Public services can be short of funds and fail to produce the desired results. Social impact bonds can resolve both problems
What’s not to like about an initiative that helps the public sector to improve critical services while achieving better value for money for the taxpayer?
Social impact bonds are a relatively new form of funding, but they offer a radical way of redesigning and modernising services. In essence, they link an explicit requirement for improved results with a return for investors.
The contracts cover any public sector activity where better outcomes can be quantified and used as the basis of a payment-by-results scheme. All they need to get off the ground are a public sector commissioner, such as a council, NHS trust and Whitehall department, socially motivated investors and appropriate providers. A facilitator will have to draw up a performance management contract and an external organisation monitor the outcomes and act as the ‘accountable body’.
A number of schemes have been launched in recent years, with the UK seen as a pioneer. It’s too early to analyse their success as they are long-term in nature – but the anecdotal feedback has been extremely positive.
The UK’s first social impact bond was launched in 2010 to finance a rehabilitation programme at Peterborough Prison. Investors provided £5m and could receive £8m back if reoffending rates are reduced.
More recently, Essex County Council launched a £3m scheme aimed at improving outcomes for 100 adolescents who would, without intervention, enter the care system.
Significant expansion is forecast over the coming years. The First billion report, published in September 2012 by the Boston Consulting Group, showed that social investment in the UK could grow to £750m by 2015 and potentially £1bn by 2016.
Big Society Capital, a social investment bank created by the government in 2011, launched a £600m fund last year. In November 2012, ministers set aside a further £20m to back social impact bonds and other payment-by-results contracts. Social Finance, the organisation set up to create a social investment market, recently launched a £20m social impact venture fund for retail investors.
Banks and fund managers are starting to develop expertise in and exposure to impact investing. The only major issue is currently the small-scale nature of the market and lack of expertise, but this should be addressed as the number of projects increases.
As the market grows, other opportunities will become apparent. One possibility is that social impact bonds could provide local government pension funds with an investment outlet. They certainly offer acceptable returns and a more stable performance than some other investments.
Of course, social impact bonds cannot provide all the answers to the challenges facing the public sector, but they can make a significant contribution in many areas if public sector bodies are prepared to accept new ways of working and financing.
Brian Bailey is a non-executive director of Social Finance Ltd and of the social responsibility adviser Pensions Investment Research Consultants. He is a former finance and pension fund director
This article first appeared in the March edition of Public Finance
