Next Billion Interviews Rick Edwards for Impact Investing Insights series

The following is excerpted from Next Billion's Impact Investing Insights series. You can watch Rick's interview here.

Goldman Sachs recently made headlines by investing in Roca, a Massachusetts nonprofit that tries to keep young men out of jail. The investment was notable not just because Goldman was focusing on social impact, but because it also hopes to make a profit. Under the seven-year deal, Roca will try to help 1,000 young men - and if they spend 22 percent fewer days incarcerated than their peers, the state will save enough to pay back Goldman’s $9 million loan. A larger drop in recidivism will earn it up to $1 million in profit. (On the other hand, if Roca's interventions prove ineffective at keeping men out of jail and prison, the bank will lose almost everything it invested.)

Goldman Sachs' investment is part of the largest social impact bond or "pay-for-success" effort launched to date in the United States. Pioneered in the United Kingdom, the approach is billed as a way for governments to finance social services during a time of tight budgets. If successful, it could be a prime example of the oft-cited "win-win-win" scenario, bringing benefits to government, investors and service providers, and the public - especially those directly impacted by the social services.

To prepare itself to be a successful candidate for social impact bond/pay for success opportunities, Roca had worked extensively with Third Sector Capital Partners, which describes itself as the leading non-profit advisory firm that's advancing the mission of performance social sectors in America. Rick Edwards is a partner at the organization, and he spoke with NextBillion Financial Innovation at the recent Sustainatopia conference.

"Pay for success is changing the way governments procure their social services around this country," he said. "Historically, there have always been what we call cost reimbursement contracts between the government and a social service provider. They tend to pay based on hours, or input, or how many people are treated going into a project or program. What we are doing is converting the mentality of arranging those procurement contracts to what we call outcomes - where the government contracts with that same social service provider, but only pays them based upon measurable outcomes that they achieve, and that are validated.