June 27, 2011; Source: Boston Globe | Last year, the United Kingdom launched an experiment with so-called social impact bonds as a mechanism for attracting new financing to, and improving the performance of, social programs. The new financing is drawn from investors who will receive up to 60 percent return on investment if funded programs surpass their targeted performance goals. While the U.K. results aren’t in yet, the idea has blown quickly across the Atlantic and taken root: now the federal U.S. government, several states and municipalities are considering a similar “pay for success” experiment.

Massachusetts may become the first state to implement a social impact bond-style program. Officials there are already sifting through more than two-dozen responses from nonprofits to a “Request for Information” about how to tie government funding for service delivery to results. The number of responses shows the strong level of interest in the concept. As Joe Kriesberg, CEO of the Massachusetts Association of Community Development Corporations, indicates, “It’s good to try new things.”

Kriesberg also cautions, however, that this idea won’t “solve all the challenges and problems we have in funding serious social ills.” In fact, advocates for the approach take care to specify that social impact bonding is just one funding mechanism for social programs. George Overholser, co-founder of the Boston-based nonprofit investment bank Third Sector Capital Partners, says, “This is not about replacing government financing with private financing. It’s about shining a light on where investments could best be made.” He hopes that social impact bonds will showcase effective strategies for saving money or improving services, which can then be replicated.

In the case of the U.K. pilot, the goal for the $8 million program is to reduce recidivism among 3,000 petty criminals now in a single prison by 7.5 percent over six years. The 17 initial investors are mainly charitable foundations. Overholser projects that the initial mix of U.S. investors will be similar. In the U.K., the investors will get their initial funds back if the program meets its performance target, so they’re essentially betting that this will happen at a minimum. If not, the government won’t owe them anything. If the program beats its target goal, investors stand to receive a hefty return on their investment, proportionate to the cost savings achieved.

Massachusetts program designers haven’t yet decided if and how to involve private investors, and if and how to restructure contracts with nonprofits. This bears watching.—Kathi Jaworski