The Social Impact Bond is the brainchild of Social Finance, a non-profit organisation. Unlike a traditional bond, the SIB connects private capital with government policy interventions, with the promise of a return for investors provided there is measurable success of the intervention.
The SIB model was first used in 2010 to fund a preventative programme targeting reoffending rates of former inmates of HMP Peterborough. (see below, RAND Diagram)
The programme targeted two cohorts of 1000 male inmates, all of whom completed a sentence of less than 12 months during the trial period. They were given the option of receiving support from a newly created umbrella organisation, One Service, for a period of 12 months after their release. Under this banner, service providers like Mind and John Laing Training, provided specialist support alongside pre-existing local partners including the local authority and the Jobcentre.
The SIB was commissioned by the Ministry of Justice, and £5m in investment came from a host of foundations and trusts, including the Rockefeller Foundation and The Henry Smith Charity. The conditions for a return on their investment were two-fold. They would receive an ‘outcome payment’ equivalent to 3% per annum if one of the cohorts saw a reduction in reoffending of 10% and/or both of the cohorts saw a reduction of at least 7.5%
In terms of measurement, the Government commissioned RAND Europe to carry out an impact evaluation of the pilot. Their research found that the first cohort saw a 8.4% reduction in reoffending, and the second cohort saw an 9.7% reduction in reoffending. The reports highlight the positive effects of the new model. One Service was described as a ‘strong and constructive’ partner by HMP Peterborough and other stakeholders reported several innovations resulting from the use of the SIB model such as funding flexibility and integration of information between service providers. However, the report does stress that there is no compelling reason to believe that this innovation could only be achieved with the SIB model.
Despite ambiguity about whether it is the SIB that improves policy, from its beginnings in 2010, more than 100 projects globally are funded by an SIB. However, the Financial Times reports that as of January this year, only 10 of those 100 projects had repaid their investors with a return on investment, although it is worth bearing in mind that this may be due to the lengths of the projects, with investor pay-outs being years away. This ambiguity may concern potential future investors. Another cause for concern is also the ability of government to cut short a program in response to a policy change. For example, the Peterborough SIB was cut from 2 cohorts to 3 in 2014. Although it is certainly necessary for governments to retain control over their policy, this hints at misalignment between private investors’ and government incentives. Investors want their bond to mature and deliver a return, but government must reserve the right to change its policy.
Some have concerns about whether philanthropy should be blended with investment. In a recent FT article, Akinchan Jain, a senior financial officer at the World Bank questioned the broader implications of turning philanthropists into investors, adding “some people will question the alignment of the incentives”.
Objections aside, there is a strong case that the SIB allows government to trial new and innovative policy programs without risking their budget - something that is especially important in an age of fiscal tightening. However, whether this advantage is enough to justify the cost involved in additional bureaucracy and paying out to investors is another question. This, and the question of the long-term future of the SIB model, will be better answered as more projects mature.
Sources:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/486512/social-impact-bond-pilot-peterborough-report.pdf
https://www.ft.com/content/ddf55a2e-7472-11e8-bab2-43bd4ae655dd
https://www.theguardian.com/social-care-network/2017/oct/12/council-projects-budget-bonds-third-party-funding
https://sibdatabase.socialfinance.org.uk/
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/633243/peterborough-social-impact-bond-cohort-2-results-report.pdf