Social impact bonds

Introduction

Social Impact Bonds (SIBs) are designed to attract private investors to fund public service programmes (interventions). Under SIBs, commissioners (for example, councils) pay investors, not providers, only as and when specified outcomes are delivered. These outcomes will reduce demand for higher cost interventions, such as children needing residential care.

To attract investors, there needs to be robust evidence that the interventions will achieve savings through the specified outcomes. There also needs to be clarity on how the outcomes will be assessed and measured (including which specific population sub-groups are involved).

The ‘fidelity' of the implementation of the interventions (that is, sticking to the approach tested in the evidence base) is key to ensuring anticipated benefits are delivered in practice. In the USA, specific social enterprises have been created to deliver evidence-based programmes at a given price.

Many of the outcomes in SIBs will impact and be impacted upon by the activities of various agencies. There is a strong case for relevant agencies to be joint commissioners of the approach.

Examples of interventions which commissioners might wish to invest in

These could include the following (along with illustrative areas where potential savings in future public expenditure could be realised):

• Family Nurse Partnerships which show strong evidence of improvements around conduct disorders, reductions in teenage pregnancies, reductions in crime and anti-social behaviours, and improved mental health for parents.
• Functional Family Therapy which can evidence reductions in child abuse and non-accidental injuries, reduced hyperactive behaviour and conduct problems, reductions in domestic violence, in crime and anti-social behaviour.
• Incredible Years is a parenting programme which can evidence reductions in A&E attendance, reductions in domestic violence, increased participation in education, employment and training.

Examples of existing work around social impact bonds

• The Ministry of Justice has the first SIB scheme at Peterborough Prison based on reducing re-offending rates for 3,000 ex-offenders. This £5 million bond was established in 2009 with social equity firm Social Finance with a seven year time frame.
• Manchester, Liverpool and Essex councils are working with Social Finance to create a social impact bond to fund services for vulnerable children, young people and their families. The desired outcome is to reduce the number of 10-15 year olds going into care.

Risks

There are several important risks, both for commissioners, investors and providers, which need to be addressed in any SIB proposal:

• For commissioners: these include the risk of perverse incentives, statutory responsibilities, ensuring value for money, cashable benefits realisation, clarity on outcomes and the verification of their link to agreed funded activities.
• Where there are multiple commissioners and beneficiaries, as is the case for families with complex needs, there needs to be a mechanism to get agreement at local and national level on the payment criteria. This would be much easier if Whitehall could find a way of pooling their funding at a local level (for example, a single payment to each geographic area).
• For investors issues include political risk (in dealing with the public sector), raising capital, contingent liabilities, taxation of returns, measuring outcomes, and the time lag before returns are paid.
• For providers issues include risk management, capacity levels to deliver significantly higher activity, and the use of outcomes-based contracting.

In what situations are Social Impact Bonds feasible?

Social Finance has concluded that SIBs are feasible where:

• they address a social problem that has high costs for the public sector and can be measured
• the costs are such that, if avoided, they will reduce the public sector's expenditure
• it is possible to identify the individuals that could benefit from the services funded by Social Impact Bond investment
• interventions that would deliver improved social outcomes are known and
• the interventions cost substantially less than the public sector savings that would result from improved social outcomes.

The Social Finance Market

There is an emerging market for social finance for social ventures. The Government has recently set out its commitment to accelerate the growth of this market.

The market size remains relatively small at £190 million, compared to the approximate annual philanthropic grant giving of £3,600 milion, individual giving of £13,100 million and wider bank lending of £55,300 million.

Examples of potential investors include:

• Charities and foundations
• Individual (retail) investors and ‘high net worth individuals'
• Corporate institutions (eg corporate social responsibility programmes)
• Financial institutions (a range of products such as Ethical ISAs and Bonds)
• The Big Society Bank (a new wholesale investor to social finance intermediaries)
• Public sector
• European Investment Bank
• Community development finance institutions (where investors in social enterprises and community projects benefit from tax relief opportunities).

Birmingham and three other councils are currently conducting a detailed feasibility study on the use of SIBs around families with complex needs. The results are anticipated in early 2012.