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Social impact bonds

How to finance public sector social outcomes with investment from the private sector – a type of social investment

What does it mean?

Social Impact Bonds (SIB) are a form of outcomes-based contracts between the public and private sector. The former agrees to pay for substantial improvement in social outcomes for a specific population, which will reduce the public sector’s costs in the long run. The private sector initially pays for intervention, which is delivered by service providers with a proven track record. The private sector will only be repaid if a significant social impact is achieved. 

Who might use it?

If a charity or social enterprise is able to demonstrate its high social impact, it may be able to collaborate with a financial intermediary to attract external finance through an SIB. 

  • The civil society organisation provides the service to the target population, which aims to reduce future public sector costs.
  • Private funds will finance the intervention, delivered by an organisation with a good track record.
  • The public sector pays for improved social outcomes that result in public savings as these bonds are based on the theory that early intervention can help prevent subsequent serious problems.
  • Unlike traditional bonds, SIBs do not have a fixed rate of return; financial return depends on the achievement of specific social outcomes set at the start of the bond issue. The higher the social impact, the higher the return earned by the private sector. It is, therefore, important to choose effective and proven  civil society organisations.

The civil society organisation bears no financial risk as the repayment is between the public and private sector; the only risk borne is reputational. SIBs provide upfront funding for prevention and early intervention services. The public sector pays if (and only if) the intervention is successful. Therefore, SIBs re-allocate the risk between the public and private sector. 

The case study below explains an SIB, however, as this is the first SIB pilot, this form of investment still does not have a proven track record. Furthermore, new types of SIBs are now emerging with different underlying structures. 

Who provides it?

Social Finance provides a range of financial advisory services to raise capital through robust investment propositions.

Case study - Social Impact Bond

After receiving investment support from Impetus Trust, St Giles Trust, a charity which provides access to housing, training and jobs for ex-offenders, went on to work with Social Finance to develop the first Social Impact Bond (SIB).

This Social Impact Bond was launched in 2010, and has been designed to reduce re-offending amongst male prisoners leaving HMP Peterborough who have served a sentence of less than 12 months. During this pilot, experienced social sector organisations, including St. Giles Trust, The Ormiston Children and Families Trust, SOVA and YMCA will provide intensive support to 3,000 short-term prisoners over a six year period, both inside prison and after release through the ONE Service programme.

Social Finance raised £5m from 17 social investors to fund this work, which is new money into the sector. The investors are mostly charitable trusts and foundations, some of which are the giving vehicles of high net worth individuals or private banks.

If this initiative reduces re-offending by 7.5%, or more, investors will receive a share of the long term savings to the Government from the Ministry of Justice. If the SIB delivers a drop in re-offending beyond this threshold, investors will receive an increasing return the greater the success at achieving the social outcome, up to a maximum of 13%. However, if reoffending isn’t reduced by at least 7.5% the investors will receive no recompense at all. Returns will be decided by comparing the number of reconvictions for the One Service cohort compared to a similar group of short sentenced male prisoners across the UK.

While this is a model which is yet to be proven, this first year report from Social Finance, Social Impact Bonds: The One Service. One Year On demonstrates an encouraging level of uptake for the service. Whether the SIB will reduce reoffending enough to generate a return for investors will be revealed in year four of the programme.

Find out more about Social Finance’s work on Social Impact Bonds.

Page last edited Oct 22, 2015

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