2012 Pay-for-Performance Social Investing
In 2010, a new method of solving social problems was proposed in Britain. It called for putting up philanthropic or private investment funds to create programs that could head off bad future outcomes that would carry social costs. If the interventions were successful in avoiding future problems, then some of the public money that consequently didn’t have to be spent on things like law enforcement or welfare programs would be shared with the program funders. This is called “pay-for-performance” social investing (or sometimes described misleadingly as a “social-impact bond”). If proven and refined over time, this could become a way for not only donors but also for-profit investors to apply the power of capitalism to the amelioration of social problems in efficient ways.
Not long after the debut of this idea in Britain, American social entrepreneurs and philanthropists imported it to the U.S. and began much more extensive testing of the concept. In 2012, Goldman Sachs put up $10 million to offer nonprofit services to New York City juvenile delinquents exiting Rikers Island prison, aiming to avoid future lockups by offering them help in finishing their education, finding jobs, and managing their lives. Bloomberg Philanthropies provided a financial guarantee of the invested funds.
While that project was not successful, other pay-for-performance experiments are currently being set up around the U.S. These include a Utah effort, using money from United Way of Salt Lake, Goldman Sachs, and philanthropist J. B. Pritzker to reduce spending on special-ed and other remedial schooling later in life by educating children in high-quality preschools. It was the first pay-for-performance test to pay off for its investors, though there is disagreement on how successful it was because the effort failed to include a control group against whom outcomes could be compared. There are efforts in Massachusetts to get chronically homeless individuals off the street, and to reduce recidivism among young released convicts. In California, the James Irvine Foundation and REDF (see 1997 entry) joined in an effort to reduce joblessness, and another pilot was launched to try to cut the social costs of treating children with asthma by managing the problem earlier. In 2014, 15 states were in the process of testing pay-for-performance ventures in collaboration with philanthropists and corporate social investors.
- Social-impact-bond activity, socialfinanceus.org/social-impact-financing/social-impact-bonds/history-sib-market/united-states