Nick DeLuca - Staff Writer
05/08/14 @ 1:01pm
Goldman Sachs is partnering up with a local non-profit to help keep Massachusetts' incarceration rate low. So lucrative is the partnership, in fact, that Goldman stands to gain as much as $1 million in profit if Roca – a Greater Boston Area organization dedicated to pulling young men and women out of impoverishment – keeps people from being thrown behind bars.
According to Bloomberg, each person Roca keeps from being jailed or imprisoned saves the state an eye-popping $12,400. You read that correctly: That's $12,400 per person."If it can close a 300-person facility and keep from expanding jail space," Bloomberg writes, "it could save $47,500 per person per year."
Goldman invested $9 million of a $21 million social-impact bond to benefit Roca. If Roca continues to help keeping people from turning into criminals, the amount of money saved by the state would line the pockets of investors. A 40-percent drop in incarceration equates to $22 million in repayments from the state. As the primary investor, Goldman will be first to see a return.
There's a flip side, though. If Roca proves to be ineffective, Goldman will lose almost the entire investment. But no matter what Goldman stands to gain five-percent annual interest on the loan.
Understandably, Goldman's involvement in public safety issues may raise a few eyebrows. After all, it's not the most genuine investment banking firm on Wall Street. Allegations of profiteering aren't necessarily in the wrong but to some, it's a show of communal support in a sector where any tier of governmental involvement is falling short. Investors see a return on their contribution, the state saves some money and public safety is widely improved.
Translation: In the end, everybody wins.
“Social impact bonds have potential upside for investors,” Said former New York City Mayor Michael Bloomberg back in 2012, “but citizens and taxpayers stand to be the biggest beneficiaries.”
Local venture capital firms in Massachusetts agree.
“This has political appeal, because it’s both socially progressive and fiscally conservative,” George Overholser, a former venture capitalist who founded Third Sector Capital Partners, told the Boston Globe in 2012. “That’s a real winner. People tend to love it on both sides of the aisle ...“There will be profits, yes, but always at a very modest level. The returns are well below the market rate, compared to the risk.”
Social impact bonds are quickly gaining steam worldwide. Bloomberg notes further that the industry is valued at about $40 billion and continues to gain support domestically. Both Ohio and Colorado are poised to their markets to $500 million, not at $80 million, by the next year alone. President Obama even included a $300 million provision in his 2015 budget proposal (see page 126).
Time for you to weight in, Boston. What do you think about Goldman Sachs's investment? Will it prove to be advantageous or detrimental? Let us know your thoughts in the comment section below.