New Horizons for Philanthropy: Paying for Success
By Donald K. Jonas, Ph.D.
We often think of philanthropy as living on its own separate island. It exists outside of the business world and is distinct from the public sector. When the free market leaves a void or where government fears to tread, in steps philanthropy with a solution.
From funding new homeless shelters, building new college dorms, keeping the lights on at a soup kitchen or purchasing medications for a health care clinic, we have been programmed to think of philanthropy as an isolated transaction between a donor and a nonprofit.
Roles and expectations are clear. The nonprofit looks at unaddressed needs and creates a plan to fill the gaps. The nonprofit builds a case for support, hits the pavement asking potential donors for support, then stays awake at night praying a donor agrees to give.
But a new kind of philanthropic investment strategy – known as a Social Impact Bond (SIB)– has the potential to dramatically change how we conduct philanthropy in America. While theoretically appealing and potentially groundbreaking, SIBs are also new and unproven.
The breakthrough idea with SIBs is that they create a way for private investors, nonprofit providers and the public sector to come together to dramatically scale up social innovations.
Think of a Social Impact Bond less like a traditional bond but more like a contract between three parties: private investors, a nonprofit agency, and government.
In a simplified version, a private investor becomes aware of a nonprofit making a difference in a community. The nonprofit is achieving great results, saving local government taxpayer dollars that would otherwise require public funding.
The nonprofit agency may be making a big difference, but the scale of impact may be relatively small.
So rather than make a traditional gift to the nonprofit to either maintain current operations or modestly grow their outreach, what if the private investor partnered with the nonprofit and local government to dramatically scale up the impact to reach a substantially larger population?
This is where Social Impact Bonds and an emerging movement to “Pay-For-Success” steps in. Very recently, in a few markets around the country, pioneers are testing this new model. From early childhood education expansion in Utah, to adolescent incarceration innovations in New York City, a grand experiment to dramatically scale up what we know works in philanthropy is taking place.
In the New York City example, Goldman Sachs is investing nearly $10 million over a four-year period to help grow an evidenced-based behavioral learning intervention for 16-18 year olds with a high likelihood of re-entering jail after incarceration. Goldman’s loan goes to a local nonprofit providing this new treatment for youth. The Bloomberg Philanthropies is making a significant investment in the local nonprofit as well, and these funds will serve as a guarantee fund to back Goldman’s loan.
The public sector has a critical role to play in this partnership. The Department of Corrections in New York City will be obligated to pay for services provided by the nonprofit only if the program achieves predetermined targets that reduce costs to the city.
In essence, New York City, and all of her taxpayers, will only pay for this program if it is successful. If the program works, the DOC will pay the nonprofit for their performance, and the nonprofit will then pay back its lenders for their investment.
The flip side is that this is an investment that does not come without risk to investors. If the nonprofit does not achieve its targets and does not save taxpayer dollars, then the private investors would not see a return on their investment.
If the nonprofit does not hit its marks, the financial contribution would become more a like a traditional philanthropic gift, written off as a charitable donation.
The new world of SIBs and “pay-for-success” models is by no means a sure winner. There are not-insignificant philosophical issues that need deeper discussion. Is it good for philanthropy to embrace a model which rewards risky private financial investments which hold the potential to provide a “return” for assisting with humanitarian needs?
There are also key questions needing refinement and further discussion.
- Which local innovations are potentially best served by a SIB approach?
- What kind of nonprofit agencies are uniquely positioned to benefit from this model?
- Will more government agencies be interested in stepping beyond their core and critical role as public sector servants of public dollars in order to explore and test alternative strategies?
Most importantly, will SIB’s and these new “pay-for-success” models work? We have yet to see a SIB investment move from theory to implementation to analysis, so we do not yet have reliable data or the benefit of time to assess their utility and viability across multiple issue areas or in divergent markets.
But if SIBs succeed in scaling up successful social sector interventions, we may look back at this time in the evolution of philanthropy in America with awe. This new approach could herald a new way to improve lives and transform communities.
About the Author: Donald K. Jonas, Ph.D. is Executive Director of Care Ring. He previously served as Executive Director of the Presbyterian Healthcare Foundation and before that was Senior Vice-President, Community Philanthropy at Foundation For The Carolinas. Don has authored or co-authored numerous books, monographs, and articles on a variety of topics, including the aging of our labor force and the future of America’s health care system.