Social Impact Bonds: an introduction
Although the first Social Impact Bond (SIB) scheme was launched in September 2010, few schemes have gone ahead since. This is somewhat surprising given that SIBs, on paper, look like an attractive way for the Government to fund projects where prevention or intervention can be used to achieve savings for the public purse in the future. Indeed, since the first SIB was launched the wide array of public spending cuts should mean that they are an even more attractive prospect now than they were 18 months ago. Yet SIBs remain a fairly obscure concept, which begs the question...why?
What are SIBs?
In basic terms a SIB is a tripartite arrangement between an investor, the public sector and those organisations tasked with delivering the outcomes. The investor agrees to invest money which will be used to fund interventions related to a social issue. The investment is paid back, plus a return, if social outcomes are achieved to a pre-agreed level. The level of return increases with the level of improvement in the social outcomes. SIBs are not like traditional bonds because, if the desired level of social outcomes are not met, investors stand to lose their original investment.
When can they be used?
For the SIB to work, there needs to be a social issue which can be clearly identified in order for the intervention to be sufficiently targeted and for the social outcomes to be measurable. Likewise, there needs to be an intervention or prevention method available which, when applied to the social issue, can result in the desired social outcome and savings to the public purse.
Needless to say, detailed costing and modelling of the scheme is needed in order to gauge the level of investment required and, for the public body, to show that the budget savings in the future are worth the costs. The time scale involved in the intervention is also critical to the success of any SIB as one of the investor's prime concerns is likely to be the timing of receipt of their returns.
Where have they been used so far?
Peterborough Prison
The first SIB was launched by Social Finance, a non-profit organisation, and St Giles Trust, in September 2010. The scheme involved the creation of £5m of SIBs, with the money being invested in rehabilitation services for prisoners serving less than 12 months in Peterborough Prison. In this case the social issue was re-offending amongst this group of prisoners; the social outcome sought is a reduction of 7.5% in the level of re-offending leading to cost savings in the prison’s budget. The police in Peterborough have reported a decrease in re-offending a year on from the investment, but whether the scheme is ultimately deemed a success won’t be known for several more years.
Deprived Areas
In August 2011 the Government announced plans for new SIB schemes in Westminster, Hammersmith, Fulham, Birmingham and Leicestershire. The Government hopes to raise a total of £40m from these schemes, which would aim to help families living in poverty. Given that an estimated £4 billion every year is spent in helping the 46,000 most deprived families, it is easy to see why the Government hopes preventative SIB investment could help save the public purse vast amounts in the future by reducing crime and other welfare burdens which are associated with the poorest areas.
Press reports published this week indicate that two new SIBs aimed at helping young people have just been launched, supported by the Department for Work and Pensions. It is reported that around six social investors are already involved in one of these projects, including £500,000 being invested by Big Society Capital. Other similar schemes are understood to be in development in Liverpool and Essex, and we are beginning to see the concept of SIBs being applied to "private" investment opportunities.
Scotland
To date there have been no SIB schemes launched in Scotland, however the Scottish Government has said it is “currently investigating the potential of SIBs to contribute to improved outcomes and these may have potential to contribute to regeneration as well as other Governmental priorities”. The Scottish Parliament’s Finance Committee is due to meet in early February to consider alternative funding methods, and SIBs are on the agenda.
This initiative is supported by the Scottish Council of Voluntary Organisations while Social Finance, the pioneers of the SIB scheme in Peterborough, have expressed a desire to launch similar schemes north of the border.
Why aren’t there more schemes in place?
The reason SIBs are thought to be attractive is that they provide a funding method for schemes which, because the money is being used for prevention and benefits will not be achieved until further down the line, may not be a spending priority for the public body concerned. For the public sector, the shifting of financial risk to the private sector is the main draw. The public sector budget, in theory, has nothing to lose by instructing an SIB scheme even if the desired outcome is not achieved because in that situation they pay nothing. Even where repayment and return is required to be paid, the cost does not need to be borne up front, can be planned for over the course of the SIB programme, and if the scheme achieves its aims, ought to be funded out of savings.
Some have argued, however, that private investment actually ends up costing the Government more in the long term. This is because the SIB model is complicated and so requires extensive preparation and the involvement of consultants to ensure viability; it is reported that the Peterborough project took 18 months from conception to launch. The legal structure and contractual arrangements can be complex, and there are regulatory issues to consider too. Others oppose the concept fearing that the SIB structure can result in an approach to social problems which disregards the most deserving cases in favour of those which will help targets be met. There is also a school of thought which considers that any scheme where helping people becomes a commercial exercise is morally wrong.
We’ve touched already on the possible disadvantages for investors. SIBs are high risk because investors can lose their whole investment if the scheme is not successful. Both return and recovery of original outlay are dependent on factors which are outwith the control of the investor. In addition, once the money is invested there is no way for the investors to remove their investment as the SIBs are not a liquid asset and cannot (at least until some sort of secondary market in SIBs emerges, which is likely to be some time off) be sold on or cashed in before the scheme is complete. Nor are there any tax breaks to make the investment more attractive.
Tellingly, there were no private investors in the Peterborough Prison scheme; instead the bonds were taken up by charitable trusts and foundations. This could indicate that SIBs are attractive to investors for philanthropic reasons as much as for the potential return on investment. A SIB is probably easier for a charity to justify as an investment if, in addition to a financial return, it contributes to the charity’s purposes. Yet even charities, the group of investors most likely to be attracted by the social aspect of SIBs, may find it hard to reconcile the inherent risks of investing in SIBs with their duties to the charity.
For charities in Scotland who would like to explore investing in SIBs there is no specific prohibition against them doing so. Charity trustees are empowered to use the charity's property for investment purposes but they should always consider the suitability of the investment, the need for diversification, and take advice from a properly qualified person. OSCR has not published specific guidance on charities investing in SIBs, but the Charity Commission’s guidance on this issue makes for interesting reading.
In the future, it may be that tax breaks or some way in which SIBs can be traded is needed in order for less-social conscious investors with more capital at their disposal, such as pension funds, to be attracted into the SIB market. Indeed, just yesterday the NVCO published its report on Tax Incentives for Social Investment, urging the Government to improve the tax incentives available to private investors who wish to invest in SIBs and other social investment programmes. With the Scottish Government also showing interest in SIBs, social investment in Scotland is certainly an interesting and developing landscape. That’s why we are delighted to be involved in the forthcoming conference which will bring together the Scottish Government, charities, Social Finance and professional advisers. It is certain to be thought provoking, and we hope to see some of you there!
If you would like to discuss this in more detail please contact our third sector expert, Lauren Scott.
