I spent time yesterday at an interesting seminar on, among other things, social impact bonds.
Never heard of them? Fear not, here’s a simple guide.
Think about this problem:
The government is very happy to fund social sector organisations to deliver the outcomes it wants. That’s particularly so if organisations guarantee to bring measurable results in problem areas that currently represent high cost to society. But it’s very unhappy about committing its money, and its political reputation, to failures. Innovation is risky. It’s difficult for elected politicians to finance from the public purse.
Non-profit organisations are close to their clients, and have a good sense of what will really make a difference. If they could innovate, they could achieve even better results for their clients and wider society. They would have a very good chance of delivering the outcomes government wants, and more. But they operate on tight budgets. In particular, they don’t have access to growth capital – the funding to invest in development and innovation.
Deadlock and frustration. Social entrepreneurs could tackle some of society’s more intractable problems in creative and inventive ways. Governments would really appreciate that. But they can’t cope with risk.
Imagine if there were such a thing as social investors. That is, people and organisations with money to invest and whose hope of return would be a mix of financial and social reward. They are happy to take risks, because they know that’s the best way of achieving meaningful, lasting change. They like the idea of funding innovative projects that bring a social benefit. They don’t mind funding some failures, because they know business needs failures. Just so long as, ultimately and over time, the successes, measured in both social and financial terms, compensate for the losses.
Could that break the stalemate?
Yes, says Social Finance, the promoters of social impact bonds. This cunning idea, which aren’t bonds in a financial sense at all (but someone liked the name), is constructed so that:
- Governments agree to pay a return to investors if, and only if, certain desired and significant outcomes are reached. No outcomes delivered, no public funding.
- Service providers get a significant chunk of growth capital, which they use to develop and innovate, achieving outcomes that were previously impossible because of restricted budgets. They do this at no financial risk to the organisations. The growth capital is for them to use on services to achieve the outcomes. They don’t have to pay it back or attempt to engineer a financial return on it.
- Social investors take the risk, and stand to get their money back with interest from the government if the outcomes are met. If the service providers do not manage to bring the hoped-for outcomes, the investors don’t get their financial return – but still have the return of having funded innovation in socially desirable outcomes.
If all that’s a bit theoretical, there is now a practical, real life example – a trial announced by Social Finance last month.
The first social impact bond is with the Ministry of Justice in an attempt to reduce reoffending rates of short sentence male prisoners leaving Peterborough Prison.
Of the 40,200 adults on short term sentences, an estimated 60 per cent will go on to reoffend within a year of release. Reducing that rate could produce significant benefit to the taxpayer and society.
The social impact bond will fund social organisations, such as St Giles Trust, to provide intensive support to 3,000 short-term prisoners over the next six years, both inside prison and after release, to help them resettle into the community. If the initiative reduces reoffending by 7.5 per cent or more, investors will receive payments from the Ministry of Justice. The greater the drop in reoffending achieved, the higher the return to investors, up to a maximum of 13 per cent.
What’s not to like? Each of the partners does what they are good at. The risk is located with people who are happy with it. The service providers get to show how growth capital can be used to tackle underlying causes, rather than wasting short-term revenue funding on crisis interventions.
Social Finance‘s Eleanor Stringer, who presented the seminar, stresses that the issues are pretty complex. Potential projects need to be carefully selected, and the contractual details painstakingly negotiated. At the moment it only makes sense with an area such as reoffending, where the potential return on high investment in preventative work is likely to be clear and tangible reductions in actual public spending.
The social investment seminar was organised by the Ethical Enterprise and Employment (3xE) Network and Social Enterprise East Midlands. It included a useful session on measuring social impact by Camilla Nevill, senior analyst in New Philanthropy Capital’s research team. Plenty more stuff on social investments and research tools on their websites.
