Born as a pilot scheme in the Fens of East England, Social Impact Bonds have since been deployed in dozens of countries around the world – bringing together private finance, government and charities to tackle knotty social problems. Gavin O’Toole meets Jane Newman of Social Finance, which developed the model

Peterborough does not strike the casual observer as a revolutionary place.

But in 2010 the city, set on the edge of the flat, marshy ‘Fens’ in eastern England, hosted the world’s first ‘social impact bond’ (SIB) – demonstrating a model that has since inspired similar projects in at least 24 other countries.

The Peterborough SIB raised £5m (US$6.5m) to finance a six-year pilot scheme designed to cut reoffending among a cohort of 2,000 short-sentence prisoners being released from the local jail. Championed by former justice secretary Ken Clarke, it produced excellent results, reducing recidivism by 9% against a Ministry of Justice target of 7.5%.

For Jane Newman, the international director at Social Finance – the organisation behind this quiet revolution – the global interest that followed was totally unexpected, with 131 deals launched worldwide raising more than £305m (US$400m) of investment capital.

“We were completely bewildered,” she says. Social Finance’s chief executive is a former investment banker, she adds, and he “always says that Peterborough was one of the smallest deals he has done, but the one that has had the most attention, the most written about it, and the biggest impact.”

“There was a huge interest and appetite from all parts of the world to understand how it works, and whether it was a mechanism that could be used in other countries and other contexts,” continues Newman, who works with overseas organisations to help catalyse the development of a broader social investment market.

The result has been impressive: the organisation’s database lists the launch of 131 social impact bonds to date, from the Congo to Colombia, with a further 69 in development.

The name’s Bond. Social Impact Bond.

The first thing to note about social impact bonds is that they aren’t really bonds at all. “Technically, it is more like a project finance structure focused on a social issue, like a public-private-social partnership between three parties: the public sector, investors, and delivery organisations,” she explains.

SIBs are set up to realise public policy goals, with those goals defined by public bodies that might, for example, want to reduce reoffending, youth unemployment or homelessness. Tackling those issues produces savings across a wide range of public services, so public servants can commit to making payments to third sector bodies that hit set targets. And to fund their operations until they can demonstrate successful delivery, charities and social enterprises rely on risk capital provided by private investors, philanthropists and fund-holding charities. If the third sector organisation manages to hit its targets, the investors get their money back with a reasonable return – in the Peterborough case, they earned 3% per year.

Implicit in the model is the use of innovative or experimental approaches to service delivery, allowing new techniques to be piloted; using risk capital, the social enterprises can take greater risks than is the case with public money. They’re often used “around a particular intractable, difficult problem where conventional forms of funding aren’t delivering effective results,” Newman explains.

From the investors’ perspective, she adds, “you can also see it as a bridging loan, but one where the lender is also accepting risk. It is not always repayable – because if you fail to succeed, there is no refund.” And even when targets are met, returns are fairly modest: most investors are philanthropic, with the Peterborough project being backed by 16 wealthy individuals and foundations with social aims.

Former justice secretary Ken Clarke, who championed the first SIB in 2010 (Image courtesy: Policy Exchange/Wikimedia)

Which investors, which policy goals?

While there is nothing in principle to exclude institutional investors from these instruments – the number of SIBs in the capital markets has been growing – the due diligence required to ascertain risk in these projects is exacting. 

“We have obviously spoken to institutional investors over the years and there is appetite for that, but the question is whether pension funds, for example, can really assess the risk,” explains Newman. “At the moment, the transactions for the most part are quite small, and that makes them quite hard work for an institutional investor to go through all the due diligence”.

Newman says the risk profile of experimental social programmes funded by SIBs, and the complex partnerships required to implement them, makes these instruments suitable only for certain programmes. They’re not appropriate, she believes, for most reactive services such as the provision of social care or medical treatments – where the problem is clearly identifiable and the solution well understood. So they shouldn’t be used “when you know what you want, you know how to get it, and you have a very high degree of certainty that what you are paying for will deliver,” she says. “That would just then be a wasteful way, an exotic way, of financing something that you know is going to work anyway.”

However, they can be powerful in providing preventive services – supporting individuals to address wider issues in their lives, with the goal of averting problems such as crime and drug abuse. Here, the efficacy of services is hard to predict, and their results equally difficult to assess – with the savings emerging in the form of lower demand for services such as criminal justice, health and homeless hostels.

So public bodies must bank on these positive outcomes coming through over time, and set a clear set of metrics to determine success – such as Peterborough’s reoffending targets. “If the outcomes that you want and the way you want to get them is too uncertain, then you will find it difficult to get investors,” comments Newman. “You have to find the right balance of risk between the parties.”

Moreover, investors want to know that the organisations delivering services have a good chance of hitting targets, meaning they will only back those with a track record in the field – making SIBs unsuitable for kick-starting new social enterprises.

Pilots testbed

While she has seen many transactions in her seven years with Social Finance, Newman has her “poster children” – including the Mental Health and Employment partnership in the UK.

This helps people with serious mental health difficulties into work – nationally, just 7% of this group are in paid employment – by bringing together stakeholders such as clinical commissioning groups, charities and employment professionals, to cooperate in finding them work placements.

“Not only is this an interesting platform, but we have learnt how to replicate and multiply it across the country,” says Newman enthusiastically. “Because it is all well and good doing one transaction, but what you have to do is work out what happens next and how you can transition the programme into some kind of standard provision of mainstream services.”

A similar delivery model has just been launched in the US by the Department of Veterans Affairs, which is running a $5.1m SIB to help returning servicemen suffering from post-traumatic stress disorder to secure employment.

Global evolution

The international ripples of the splash made in Peterborough first washed up in New South Wales, Australia, which funded a programme aimed at preventing children at risk from being taken into care. “We had lots of conversations with people in the government in New South Wales about how it worked; market participants; intermediaries like us and the NGOs that were involved in the deals,” says Newman

The US then began to take up SIBs with gusto, reflecting what Newman describes as a “huge appetite” among philanthropic foundations to apply the model. Social Finance UK now has a sister organisation across the Atlantic: Social Finance US.

Fears that SIBs would be limited to Anglophone markets were soon put to rest when they began to proliferate within the European Union; another sister organisation, Social Finance Netherlands, has since been created. “It has gone way beyond the Anglo-Saxon world. And as it does so it obviously localises: it has to fit within the legal system, it has to fit within the social sector and the way government works,” says Newman.

“So in The Netherlands, where government is devolved to a very local level, rather than central government being the core actor, there you are looking at municipalities.”

SIBs are also now proliferating in emerging markets – Argentina launched an ambitious US$40m pilot SIB to boost the job prospects of underprivileged young people in Buenos Aires, for example – and multilateral institutions such as the World Bank have shown great interest.

In the UK, the Department for International Development (DfID) has established an impact bond working group of donors to develop ways of using this instrument for international development.

Peterborough was formerly known mainly for its cathedral, which towers over the flatlands town

Not every risk pays off

While a diverse portfolio of SIB models is evolving globally as part of a much broader “impact investment market”, these instruments are not without their problems.

SIBs have so far proliferated in areas of delivery lacking obvious precedents, sometimes making them laborious to implement through “learning-by-doing”.

This can help to explain failures – such as the first high-profile US impact bond, financing a programme to cut reoffending among youths at Rikers Island prison in New York City. The programme did not demonstrate any significant reduction in reoffending, and was closed early with a partial loss to investors – but it was still considered to be a useful pilot, and has not prevented the proliferation of SIBs elsewhere in the country.

“It is important there are failures,” comments Newman. “If there aren’t failures you don’t learn; and if there were never failures, that suggests that there’s not enough risk in them.”

Legal and funding complexities

With years of experience as a corporate partner in a large law firm before joining Social Finance, Newman notes that structuring SIB deals legally and predicting whether a regulatory framework will throw up obstacles to them during their lifecycles can be daunting.

“They are complicated and quite time-consuming to put together,” she says. “Anyone who has worked in this field would admit that they are not easy instruments, and will ask: ‘How can you reduce the complexity?’”

She adds that while regulatory changes have not on the whole been required to enable SIBs to operate, government have often found them hard to fit into existing procurement structures. “You are really committing today to pay for success in the future, and government financial cycles have annual budgets, so one question that always comes up in a new jurisdiction is: ‘Can this government commit a future government or a future budget to this expense?’”

A response in the US has been to pass enabling legislation at both state and federal levels that allows public finance managers to make forward commitments with this type of financial instrument.

In the UK, “outcome funds” are being established to fund SIBs in particular fields of social policy – allowing public servants to consider bids from would-be operators without having to secure dedicated funding for each scheme. “That will enable you to commission multiple deals for this kind of funding in different areas, because you are not having to negotiate each time on the government side,” explains Newman. “You have got basically money looking for a home, as opposed to people having to go and negotiate for that each time.

“Once you have got that kind of volume you can build all the sort of knowledge mechanisms and learning cycles around that, and your transaction costs will come down. You’ll also be able to have larger conversations with a broader group of investors because you will be needing investment at scale – and that’s what investors want.”

Ken Clarke’s Peterborough scheme, in the end, finished early when the government extended probation services to short-sentence prisoners. And whilst it was intended as a way to pilot innovative approaches to tackling reoffending, most of the key lessons were lost as his successor Chris Grayling – whose more punitive approach made a sharp contrast with Clarke’s focus on rehabilitation – oversaw a disastrous outsourcing of probation.

Yet whilst Peterborough SIB must now be regarded as a novelty within the UK’s justice system, rather than a turning point, its impact has reached far beyond the Cambridgeshire city. Ken Clarke and the Social Finance team kick-started a movement that has since provided a model for new forms of service delivery around the world; chances are, the story of SIBs has only just begun.

A version of this article first appeared on our sister publication Global Government Forum


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