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A Good Idea
Putting The Profit Motive Behind Social Work

Merrill Lynch has just announced a partnership with New York State on a social impact bond aimed at decreasing recidivism for inmates released New York’s prisons. As Social Finance, the nonprofit associated with this venture writes in its press release announcing the project, Merrill Lynch and a group of other investors have pledged to invest in the Center for Employment Opportunities to cover the upfront costs of preparing 2,000 inmates for work outside prison:

This transaction provides CEO with a flexible, predictable source of funding to expand their program, provide investors with an opportunity to align their investment portfolio and social values, and ensure that government only pays for positive results. Most importantly, 2,000 individuals will receive the help they need to have a shot at a better life.

Under this pay-for-success partnership, the public, private and social sectors have come together to achieve a common goal – increasing employment and improving public safety in New York – in a structure and distribution model that we believe represents a significant step toward building a more robust, sustainable SIB marketplace.

Essentially, these social impact bonds work by allowing governments and financial institutions to split the risk of funding innovative social programs. First, investors put up the money for these programs to get started. If they can demonstrate their effectiveness, the government steps in and reimburses the investors for their commitments. If they don’t, the investors take a loss, and taxpayers will not be left on the hook for a failed program.

We wrote about the launch of the first one of these programs over a year ago, and we noted then that the usual suspects were wringing their hands about mixing a profit motive in with social work. Though it’s too early to tell how that initial program is faring, our counter-argument remains the same: Even if the programs ultimately fail, it’s better to creatively finance experimental approaches than to stick with what we’re doing already. Because what we’re doing now clearly isn’t working.

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