Social Impact Bonds

You will hear a lot, locally and nationally, the next few months about Social Impact Bonds. Here is a quick guide to what they are, and the advantages and disadvantages.

Like so much innovation in fundraising, at the moment, organisations are advised to look carefully at the pros and cons of such models before investing too much time, energy and, in some cases, your own finances into them.

What is a Social Impact Bond?

A Social Impact Bond (SIB) is a funding stream given to an organisation, on condition that it achieves a certain result. SIBs first appeared in 2010 and are usually centred on high-level needs in society, e.g. homelessness, unemployment, drug and alcohol dependency. A bond is sold to private investors who are paid a return only if the associated social project succeeds in attaining a certain level of social result within a given period of time.

More specifically, capital provided by private investors is used by one or more service providers, to set up or finance activities that will bring about both positive social outcomes for the beneficiaries and reduce future public costs. These cost-savings are then shared by public authorities (sometimes referred to as the commissioner of the bond) with the original investors, who receive payment in the form of a return on their original capital investment.

Social impact bonds are a form of “pay for results” funding, because the repayment of the original investment, and/or payment of financial return, is dependent on the achievement of measurable social outcomes. If the service attains a certain goal (i.e. social outcomes improve), then at the end of the term of the bond, the original investment is repaid to the investors plus a financial return. This return may vary depending on the extent of the improved outcomes, with higher returns paid for better results.

BenefitsThere are advantages

  1. No funding or capital has to be found to invest in setting up such social interventions.
  2. The risk of failure is transferred from public authorities to private investors.
  3. And no additional funds are needed to pay the return, since if the goal is met, public savings generated by the social result will be greater than the promised investment return.
  4. More funds are available for prevention and early intervention services.
  5. The SIB approach requires close scrutiny, so that investors can maximise their return, so evaluation is embedded from the outset and is rigorous.
  6. Government funds “what works”; thus repositioning government spending to cost-effective preventive programs.

One of the most popular and successful example in the UK has been that of a pilot project at Peterborough Prison in 2010:

Organisations, as well as individuals, investing £5 million to pay a range of “third sector organisations” to prepare rehabilitation programmes and help approximately 3,000 male prisoners serving sentences of less than 12 months. Previously there was no such programme for these short-term prisoners.

The aim was that after six years, the One Service (as it was called) would successfully reduce re-offending by more than 7.5%; investors would receive their investment back, plus a return based on the proportion of the cost of re-offending. Total payment was capped at £8 million. If the intervention was not successful, investors would receive nothing. Payments of the investment return would be made out of savings in the cost of prosecuting and jailing re-offenders.

Last year, the Bond was repaid to investors in full with 3% interest, however, it was also abandoned, and finished a year early, when the Government launched its own programme Transforming Rehabilitation, which has been less successful.

Criticisms

  1. Administration — SIBs can be seen as bureaucratic and complex.
  2. Criteria for success — donors will seek to fund that which can be observed and measured, the outcomes (not just the outputs). This will leave agencies addressing the huge structural problems in society unable to access these funds. This is going to be particularly true for advocacy, arts and alternative organizations.
  3. It will be difficult for social coalitions to get funding, as their contributions are dispersed through member organisations and the effect they have on government policies, for example.
  4. SIBs may favour certain goals that will offer a higher chance of success to investors (making the benefits of innovation less significant)
  5. Investor influence — donors, or now investors, will want to make sure their money is being used according to contract, and will therefore want to be more involved in the delivery of social services.
  6. Unfair competition — among voluntary groups will emerge. Agencies that secure funds will be able to operate in areas where NGOs now operate, but they will have greater resources, more narrowly defined goals (and therefore successes to publicise) and will set the standard for government-funded agencies and their actions.
  7. Reduces public responsibility — by reducing the Government’s responsibilities and accountability for delivering services.

There has, for example, been much criticism of SIBs in homelessness charities — that they have not worked to help, equally, all those sleeping rough, and have forced solutions on certain groups of rough sleepers.

What this means for local groups already working with young people and NEETs is that there are monies out there, but that you may be asked to work in a specific way to meet the outcomes. And you may be asked for lots of monitoring and evaluation data.