social impact bond future developments and trends

© Social Finance, 2011

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SIB Future development and trends

Webinar 17 May 2011

Toby Eccles

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


Agenda

Section 1 – Introduction and definition

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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

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



Social Finance

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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.

Key social issues

Voluntary Sector

Government

Social Finance

Research & Development

Financial Structuring

Capital Raising

Long-term Social

Change

Social Investment

Market Growth

Voluntary Sector

Development

Private Sector



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.

Social Impact Bond

Delivery Agency

Public Sector Investors

Target population

Make payment based on defined

outcomes

Financial returns

dependent on outcomes

Initial investment

FundsService Providers

Advisory Committee

Information

Services

Improved social outcomes

Reduced public sector costs

Wider benefits to society



Agenda


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




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Finding funding for services

Commissioning on outcomes

The problem of attribution

• If payments are made in arrears, organisation will need to find funding to pay for the delivery of services.

• Third sector organisations often struggle to access working capital to cover this gap:

o There is a lack of supply of finance in the sector; and

o Very few organisations have sufficient reserves to pay for service delivery.

• As a result, only a small range of organisations will be able to engage in outcomes-based commissioning.

• Effective organisations may be unable to participate.

•Outcomes are rarely achieved through one service.

• For example, helping an ex-offender to turn their life around might require housing advice, employment training and addiction support.

• It is often difficult to identify which services are the ones that achieve the intended outcome.

• It is rare that one organisation alone can provide all of the services needed to achieve the outcome.

• As a result, it is sometimes difficult to build a contract based on outcomes with individual organisations.

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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.

Deliver services

Achieve outcomes and

receive funding

Funding gap

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



Towards an effective social economy

Third sector delivery of public servicesA healthy social economy needs both

diversity of provision and rational market discipline.

The benefits of third sector public service delivery

•Quality is increased thanks to localised services that are developed by trusted organisations.

• It leads to a greater diversity of provision and increased choice, pressures that can lead to better services.

Barriers to third sector involvement

•Many third sector organisations lack the scale and capacity to bid for public sector contracts.

• They do not typically have access to investment that will allow them to build such capacity.

• Public sector contracts are not always aligned with third sector organisations’ mission. This can lead to ‘mission drift.’ 8

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.

Diversity of provision

• A healthy social economy needs a wide variety of robust, high quality service providers.

• Sometimes commissioning practices can favour larger, often private sector, service providers.

Rational market discipline

A key issue is that present funding streams do not act as an effective market discipline:•Grants can be opaque and at times irrational. •Revenue from public sector contracts can be focused on inputs and process. •Donations focus on brand, not impact.

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



Early interventions

•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.

The Social Impact Bond can support the shift from acute to 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


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Agenda


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





Adapting to new social areas


Criminal Justice

Many women who end up in prison are themselves victims of abuse, domestic abuse or violence

Can more women be diverted from going to prison, by intervening with those who have received multiple community orders

Children’s ServicesChildren who have been in care have many of the poorest outcomes in our society• 50% of the prison population have

been in care• 80% of Big Issue sellers have been

in care

Can intensive support for families and foster carers, reduce the numbers entering care and provide more stable, family environments for those in the care system?

Drug Rehabilitation

Hospital admissions are rising, partly due to the growing numbers of older people and patients with long-term conditions such as diabetes. They are costly for commissioners and disruptive for patients. Can better community interventions and primary care services help patients with long-term conditions to stay healthy and out of hospital?

Users are significantly more likely to commit crime, claim benefits, experience health problems and have their children taken into care

Can additional services such as family counselling, peer mentorship and transitional employment services, improve treatment outcomes?

Healthcare

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Issues for government


Outcomes for multiple parties

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

Cashability of cost savings

A supply reduction strategy needed alongside the demand reduction strategy of the SIB

Local authority and housing

Criminal JusticePolice

Benefits

Health

Drug Rehabilita

tion

Chaotic Families

Easily realised

More difficult

• Reduced children in care children’s home places

• Reduced hospital admissions reduced hospital beds

• Reduced offending fewer prison places

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Issues in building models

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Alignment of cost

outcome with social

value

Fully aligned: Reduced reoffending

Secondary outcome measures required to ensure incentives are effectively aligned

Scale and attribution

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

Partially aligned: Reduced numbers of Children in care

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


Further observations

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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


Potential market growth

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Note 1. Criminal Justice figures do not include Peterborough SIB2. Which areas progress more rapidly and which more slowly is unpredictable, therefore the headings

are to some extent indicative

Sept 2012 Sept 2013 Sept 2014Criminal Justice No. of SIBs launched per year # 2 5 12 Value of SIBs launched per year £ £20,000,000 £50,000,000 £120,000,000Childrens Services - LA SIBs No. of SIBs launched per year # 2 8 20 Value of SIBs launched per year £ £14,000,000 £60,000,000 £160,000,000Healthcare SIBs No. of SIBs launched per year # 1 2 10 Value of SIBs launched per year £ £5,000,000 £15,000,000 £150,000,000Drug Rehabilitation SIBs No. of SIBs launched per year # 1 2 3 Value of SIBs launched per year £ £5,000,000 £12,000,000 £21,000,000Young Adults - LA SIBs No. of SIBs launched per year # 0 1 5 Value of SIBs launched per year £ £0 £5,500,000 £35,000,000Chaotic Families - LA SIBs No. of SIBs launched per year # 1 3 6 Value of SIBs launched per year £ £5,000,000 £15,000,000 £30,000,000Total SIB Market No. of SIBs launched per year # 7 20 53 Value of SIBs launched per year £ £46,000,000 £156,500,000 £445,000,000

Cumulative No. of SIBs # 7 27 80 Cumulative value of SIBs £ £49,000,000 £203,500,000 £718,500,000


Agenda


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





Challenges for stakeholders


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

Commissioners

• Collaborating for outcomes• Availability of evidence• Building compelling intervention propositions

Design thinking vs. Evidenced programmes

Service Providers

• Present social investment market players would not support capital at levels outlined above

• Need to generate structures to reach into different investor communities

Investors

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Commissioners


Move towards market shaping and away from procuring is a huge challengeCommissioners 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

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Service providers I – Intervention development


Two emerging needs – intervention development and service integration

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.

Two schools of thought on

intervention development

Evidence based programmes: Focus on scientifically proven interventions and manage quality through fidelity to the original programme structure

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

Service providers II – Service integration

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Integration

Service Providers

Investors / Finance

Government

• Contract management• Information management• Technical assistance• Performance management• Interface management

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

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Investors


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

Investors in individual projects likely to stay relatively specialised

• Can we reduce the overhead and transaction costs per transaction?

• Can we open up new pools of capital by using tax incentives such as the Enterprise Investment Scheme or a Venture Capital Trust?

To broaden the market we see two structures that are needed:

• Capital guaranteed or partially guaranteed SIBs: by reducing the perceived level of capital risk , we believe that we should be able to expand the range of investors

• SIB Funds: pooling of investments to provide scale and diversification

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

Individual SIBs Structure Products

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Conclusion

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


Slides will be uploaded to the following web address:

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



social impact bond future developments and trends

Economy & Finance