Health Minister Jonathan Coleman says private investors in the mental health sector will not be able to cherry-pick clients or "fudge results" in order to get a return on their investment.
The Government has confirmed plans for New Zealand's first social bond, which will focus on job support within the mental health sector.
Dr Coleman defended the scheme against claims that it was gambling with New Zealand's most vulnerable people.
Until now there had been no sanctions or incentives in the mental health sector, he said. Because individuals, private companies or charities would be paid a return only if targets were met, there would be an incentive to provide high-quality services. "This will sharpen everyone's minds," Dr Coleman said.
Responding to concerns by the Labour Party, he said providers would not be able to avoid difficult, more expensive clients or play the system. "We get to set the contract and say, 'This is the group you're paid to work with'," he said.
The scheme allows the Government to contract out some social services to non-government organisations, with agreed targets and timeframes.
The services are provided with funding from investors, who may be individuals, banks or charities.
If the targets are reached, the Government pays the investors back, and also pays a return on their investment.
The finer details of the policy are still being worked out. It is not yet known which organisations could be involved, what the targets will be, or what the maximum returns could be.
Labour MP Annette King said the policy was a "disaster in the making" which treated vulnerable people as "guinea pigs". She pointed to independent advice to the Department of Internal Affairs from 2011, which said social bonds created significant risks and difficulties for both Government and investors.
New Zealand Initiative executive director Oliver Hartwich said social bonds could appeal to philanthropists such as Sir Stephen Tindall or to risk-averse investors such as pension funds.
He said social bonds removed the Government's monopoly on social services, reduced risks to the taxpayer, and encouraged better results.
The key to their success was setting clear targets and timeframes, Dr Hartwich said. While it was easy to set targets for services such as criminal reoffending, it was more difficult to help mentally ill people find jobs.
Social bonds have been tried in the US, Britain and Australia. Charities and banks invested in schemes such as prisoner reintegration for returns of up to 13 per cent a year.\
Social bonds: how they work
• Government contracts out some social services to NGOs, which are set strict targets and timeframes for the services.
• The provision of the services is funded by investors, who buy social bonds issued by the Government.
• If the targets are reached, the Government pays back the investors, plus a return on the investment (to a maximum amount).