the potential to save over $45000 per inmate per year. A dramatic drop in recidivism will mean a bumper for Goldman which will cash in on its investment. These vehicles have come to be known as Social Impact Bonds or SIBs. UK entrepreneur Ronald Cohen pioneered these SIBs through his firm Apax Partners. They have just taken root in the US and are also all the rage in Canada.

SIBs work if the causes can actually demonstrate calculable returns.

They get money for NPOs, taxpayers are off the hook for unsuccessful ventures and private capital gets to do good. Now what could possibly be wrong with that?

At MCIS we help refugees and immigrants who speak limited English/French move out of homeless shelters into permanent housing providing language services. There is an opportunity for a SIB investor right there.

Any takers?

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