slide 1 new ways of financing social outcomes geoff mulgan

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New ways of financing social outcomes

Geoff Mulgan

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Why?

•A need for new investment (philanthropic and commercial) for public goals at a time of scarce resources•An interest in better interventions that prevent future costs and problems for government• Appeal of markets for outcomes, with parallels in carbon

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Building on a long history:

•Commissioning for outcomes•Payment by results•PPPs•Shared savings models•Publicly created markets

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•Every politician would love a way to bring in new money that only rewards results achieved

•The investment world would love a new market – and to be able to claim that they are doing good and making money at the same time

•Charities would love a new source of investment

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1. Design options

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• Finance from Foundations, or Commercial investors

Raising a sum for investment

• Implemented by a range of providers, coordinated by a lead organisation, intermediary or an SPV

A programme of actions

• Commitment to pay on achieving outcomes• Benchmarked

against control group, and separated from "environmental" risk factors

A commitment to repay

Social Impact Bonds

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• First SIB contract signed with the Ministry of Justice in March 2010. Social Finance raised £5m to fund work with 3,000 male, short-sentence prisoners leaving Peterborough prison.

• Nationally, 60% of such prisoners re-offend within 1 year. They receive little statutory support to address causes of offending.

• Social sector organisations, such as St Giles Trust provide intensive support to prisoners and their families, both inside prison and after release.

Peterborough SIB

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• Investors will receive a return if re-offending among the prison leavers falls by 7.5% or more compared to a control group of short-sentence prisoners in the UK. Funding for payments is partly subsidised by the Big Lottery Fund.

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•Commissioned by state government likely to be focused on juvenile justice, parenting support for vulnerable families, disability, homelessness and mental health.

• Budget committed $100m to support Pay for Success Bonds, homelessness, education, criminal justice. Massachussets announced aim to be one of the first.

New South Wales and USA

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2.Suitable fields

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Stakeholders are open to SIB approach

Savings for the government stakeholder(s) are greater than the costs of the intervention

Possible to identify specific government stakeholders that will financially benefit

Enough people will benefit from the intervention to enable robust measurement of impact

The specific impacts of the intervention can be quantified

The intervention improves social wellbeing and prevents or ameliorates an undesirable outcome

The intervention is preventative in nature & sufficient funding is currently unavailable

7 tests to meet …

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3.Delivery vehicles

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Model 1

Model 2

2 key questions:

What skills are most vital for intermediaries: access to investment markets; relationships with philanthropy; ability to design intervention programmes; ability to performance management

What transaction costs are achievable and acceptable – likely range from 10-40%

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social ventures

beneficiaries

customers

expertise, people, networks

financial investment

best-practice sharing platformscommunity developers*design intermediaries*

innovation/challenge funds*innovation platforms*

investor readiness providersleadership accelerators

physical incubatorspro-bono networks

social entrepreneurship schoolssocial innovation venture labs*social venture capital funds*

social venture networksspecialist consultancies/experts

support brokersventure philanthropy funds*

community developers*community share issue brokers

Crowd-sourcing platformsgrantmakers

innovation/challenge funds*micro-funding

philanthropic networkssocial impact bond providers

social investment brokerssocial lenders

social venture capital funds*specialist banks

venture philanthropy funds*bidding platforms

commissioning advisors*social venture directories

FINANCEINTERMEDIARIES

MARKETING ANDDISTRIBUTION

INTERMEDIARIES

PEOPLE, NETWORKSANDEXPERTISE INTERMEDIARIES

evaluation standardisationplatformsperformance indices

measurement consultancies

MONITORS

commissioning advisors* competitions/prizes

design intermediaries*innovation/challenge funds*

innovation platforms*social innovation venture labs* insights, resources,

methods

INNOVATIONINTERMEDIARIES

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4. Outcomes and metrics

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•Need for unambiguous, independently determined metrics: eg prison re-entry; hospital re-admission; welfare entry from defined population group.

•Need to design out selection, cream-skimming etc and agree control groups from comparable areas without comparable interventions (or historic data) to screen out other causes (eg economic downturn, new laws).

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•What counts as success?

•Individual NGOs, projects, programmes –

sometimes claiming 30-40% efficacy

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10-20% rates count as very good in replicable research

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•The “iron law” of evaluation (“the expected value of any net impact assessment of any large scale social program is zero”) and “stainless steel law” of evaluation (“the better designed the impact assessment of a social program, the more likely is the resulting estimate of net impact to be zero”).

•Internal rates of return on social programs with positive net benefits are rarely above the discount rates of 3 to 5 percent typically used in social impact evaluations.

•Since 1990, 10 federal social programs have been evaluated using randomized experiments. According to evaluation experts Isabel Sawhill and Jon Baron, nine “found weak or no positive effects.”

•

Experts often fatalistic about any impact

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5. Risk and rewards

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•How to align appetite and incentives of investors, intermediaries, and payers?

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•Investors seeking commercial returns or mixed and minimising risk. •Government/payer seeking minimum risk (ideally complete transfer) and maximum new money•Intermediary with typically little capacity to carry risk•Providers/delivers – typically comparable risks to other programmes, options of incentive based

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% success rate of portfolio

95% 90% 75% 50%

Return per intervention for funder with overall 0% desired return

3% 5% 15% 41%

Return per intervention for funder with overall 10% desired return

13% 16% 27% 56%

Return per intervention for funder with overall 20% desired return

23% 26% 39% 70%

At an expected 75% success rate for a portfolio, these results suggest that for an average project:

• Charitable trusts and foundations would seek a 15% return; • Public sector bodies would look for nearly 30% rate of return; and • Commercial entities would aim for a rate of return of the order of 40%.

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NSW example as way of sharing risk – consequences of failure to reach milestones

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•Rewards

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6. Scale

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•What counts as optimum scale?

•Financial perspective – possibly $20-30m minimum given transaction costs, plus advantages in spreading risk

•Risk management perspective – keep scale more modest, $5-15m

•Statistical perspective – funders confidence in avoiding ‘Type 2’ errors, government confidence in avoiding ‘Type 1’ errors

Cost

effi

cien

cies

Size of organisation/unit

Very efficient

Less efficient

Small Large

What counts as optimum scale for programmes?

Cost

effi

cien

cies

Size of organisation/unit

Very efficient

Less efficient

Small Large

The pattern for public services, and national governments: so best impact of SIBs is replication not necessarily scaling, creating both stronger push and stronger incentives for adoption

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•7. Longer term evolution

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•The long-term:

•Possible evolution of asset classes – eg generic funds investing in a range of Pay for Success bonds, SIBs etc, becoming mainstream for PRI funds and options for improving tax treatment

•And/or ...

•Preventive investment, direct commissioning, incentivising outcomes + market for social capital with pooled budgets across federal, state, local

•Or transitional device to broader use of payment by results, using existing capital markets

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•Transforming Justice in Greater Manchester as alternative model for evolution – larger scale financial incentive deals

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Young People at risk of conviction1 Young People at

risk of reoffending 2 Young Adults at risk of reoffending3 Adults at risk of

short custodial sentences 4 Adults at risk of

reoffending 5Police-led Restorative Disposals diversionary approach for first time entrants where the young person admits the offence & apologises to the victim

Multisystemic Therapy –intensive therapeutic offender and family-based treatment

Restorative Youth Conferencing – restorative and community based approach involving all those involved in the crime

Choose Change –support and resettlement service for short term prisoners

Intensive Alternative to Custody –sentencing option for those aged 18-25 combining intensive supervision with punitive and rehabilitative requirements

Work is underway on: systematic evidence-based programmes to de-escalate engagement in the criminal justice system; a pooled budget across the 12 municipalities and national agencies; and a financial incentive model with payments for success in reducing demand for prison &c, with savings shared between the various partners.

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•Potential hybrid ‘preventive investment’ model:

•Investment fund raised from mix of philanthropy, public, local commercial funds plus public local savings product

•Invested in package of interventions (eg focused on youth)

•Repayment commitment from state government linked to outcomes achieved

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•We should welcome enthusiasm!

• The challenge: how to strike the right balance with intelligent scepticism

•PFI as a warning: no serious evaluation, measurement; no serious experimentation; and a vast and unnecessary waste of public money on the way to some quite useful tools