Bonds with a social conscience - by Sarah Flood

This article first appeared on Public Finance

Social Impact Bonds could be one way of making more finance available for services and projects with measurable social outcomes

Graham Allen MP’s latest report on Early Intervention, published this week, highlighted the potential of a new method to attract finance to public service projects – Social Impact Bonds.

At their simplest, these bonds are a way of financing outcomes-based contracts – but the way in which they do that is new and innovative.

In basic terms an SIB works like this. A commissioner will be faced with a measurable positive outcome they want to increase or a negative outcome they want to decrease – say increasing the number of people taking regular exercise or reducing reoffending rates among a certain population.

A bond is launched which enables a range of investors to fund the delivery of a specific outcome, eg a 20% reduction in recidivism. That investment then funds programmes to tackle that problem (such as skills training, housing, adult literacy and alcohol and substance misuse treatment).

Assuming the programme is successful, the investors are repaid their funds plus an agreed return at the end of the contract period. This is based on the savings delivered to the commissioner due to not having to fund the prison costs that would have been incurred had that population continued to reoffend at historical rates.

Investors know the period of time that their money is going to be ’locked up’ for and they get to make a financial return whilst funding a social good (something we know private investors, pension funds and foundations etc are increasingly looking for in their portfolios).

Commissioners benefit by shifting risk to investors and providers – if outcomes aren’t met they don’t pay out. Service providers benefit from up-front investment; especially helpful for providers with good track record but who are capital poor.  And service users benefit from a properly financed, time-guaranteed programme of tailored support at a time when public sector budget strings are tightening.

Helping providers access capital means that a whole range of providers can play a role who might otherwise be excluded from the commissioning process; charities, social enterprises and voluntary organisations who are embedded in their communities and have a great deal of expertise to offer local health service and council commissioners but who find existing commissioning practices a barrier to winning contracts. By increasing the range and type of organisations able to get involved it creates greater choice for commissioners.

Proponents will say that SIBs offer an innovative way to tackle some of the huge social problems the country faces in a time of austerity.  SIBs also help to direct funding to preventative programmes and enable a new way of thinking that focuses on reducing future demand rather than dealing with current demand (as this week’s report set out.)

Those who are more circumspect argue that SIBs are yet to prove their value as a source of finance and that the public sector has already been burned by promises of ‘innovative new funding ideas that will solve all its problems’ in the form of PFI. There are also concerns about the impact of setting the wrong outcome targets which shift the problem between policy areas or create perverse incentives.

But new ideas always have to deal with the problem of proving their worth, which is why the Social Investment Business was an early supporter of a pilot being run by Social Finance with Peterborough Prison.  Funded by charities and social investors with an interest in development of SIBs,  the aim is to allay some fears by creating a successful real world example of how the model can work.

As for setting the right targets, that will rely on the skills and knowledge of commissioners who will really have to come into their own as experts in their fields, something which perhaps current processes don’t encourage. It will also require a more collaborative approach, where commissioners, investors and providers are working together to identify approaches that are going to be cost effective.

In the next 12 months we hope to see the launch of the first actual social impact bond launched to investors on the high street.  As the Peterborough pilot continues and new projects are launched the idea should become increasingly easy to understand – and attractive to new investors.  And of course more MPs, policy makers and commissioners willing to champion the idea in the public domain would be good to see too.