Social Impact Bond Future Developments and Trends

SIB Future development and trends

Webinar 17 May 2011

Toby Eccles

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Social Finance is Authorised and Regulated by the Financial Services Authority FSA No: 497568 © Social Finance, 2011

Agenda

Section 1 – Introduction and definition

Section 2 – A model for social change
• Commissioning on outcomes
• Towards an effective social economy
• Early interventions

Section 3 – Adapting to new social areas
• Issues for government
• Issues in building models
• Potential market growth

Section 4 – Challenges for stakeholders
• Commissioners
• Service Providers
• Investors

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Social Finance

We are a team of bankers and social sector specialists.
We believe that if social problems are to be tackled effectively, successful organisations seeking to solve
them need sustainable revenues and investment to enable innovation and growth.
Our role is to devise the financial structures and raise the capital to enable this to happen.

Government
Voluntary Sector Private Sector

Social Finance
Research & Development
Financial Structuring
Capital Raising

Key social issues

Long-term Social Social Investment Voluntary Sector
Change Market Growth Development

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What is a Social Impact Bond?

• A Social Impact Bond is a contract with the public sector in which it commits to
pay for improved social outcomes.

• On the back of this contract, investment is raised from socially-motivated
investors.

• This investment is used to pay for a range of interventions to improve the social
outcomes.

• The financial returns investors receive are dependent on the degree to which
outcomes improve.

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Social Impact Bond mechanism

Social Impact Bonds raise funds for outcomes-focused activity based on a contract with public sector
agencies. Investors are repaid on the basis of the outcomes achieved.

Advisory Committee

Make payment Financial returns
based on defined dependent on
outcomes outcomes
Public Sector Social Impact Bond Investors
Delivery Agency
Initial investment

Improved social outcomes
Reduced public sector costs
Wider benefits to society
Funds
Service Providers
Services

Information

Target population

5

Agenda




• Commissioners
• Investors

6

Commissioning on outcomes

Commissioning has in the past been focused on inputs, efficiency, and process rather than quality.
There are a range of ways to improve commissioning, one of which is outcomes. Two factors make
commissioning on outcomes difficult.
Finding funding for services The problem of attribution

• If payments are made in arrears, organisation will need • Outcomes are rarely achieved through one service.
to find funding to pay for the delivery of services.
• For example, helping an ex-offender to turn their life
• Third sector organisations often struggle to access around might require housing advice, employment training
working capital to cover this gap: and addiction support.
o There is a lack of supply of finance in the
sector; and • It is often difficult to identify which services are the ones
that achieve the intended outcome.
o Very few organisations have sufficient reserves
to pay for service delivery. • It is rare that one organisation alone can provide all of the
services needed to achieve the outcome.
• As a result, only a small range of organisations will be
able to engage in outcomes-based commissioning.
• As a result, it is sometimes difficult to build a contract
based on outcomes with individual organisations.
• Effective organisations may be unable to participate.

Achieve outcomes
Deliver services
and receive funding

Funding gap

SIBs bring in separate investors to provide the outcome finance and allow services to be commissioned
as a group 7

Towards an effective social economy

There is widespread agreement that charities and social enterprises should be more involved in the
delivery of public services, and that there is a need for an effective social economy.

A healthy social economy needs both diversity of
Third sector delivery of public services
provision and rational market discipline.
The benefits of third sector public service delivery Diversity of provision

• Quality is increased thanks to localised services that are • A healthy social economy needs a wide variety of robust,
developed by trusted organisations. high quality service providers.

• It leads to a greater diversity of provision and increased • Sometimes commissioning practices can favour larger,
choice, pressures that can lead to better services. often private sector, service providers.

Barriers to third sector involvement Rational market discipline

• Many third sector organisations lack the scale and A key issue is that present funding streams do not act as
capacity to bid for public sector contracts. an effective market discipline:
• Grants can be opaque and at times irrational.
• They do not typically have access to investment that
will allow them to build such capacity. • Revenue from public sector contracts can be focused on
inputs and process.
• Public sector contracts are not always aligned with • Donations focus on brand, not impact.
third sector organisations’ mission. This can lead to
‘mission drift.’

Outcomes as a market discipline would be a substantial improvement for the social economy and enable
greater investment in successful social enterprises. 8

Early interventions

The Social Impact Bond can support the shift from acute to community-based care

• Government budgets are limited and early intervention
spending is easier to cut in difficult times.

• Over time this creates a a negative spending cycle and an
ever growing need for government resources to be spent
on expensive acute care.

• Social Impact Bonds can support positive spending cycles
that increase investment into early interventions and
community-based care.

Social Impact Bonds transfer the risk of failure of early intervention away from the public sector and
allow investment in prevention without impacting on the acute budget until outcomes are achieved

9

Agenda




• Commissioners
• Investors

10

Adapting to new social areas

Children’s Services Criminal Justice
Children who have been in care have many of
the poorest outcomes in our society
Many women who end up in prison are
• 50% of the prison population have been in
themselves victims of abuse, domestic abuse
care
or violence
• 80% of Big Issue sellers have been in care
Can more women be diverted from going to
Can intensive support for families and foster
prison, by intervening with those who have
carers, reduce the numbers entering care and
received multiple community orders
provide more stable, family environments for
those in the care system?

Healthcare Drug Rehabilitation
Hospital admissions are rising, partly due to the Users are significantly more likely to commit
growing numbers of older people and patients crime, claim benefits, experience health
with long-term conditions such as diabetes. They problems and have their children taken into
are costly for commissioners and disruptive for care
patients.
Can additional services such as family
Can better community interventions and primary counselling, peer mentorship and transitional
care services help patients with long-term employment services, improve treatment
conditions to stay healthy and out of hospital? outcomes?
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Issues for government

Outcomes for multiple parties

Local authority
and housing

Criminal Justice
Chaotic
Families Police
Drug
Benefits Rehabilitation

Health

A unified central government outcomes fund to support locally generated model would
support this emerging stage of the market

Easily realised • Reduced children in care  children’s home places
Cashability of
cost savings • Reduced hospital admissions  reduced hospital beds
More difficult
• Reduced offending  fewer prison places

A supply reduction strategy needed alongside the demand reduction strategy of the SIB
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Issues in building models

Fully aligned: Reduced reoffending
Alignment of
cost outcome
with social value Partially aligned: Reduced numbers of Children in care

Secondary outcome measures required to ensure incentives are effectively
aligned

Sometimes looking at smaller populations and/or where a comparison group
Scale and is hard to develop
attribution

Considerations: stability of historical data/baseline and cashability of cost
savings

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Further observations
The development of the SIB model in any new area is complex and requires time
• Once a model is put together the potential for wider replication is significant

The outcome and comparison structures require the most work
• Careful analytics and research need to be balanced with pragmatism
• We define the best outcome measure as “the simplest measure possible that effectively incentivizes the
right behaviour from service providers and gives investors confidence”.

Impact of interaction between different department’s payment by results pilots unclear
• For example, the work programme (DWP), Drug rehabilitation (DH), Reducing reoffending (MoJ)

There is inertia created by the uncertainty of delivering cost savings
• We have been helped by working in a broader cost cutting environment when supply reduction strategies
are already being put in place

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Potential market growth
Sept 2012 Sept 2013 Sept 2014
Criminal Justice
No. of SIBs launched per year # 2 5 12
Value of SIBs launched per year £ £20,000,000 £50,000,000 £120,000,000
Childrens Services - LA SIBs
Healthcare SIBs
Drug Rehabilitation SIBs
Young Adults - LA SIBs
Value of SIBs launched per year £ £0 £5,500,000 £35,000,000
Chaotic Families - LA SIBs
Total SIB Market

Cumulative No. of SIBs # 7 27 80
Cumulative value of SIBs £ £49,000,000 £203,500,000 £718,500,000
Note 1. Criminal Justice figures do not include Peterborough SIB
2. Which areas progress more rapidly and which more slowly is unpredictable, therefore the headings are to some extent indicative 15

Agenda




• Commissioners
• Investors

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Challenges for stakeholders

• Managing risk of both failure and success
• Lack of experience
Commissioners
• Ensuring genuine risk transfer
• Working on innovative structure at a time of massive change

• Collaborating for outcomes
Service • Availability of evidence
Providers • Building compelling intervention propositions
 Design thinking vs. Evidenced programmes

• Present social investment market players would not support capital at levels outlined
Investors above
• Need to generate structures to reach into different investor communities

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Commissioners

Move towards market shaping and away from procuring is a huge challenge
Commissioners have traditionally assessed what services are required and then procured them as cheaply
as possible

This model assumes that the commissioner knows best
• What services are needed and what is best value for service users

• What is the best intervention model for achieving the desired social outcomes

The role becomes one of defining the market, either by
• Agreeing budgets for service users to spend and supporting them in spending them, or by
• Valuing outcomes and commissioning services accordingly, enabling greater adaptation to service users
and innovation in service provision

This model assumes that either the service user or a mix of the service user and the service providers know what
works best

This model requires very different skills and expertise which are only just emerging

Social Finance is Authorised and Regulated by the Financial Services Authority FSA No: 497568
18
© Social Finance, 2011

Service providers I – Intervention
development
Two emerging needs – intervention development and service integration

Evidence based programmes:
Focus on scientifically proven interventions and manage quality through
Two schools of
fidelity to the original programme structure
thought on
intervention
development Service design:
Develop by focusing on insights gained by shadowing the user experience

Both are valuable and share a data driven approach, but are not directly compatible.

Extracting the best of both is one of our key challenges.

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Service providers II – Service
integration

Government

• Contract management
• Information management
• Technical assistance Investors /
Integration
• Performance management Finance
• Interface management

Service Providers

Service integration is an emerging expertise that is key to achieving outcomes

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Social Finance is Authorised and Regulated by the Financial Services Authority FSA No: 497568 © Social Finance, 2011 20

Investors

New structures are needed to bring together the level of capital required

Individual SIBs Structure Products
Investors in individual projects likely to stay To broaden the market we see two structures
relatively specialised that are needed:

• Can we reduce the overhead and transaction • Capital guaranteed or partially guaranteed
costs per transaction? SIBs: by reducing the perceived level of
capital risk , we believe that we should be
• Can we open up new pools of capital by able to expand the range of investors
using tax incentives such as the Enterprise
Investment Scheme or a Venture Capital • SIB Funds: pooling of investments to provide
Trust? scale and diversification

• Both require a few more SIBs to be up and
running before they can be fully explored

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Conclusion

• Two mega trends into which the Social Impact Bond plays
• Building a market oriented approach to public service provision
– Focusing on the needs of service users rather than government
– Focusing on outcomes rather than inputs and process
– Moving away from government as monopoly supplier
• If successful could have as profound an impact as the development of the
welfare state…
• Building a social investment market
– People starting to realise that their money is part of their influence on the world
– The potential is for active investments in society for people to be proud of and talk
about
– The scale of passive ethical investment indicates the potential scale of this market
• If successful could change people’s relationship with their own money
• This is an opportunity to support profound positive change in our society

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Slides will be uploaded to the following web
address:

www.socialfinance.org.uk/sib/webinars/social-
impact-bond-futures-development-outcome-
based-finance

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Social Impact Bond Future Developments and Trends

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