Social impact bond

A Social Impact Bond, also known as a Pay for Success Bond, is a contract with the public sector in which a commitment is made to pay for improved social outcomes that result in public sector savings. The expected public sector savings are used as a basis for raising investment for prevention and early intervention services that improve social outcomes.

Social Impact Bonds are not bonds in the conventional sense. While they operate over a fixed period of time, they do not offer a fixed rate of return. Repayment to investors is contingent upon specified social outcomes being achieved and therefore in terms of investment risk Social Impact Bonds are more similar to that of an equity investment.

In the UK, the first Social Impact Bond run by Social Finance was announced on 18 March 2010 by then Justice Secretary Jack Straw.

In the US, Social Impact Bonds have been called Pay for Success Bonds. A report from the Center for American Progress (released in February 2011) analyzes their potential.

History

The idea of the Social Impact Bond has been promoted and developed by a number of agencies and individuals in an attempt to address the paradox that investing in prevention of social and health problems saves the public sector money, but that it is currently difficult for public bodies to find the funds and incentives to do so.

In the UK the Prime Minister’s Council on Social Action (a group of ‘innovators from every sector’ brought together to ‘generate ideas and initiatives through which Government and other key stakeholders can catalyse, celebrate and develop social action’) was asked in 2007 to explore alternative models for financing social action. The group began to develop the idea of a Social Impact Bond, and the work is being taken forward by a number of organisations including Social Finance, an organization committed to increasing investment in the third sector, the Young Foundation, the Center for Social Impact in Australia, other NGOs and private firms.

The idea of a Social Impact Bond has generated significant interest from across the political spectrum in the UK.

Social Impact Bonds have also generated interest in the United States. In January, 2011 Social Finance announced a Boston, Massachusetts based sister organization to offer Social Impact Bonds in the U.S. In February 2010, Barack Obama’s proposed 2012 budget stated that up to $100m would be freed up to run Social Impact Bond pilot schemes.

Definitions

There are a range of interpretations of what the term ‘Social Impact Bond’ means. For example, Social Finance describes Social Impact Bonds as:

‘Social Impact Bonds are based on a commitment from government to use a proportion of the savings that result from improved social outcomes to reward non-government investors that fund the early intervention activities.’

The Young Foundation describes Social Impact Bonds as:

‘a range of financial assets that entail raising money from third parties and making repayments according to the social impacts achieved.'

Social Finance therefore specifies that the investment is from non-government bodies, whereas the Young Foundation envisages that public bodies could be potential investors.

Benefits of social impact bonds

The benefits of Social Impact Bonds depends on the definition being used, but the broad benefits are that:

• More funds are available for prevention and early intervention services.
• The public sector only has to pay for effective services; the third party investor bears all the risk of services being potentially ineffective.
• Investors and servicers have an incentive to be as effective as possible, because the larger impact they have on the outcome, the larger the repayment they will receive.
• The Social Impact Bond approach imbeds vigorous ongoing evaluation of program impacts into program operations, accelerating the rate of learning about which approaches work and which do not.

Pilots

The Government has continued to remain interested in the idea of Social Impact Bonds, and in December 2009 it published the white paper ‘Putting the Frontline First: Smarter Government’, which stated ‘We will pilot Social Impact Bonds as a new way of funding the third sector to provide services.’

Re-offending

Social Finance has been examining how Social Impact Bonds could work in practice in the UK by, for example, raising non-government investment for services to prevent re-offending.

On 18 March 2010, Secretary of State for Justice Jack Straw announced a six-year Social Impact Bond (SIB) pilot scheme run by Social Finance that will see around 3,000 short term prisoners from Peterborough prison, serving less than 12 months, receiving intensive interventions both in prison and in the community. Funding from investors outside government will be initially used to pay for the services, which will be delivered by Third Sector providers with a proven track record of working with offenders. If reoffending is not reduced by at least 7.5% the investors will receive no recompense.

The Social Impact Bond in Peterborough was launched by Secretary of State for Justice Kenneth Clarke MP and Prisons Minister Crispin Blunt on 10 September 2010.

Communities

The chief secretary to the Treasury, Liam Byrne, announced that Social Impact Bond trials could be expanded across government departments. “The Department for Children, Schools and Families have pledged to explore the potential of SIBs to lever in additional resources to support early intervention approaches with children and young people,” he said in Parliament.“Communities and Local Government are also working with Leeds City Council and NHS Leeds to enable them to use a SIB approach to reduce health and social care costs among older people. Similarly Bradford Metropolitan District Council are considering applying this model as part of their involvement in the government’s Total Place programme.”

Vulnerable children

Three UK local authorities are working with Social Finance to assess the potential for social impact bonds to improve family support services. These studies will assess the potential of social impact bonds to fund preventative and early intervention services which improve outcomes for children and generate cost savings for Local Authorities.

Publications

• Social Finance (2011) A Technical Guide to Developing Social Impact Bonds, [5]
• Centre for American Progress (2011) Social Impact Bonds [6]
• Social Finance (2010) Towards a New Social Economy: Blended value creation through Social Impacts Bonds, [7]
• Young Foundation (2010) Social Impact Investment: the challenge and opportunity of Social Impact Bonds, [8]
• Social Finance (2009) Social Impact Bonds: Rethinking finance for social outcomes, [9]
• Impact Economy (2011) Four Revolutions in Global Philanthropy, [10]

External links

• Social impact bond