Mayor Michael Bloomberg to use Rikers Island as testing ground for private firms to help stop recidivism – and make a profit

This article is more than 8 years old

This article is more than 8 years old

New York's notorious Rikers Island jail would not immediately suggest an obvious source of lucrative profits for the banking industry. But investment giant Goldman Sachs is now hoping to make potentially millions of dollars by helping persuade the prison's inmates to turn over a new leaf.

The strange turn of events is the consequence of an announcement on Thursday by New York City mayor Michael Bloomberg that the facility is to be the testing ground for a controversial new source of funding for social projects called "social impact bonds".

The device, pioneered in Britain, will be the first of its kind for an American city and essentially taps private investors for funds to run projects that have normally been the concern of the state or non-profits.

If the projects run well, the investors can earn a healthy profit. If it fails to meet targets, then they get hit with a loss.

As such, Goldman has now shelled out a $9.6m loan that will pay for a new four-year scheme aimed at reducing re-offending among young prisoners released from Rikers.

It is structured so that if the scheme reduces recidivism by more than 10% it could make as much as $2.1m.

If, however, it falls short of that target, Goldman's losses could add up to as much as $2.4m.

"Helping young people who land in jail stay out of trouble when they return home is one of the most difficult, and most important, challenges we face … we are eager to see the outcome of this ground-breaking initiative," Bloomberg said in a statement announcing the plan.

His administration also called for "expressions of interest" from other investors keen to take on similar schemes.

Social impact bonds are now being considered by other American cities and arms of state government, including in Minnesota and Massachusetts.

Some American non-profit groups, such as Central City Concern in Portland, Oregon, have already got funding via philanthropic bonds.

The investment vehicles are fairly common in Europe and one of the most high-profile schemes is currently underway in the British city of Peterborough.

That programme began in 2010 and it too involved an attempt to reduce re-offending rates from people leaving detention. Its success is still being evaluated.

But the concept behind social impact bonds – essentially bringing in a profit motive into often sensitive areas of social policy – has critics.

Mark Rosenman, director of the Washington-based Caring to Change organisation, said he was sceptical about the idea of a market-based solution to difficult and complex social issues. "My general concern is that when you open a portion of the non-profit sector to the profit motive, we find that it displaces concern about solving public problems with a concern for private profit. You see that with the healthcare sector and higher education.

He added that a particular problem was how success and effectiveness was accurately measured in any social impact bond scheme.

"How do you develop a metric to measure success that fully reflects the public purpose of the project?" he asked.

In New York, the Goldman cash will be used to fund a programme called the Adolescent Behavorial Learning Experience (Able), which is part of the Young Men's Initiative working on Rikers Island.

Able is aimed at cutting the current poor state of youth recidivism in New York which sees some 50% of adolescents aged 16 to 18 who are released from detention return within a single year.

"There has never been a project on this scale delivered at Rikers before. It is a pioneering, transformative approach," said Christine Pahigian, executive director of Friends of Island Academy, a group which will help implement the project.