Will social impact bonds solve society’s most intractable problems?
Social impact bonds will pay returns to private investors for successfully tackling deep-rooted societal problems. But they are not a money-making wheeze.
Author: Alan Travis, The Guardian |
The new Localis report, Total Neighbourhood, advocates a revised model of Social Impact Bonds which devolves commissioning powers to local government – Local Outcome Bonds. In this article, Alan Travis shows the potential of Social Impact Bonds to achieve impressive social outcomes and offer an attractive investment option for private sector backers.
The justice secretary, Kenneth Clarke, says the payment-by-results pilot scheme now under way at Peterborough prison is the most radical part of the government’s “big society” programme. For him, the scheme, he says, “is exactly the kind of thing we are after”.
It is the first in the world to use an innovative private finance package to fund intensive “through the gates” voluntary organisation work with 3,000 short-sentence prisoners to break their cycle of reoffending after release.
The scheme is at the heart of the Conservatives’ promised “rehabilitation revolution”, although the deal was actually signed off in March by Jack Straw when he was justice secretary in Labour’s government.
Cutting reoffending rates is a long-term business, and the first payments are unlikely to flow for several years, but the first indications of whether or not it is a success are expected as early as the first half of next year.
Behind the scheme, which officially launched last month, lies the first social impact bond, which its creators believe can be used to attract investment from outside government for a range of hard-to-fund preventive schemes that could tackle some of our most intractable social problems.
Big Lottery funding of 5m is being used to develop a further package of two or three more social impact bonds. These bonds could fund programmes reducing the number of children going into care, working with children in pupil referral units, diverting persistent women offenders from prison, and developing more effective drug rehabilitation projects. Schemes to tackle long-term health problems in the community, such as diabetes and asthma, could also produce big savings in acute hospital bills.
The organisation behind the scheme is Social Finance, the social investment bank which brings together some of the leading lights of the charity and private finance worlds, including David Robinson, founder of east London charity Community Links, former Audit Commission chair and RNID chief executive James Strachan, and private equity pioneer Sir Ronald Cohen, who chairs the Social Investment Taskforce and the Commission on Unclaimed Assets.
First of many
Social Finance acknowledges that the Peterborough prison social impact bond scheme is a small-scale pilot, but hopes it will be the first of many that could build a mainstream social investment market that attracts financial institutions and retail investors.
“There is a lot of interest from the private banking networks. There is a growing sense among their clients that they would like to invest in social progress more directly. We are responding to that,” says David Hutchinson, Social Finance’s chief executive and former head of UK investment banking at Dresdner Kleinwort.
He claims that 10m to 15m initial funding for social impact bonds could be raised within 12 months.
Social Finance has forecast that a 50m bond could fund sufficient rehabilitation work to cut the current 60% reoffending rate for short-sentence male prisoners by 20%. The savings this would achieve would allow four prisons to be closed within five years at a saving of 62m in running costs.
So how do the nuts and bolts of the Peterborough social impact bond work?
Hutchinson says they have raised 5m upfront from charitable institutions, including the Barrow Cadbury Trust and one of the Sainsbury Family Charitable Trusts. This will fund rehabilitation work being done now by voluntary organisations including the Ormiston Trust, the YMCA and St Giles Trust, with 3,000 prisoners who are expected to be leaving Peterborough prison over the next six years. The organisations will engage with short-term prisoners in jail to improve their education, skills and confidence in order to help them better integrate into the community. And, crucially, once they are out of prison, the support will continue ? something the probation service only does for longer-term prisoners.
“If we are successful in achieving a measured reduction in their reoffending rates then the Ministry of Justice will make payments ? but only if we are successful,” Hutchinson stresses.
The payout pot is to be funded by 6.25m of Big Lottery cash as well as justice ministry money. Investors will get payouts if a 10% reduction in reoffending rates is achieved for the first 1,000 prisoners through Peterborough. The trigger for payments falls to 7.5% reduction in overall reoffending rates once all 3,000 prisoners have gone through the scheme.
“If we were to achieve a sustained reduction of 10 percentage points in reoffending behaviour, we would be able to deliver a return to investors of 7.5% per annum compound over the eight-year period. That is the core proposition for the investor,” says Hutchinson. “If we reduce reoffending by more than that then the returns will increase subject to a cap on the total payments available.” If they fail, the investors get nothing back, so it is a risky business.
Measuring reoffending rates is notoriously complicated. In this case, the agreed benchmark is the number of times an offender is reconvicted within 12 months of leaving prison rather than their total number of offences.
The reoffending rate of the first 1,000 prisoners will be measured against a control group of 10,000 prisoners also serving less than 12 months in other jails across the country but without the support of the services provided by the social impact bond. The two groups will have similar age profile and criminal histories. It will take about two years for the 1,000th prisoner to be released and a further nine months to establish whether he has gone back to a life of crime. Investors are unlikely to get any return on their money much before the fourth year.
For sceptics of social impact bonds, concerned that they are the latest vehicle for city slickers to make a fast buck, Toby Eccles, Social Finance’s development director, responds: “We are interested in aligning the social with the financial rather than finding a clever wheeze for making money. We are incentivised to work with the complicated and with those willing to change.”
Eccles, who is doing the detailed work on the bonds, says because it can take years for a return to flow, the provision of the initial 5m upfront from charitable trusts is crucial to enabling small charities to take part. “Small charities do not have the working capital to wait around for four years to participate in this way of working,” he says.
Rob Owen, chief executive of St Giles Trust calls this a “funding revolution” because it means he will have sight of five or six years’ worth of consistent funding ? providing what they are doing is successful.”
Scaling up
Eccles believes that it is possible to scale up the model but that it probably needs to be used in five or six prisons before real reductions in the prison population are possible.
The scheme also works for the big charitable foundations. Barrow Cadbury says it is a “win, win” situation for them as it means they can make an investment from their endowment and see a possible return, rather than just give a grant. This could be the key to unlocking far larger charitable funds than are currently available for the criminal justice sector. As Eccles explains, it means charitable foundations can use funds from their endowment capital rather than their smaller grant-giving budgets.
“Once we have some insight into the track record in Peterborough and the ability to diversify risk by offering to pay on more than one project so that they do not have all their eggs in one basket, and with some work with structuring, I think we can open that market up,” he adds.
Hutchinson says initial investors include three foundations set up by wealthy individuals, who have never invested in criminal justice before, but who are keen to see the social return as well as the financial, including the Johansson Family Foundation.
“This is what appeals to investors: that they will make a difference … investors will only invest in a robust intervention that they care about,” he says.
Social Finance has also been approached by overseas charitable investors. “We have the interest of a very significant US foundation in the social impact bond,” says Hutchinson. “They want to develop an understanding of its inner workings with the long-term ambition to see if there is any sort of scope to develop something similar in the States.”
Hutchinson insists that the work funded by the bond is not an alternative to the probation service, which does not work with short-term prisoners after their release: “We are enhancing what is already there,” he insists. “The probation service has no involvement with a prisoner the minute he leaves the prison gate, so doesn’t even know if they get to the job interview they may have set up for them.”
Paddy Scriven, general secretary of the Prison Governors’ Association, has welcomed the scheme but warned those running it not to “cherry-pick” the least difficult offenders and leave the hardline cases to the prison and probation services.
It is no wonder that Clarke, who has to deliver a 2bn cut in his 9bn justice budget over the next four years, is keen on an innovative idea that has the potential to create a social market worth potentially hundreds of millions of pounds to tackle some of the most difficult social problems.
As Eccles says: “Preventive work is currently financed in an ad hoc fashion, so you always have this problem of maintaining consistent funding. This structure will demonstrate the value of changing the way that preventive work is funded.”