With increasing demand on limited public resources, national and local governments are recognizing the need for a new approach to social services that emphasizes the identification of effective, innovative ideas. However, a lack of available funding and the reluctance to take on the risk that a promising, but unproven, idea might fail have created obstacles to this new approach. The social impact bond model is designed to eliminate these obstacles.

1. WHITE PAPER
SOCIAL IMPACT BONDS
FEBRUARY 3, 2014
Presented by: Alethia Nancoo and Caroline Billet
© 2014 Patton Boggs LLP. All rights reserved.
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of Patton Boggs LLP

2. WHAT IS A SOCIAL IMPACT BOND?
With increasing demand on limited public resources, national and local governments are recognizing the need
for a new approach to social services that emphasizes the identification of effective, innovative ideas.
However, a lack of available funding and the unwillingness to risk that a promising, but untested, idea might
fail have created obstacles to this new approach. The social impact bond model is designed to eliminate these
obstacles.
Social Impact Bonds (“SIB”) are not bonds in the traditional sense, but rather pay-for-performance contracts,
through which private capital finances innovative social programs otherwise funded by governments and
charities. Investors receive a return on their investment if the program saves public funds by addressing the
social condition it seeks to improve.
Unlike traditional bonds that generally provide a guaranteed rate of return, the return to investors in a SIB
transaction is entirely contingent upon the achievement of a specified social outcome. In terms of investment
risk, SIBs are similar to equity investments. However, a SIB is not a financial instrument that can be bought
and sold, but rather a contractual relationship between the government and an external organization to
arrange and manage social intervention programs in pursuit of a defined outcome. If the external organization
achieves that outcome, the government pays out an agreed upon return. If the desired outcome is not
achieved, the government makes no payment.
The concept of SIBs originated in the United Kingdom, where the first SIB was launched in 2010 to reduce
recidivism among the population of short term, nonviolent men incarcerated at Peterborough Prison. Efforts
to implement SIBs within the United States are gaining momentum. In August 2012, the City of New York
announced the implementation of the first SIB in the United States (the “NYC SIB”) aimed at reducing
recidivism among 16 to 18-year-old adolescents imprisoned in the Rikers Island complex. In 2013, the State
of Utah implemented a SIB (the “Utah SIB”) to expand the availability of high-quality early childhood
education. Goldman Sachs has served as the lead investor in both financing efforts, contributing $9.6 million
and $4.6 million to the City of New York and the State of Utah respectively. Most recently, the State of New
York announced the development of another SIB (the “New York State SIB”) aimed at reducing recidivism
rates among New York state prisoners. Bank of America Merrill Lynch will contribute $13.5 million, raised
from more than 40 private and institutional clients, to fund this endeavor.
THE STRUCTURE OF SOCIAL IMPACT BONDS
Although the structure of SIB transactions can vary significantly, they are likely to include the following
entities: (1) a government or governmental agency; (2) an external organization or intermediary; (3) investors;
(4) service providers; and (5) an independent evaluator.
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3. The government or governmental agency typically initiates the SIB transaction. The government or
governmental agency defines the targeted outcome, population and duration of the transaction and will
provide payment if the defined outcome is achieved.
The external organization or intermediary operates as the counterparty to the SIB contract with the
government or governmental agency. The external organization or intermediary can be a nonprofit or a forprofit entity and may be tasked with hiring and administering service providers, raising working capital from
investors, and managing overall progress.
The investors provide the working capital necessary to fund the social programs or interventions
implemented to achieve the outcome. If the program is successful and the predetermined outcome is
achieved, the external organization or intermediary repays investors with a rate of return negotiated by the
parties.
The service providers are hired and managed by the external organization or intermediary to implement the
intervention program. Generally, service providers receive direct funds from the external organization or
intermediary to provide the working capital contributed by the investors.
The independent evaluator certifies the achievement of the outcome using a methodology approved by the
parties. The independent evaluator notifies the government or governmental agency if the predetermined
outcome has been achieved. The government or governmental agency then releases performance based
payments to the external organization or intermediary which then transfers these payments to the investors.
APPLICATION OF THE SOCIAL IMPACT BOND STRUCTURE
The NYC SIB serves as an example of the successful implementation of the structure delineated above. As
stated, the City of New York launched the NYC SIB to reduce recidivism among the population of 16 to 18year-old men incarcerated in the Rikers Island complex. The NYC SIB involves a series of interrelated
contracts among the following parties:
 The City of New York (government or governmental agency)
 The Mayor’s Office initiated the NYC SIB, coordinating each of the city entities involved to
structure the contracts and negotiate their terms.
 The Department of Corrections (“DOC”) will repay the investors and provide an additional
return on investment based on the reduction in recidivism and associated cost savings.
 The Manpower Demonstration Research Corporation (“MDRC”) (external organization or
intermediary) identified the cognitive behavioral therapy intervention program and negotiated the terms
of the transaction. Additionally, MDRC oversees the implementation of the intervention program.
 The Urban Investment Group of Goldman Sachs Bank USA (“Goldman Sachs”) (investor)
provided a $9.6 million loan to MDRC to implement the intervention program that provides cognitive
behavioral therapy services for 16 to 18-year-old adolescents in the Rikers Island complex.
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4.  Bloomberg Philanthropies, a philanthropic investor, provided a $7.2 million grant that will partially
guarantee the Goldman Sachs investment if the program fails. If the program is successful, the grant will
be used to support future projects. Bloomberg Philanthropies also provided a separate grant to fund
MDRC’s costs.
 The Osborne Association and Friends of Island Academy (service providers), the nonprofit service
providers, administer the cognitive behavioral therapy intervention services which are the centerpiece of
the intervention program.
 The Vera Institute of Justice (independent evaluator) will verify that the project has achieved the
intended reductions in recidivism and determine if payment is warranted pursuant to the terms of the
transaction.
The chart below demonstrates the interaction between the parties involved in the NYC SIB transaction and
the flow of funds and services among these interrelated parties.
INVESTORS
Goldman Sachs
(commercial lender)
$9.6 Million Loan
$7.2 Mil. Guarantee
Bloomberg Philanthropies
(philanthropic guarantor)
GOVERNMENT
INTERMEDIARY
Loan Principal +
ROI
Success Payments
Based on Savings
New York City
Department of Corrections
MDRC
Grant for MDRC’s
Costs
$9.6 Million Investment
from Goldman Sachs
SERVICE PROVIDERS
The Osborne Association
Friends of Island Academy
Decrease in
Recidivism and
Budget Savings
Cognitive Behavioral
Therapy Intervention
Services
INDEPENDENT EVALUATOR
The Vera Institute of Justice
BENEFICIARY POPULATION
Evaluation of
Outcome
16 to 18-Year Old
Adolescents in the Rikers
Island Complex
This chart and the information within this section have been reproduced from information contained in Timothy Rudd et al. Financing
Promising Evidence-Based Programs Early Lessons from the New York City Social Impact Bond, MDRC (December 2013), available at
http://www.mdrc.org/sites/default/files/Financing_ Promising_evidence-Based_Programs_FR.pdf.
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5. The transaction between the parties to the NYC SIB is premised on the expectation that the investment will
result in a minimum 10 percent decrease in the recidivism rate of the target population by 2016. A 10 percent
reduction in recidivism will result in the full repayment of the principal investment made by Goldman Sachs
by July 2017. If the recidivism rate of the target population is reduced in excess of 10 percent, further net
projected taxpayer savings will be realized resulting in higher returns to Goldman Sachs.
THE DEVELOPMENT OF SOCIAL IMPACT BOND TRANSACTIONS WITHIN THE UNITED STATES
Both the State of Utah and the State of New York have adopted the same basic structure employed in the
NYC SIB, with some modification.
To fund the early childhood education program in Utah, Goldman Sachs provided an initial investment of
$4.6 million. Although Goldman Sachs will not receive the added security of a guarantee in this transaction,
J.B. Pritzker, an individual entrepreneur and philanthropist, has contributed an additional $2.4 million
investment in the form of a subordinated loan, reducing the risk to Goldman Sachs in the event the program
is deemed ineffective.
The New York State SIB, implemented to reduce recidivism among New York state prisoners, features
investment in the form of a fund managed by Bank of America Merrill Lynch. Through this fund, Bank of
America Merrill Lynch will contribute $13.5 million towards the New York State SIB, raised from more than
40 private and institutional clients. The Rockefeller Foundation will provide a $1.32 million guarantee,
ensuring that investors will receive at least 10% of their principal investment in the event the program is
deemed ineffective.
USING SIBS TO ENHANCE SOCIAL WELFARE
The entry of Goldman Sachs and Bank of America Merrill Lynch into the SIB market has prompted
competitors to take notice of low risk investment opportunities that offer both a reasonable rate of return
and a boost to public image. Increasingly, private investors are demanding double-bottom line returns which
provide both financial returns on investments and quantifiable social impact. To address investor demand
for social impact investments, Goldman Sachs has launched a $250 million social impact fund aimed at
creating investment returns linked to the success of projects in early-childhood education, affordable housing,
and reduced prisoner recidivism rates. Morgan Stanley has also announced the creation of the Morgan Stanley
Institute for Sustainable Investing with the goal of attracting $10 billion of client funds in the next five years
for projects aimed at achieving these double-bottom line returns. The participation of these leading investors
will likely draw their competitors into the social impact investment market and will dramatically increase
available funds from which governmental entities can seek financing for innovative social programs.
As municipalities face increased budgetary constraints, SIBs can provide the necessary financing to implement
innovative social programs aimed at enhancing social welfare while transferring the risk of investment in
ineffective programs to the private sector.
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6. PATTON BOGGS LLP
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roots in the political arena. The firm’s core practice areas are government relations and lobbying,
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attorneys, visit www.pattonboggs.com.
For more information about social impact bonds, please contact our Patton Boggs LLP team:
ALETHIA NANCOO
ALPHONSO (AL) TINDALL, JR.
SANI A. WILLIAMS
Partner
Washington DC
T: 202-457-6346
anancoo@pattonboggs.com
Partner
New York
T: 646-557-5150
atindall@pattonboggs.com
Of Counsel
New York
T: 646-557-5125
swilliams@pattonboggs.com
CAROLINE BILLET
ZACHARY NOVETSKY
Associate
New York
T: 646-557-5132
cbillet@pattonboggs.com
Associate
New York
T: 646-557-5145
znovetsky@pattonboggs.com
Sources:
1. Kristina Costa, Frequently Asked Questions: Social Impact Bonds, The Center for American Progress (Dec. 5, 2012), available at
http://www.americanprogress.org/wp-content/uploads/2012/12/FAQSocialImpactBonds-1.pdf;
2. Sonal Shah, Social Finance: A Primer—Understanding Innovation Funds, Impact Bonds, and Impact Investing, The Center For American Progress
(Nov. 5, 2010), http://www.americanprogress.org/wp-content/uploads/2013/11/SocialFinance-brief.pdf.;
3. FACT SHEET: The Utah High Quality Preschool Program, GoldmanSachs.com (Jan. 14, 2013, 2:44 p.m.), http://www.goldmansachs.com/whatwe-do/investing-and-lending/urban-investments/case-studies/impact-bond-slc-multimedia/fact-sheet-pdf.pdf.;
4. Jeffrey Liebman and Alina Sellman, Social Impact Bonds: A Guide for State and Local Governments, The Harvard Kennedy School Social Impact
Bond Technical Assistance Lab (June 2013), available at http://www.ct.gov/dcf/lib/dcf/ socialimpactbonds/pdf/social-impact-bonds-a-guide-forstate-and-local-governments1.pdf.; and
5. Timothy Rudd, Financing Promising Evidence-Based Programs Early Lessons from the New York City Social Impact Bond, MDRC (December
2013), http://www.mdrc.org/sites/default/files/Financing_ Promising_evidence-Based_Programs_FR.pdf.
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