Social Impact Bonds (SIBs) have caused a lot of excitement - and scepticism - since the first one was launched in 2010 at Peterborough Prison. The initial programme at Peterborough set out to reduce re-offending rates by providing through-the-gate support, financed by social investors, who would receive payment from the Ministry of Justice, based on long-term cost saving.
Since then, SIBs are increasingly becoming a mainstream tool for local authorities to consider using when tackling complex social issues, using them to improve service outcomes and potentially create budgetary savings. Already local authorities are using them to tackle issues including reducing the number of children in care, homelessness, improving adoption rates and reducing social isolation.
As an investor in more than a third of the SIBs commissioned so far, we’ve seen a lot of great examples of what works, as well as challenges to be overcome, which we published recently in our short report ‘Social Impact Bonds: Lessons Learned’. So what is our answer to the question we often come across from commissioners: ‘What will investors invest in and what should we consider when we commission a SIB?’
- Clearly define the cohort and outcomes to avoid confusion later on. For example, Peterborough SIB’s cohort is very objectively defined: ‘Every male prisoner released from Peterborough Prison having served a sentence of less than twelve months’. This is the clearest cohort definition of any of the SIBs.
- Clearly align financial return with the social impact achieved. Cases where meaningful social investment is achieved but there is a negative financial return are unlikely to be invest-able.
- Ensure risk is shared appropriately across investors, commissioners and providers so that incentives are aligned to deliver positive outcomes. For example, in the It’s All About Me SIB (often referred to as the Adoption SIB, which provides investment to Voluntary Adoption Agencies to support the placement of ‘hard to adopt children’ into families, with payments from local authorities) providers have their outcome payments reduced if the placement breakdown rate exceeds 10%, but also share in the surpluses if interventions are more successful than anticipated. This structure provides incentives for successful delivery, collaboration and also provides some downside protection to investors
- Create governance structures that are flexible and adaptable to changes in delivery but are 100% focused on delivering positive social outcomes. For example in the Essex SIB, which supports vulnerable young people at risk of entering care, the decision as to whether a child enters into care sits entirely outside of the SIB structure, ensuring that financial incentives can play no part in the child’s care plan.
- Early engagement with investors and other stakeholders can prevent delays later on in the process. Who the investors are and investor perspectives often remain unknown and absent from development conversations. But there are key components in design and implementation that are important to consider when putting SIBs together in order to ensure investor involvement later on, such as whether there are staged milestone payments and if investors are offered board seats. It is worth remembering that some of the specialist fund managers, as well as Big Society Capital, are often happy to be involved in early stage discussions.
The diversity of SIB models in local areas is incredibly encouraging, but across the board the most effective SIBs are those created with a clear vision and a collaborative approach. We are excited about the emerging innovation and look forward to continuing to work with partners to support the growth of new models and practices for tackling social problems.
Daria Kuznetsova is a strategy and market development associate at Big Society Capital.
