Social impact bonds: promises and pitfalls

OECD LEED with netFWD

Peter Ramsden Freiss Ltd

Wednesday 15th April 2015 Paris

The way we were: The simple model, inputs buy outputs

Total Cost of project

National/regional/local Funds (taxation)

OutputsInputs

The EU co-financing model: Two sources of Inputs buy outputs

Total Cost of project

EU Funds (ERDF or ESF)

National/regional/local Funds

OutputsInputs

Social Impact Bonds: What are they?

• An enhanced form of payment by results contract with the public sector in which a commitment is made to pay for improved social results (outcomes) that (normally) lead to public sector savings

• The bond has a public - private financial circuit

• Investors get a return if they deliver the target social results

• But lose their investment if they do not achieve targets

• The term bond is something of a misnomer

• Also known as Pay for Success bonds (USA)

• Pay for Benefit bonds (Australia)

Where?

Country Number Location

Australia 2 New South Wales

Belgium 1 national

Canada 1 Saskatoon

Germany 1 Augsburg, Bavaria

India 1 national

Portugal 1 Lisbon/ national

UK 22+7 National 1, Essex 1, Manchester 3, London 6, Nottingham 1, Gt Merseyside 2, Birmingham 1, Thames Valley 1, Perthshire and Kinross 1, Cardiff and Newport 1, Sheffield 1, multiple sites 7, plus 2

USA 8 Ohio, Chicago, NYC, NY State, Utah, Mass (2)

Policy Scope

Topics

Australia 2 Family care and foster care avoidance

Belgium 1 Employment

Canada 1 Vulnerable single mothers

Germany 1 Youth employment

India Education for girls

Portugal 1 Youth computer coding

UK 22+7 DWP R1 youth employment and education (9), and R2 youth homelessness and NEETS (7) foster care avoidance (2), recidivism (1) youth engagement (4), health 3

USA 8 Recidivism (3), Early childhood education (1), employment 1, family and foster care, 1 homelessness 1

Managed SIB: Example Peterborough

• Peterborough Prison Bond 2010 - 2015

• Recidivism on short term sentences is over 60%

• Reduction by 7.5% to achieve return

• ‘Through the door’ services delivered by two social enterprises (St Giles Trust and Ormiston Trust)

• Secure funding

• £5million initial investment

• Managed SIB developed by Social Finance

Managed SIB: example Peter boroughOne Servicesource Rand Europe

Key actors

Service Providers

Commissioners

Investors

Evaluators

ClientsCLIENTS

Three broad structures of SIB

According to Bridges Ventures three main types of SIB can be identified in the emerging field.

• Direct SIB: a social enterprise raises finance directly to finance a payment by results contract

• Intemediated SIB: a special purpose vehicle is set up – either as a joint venture or owned by a social enterprise and this SPV raises the working capital and manages the process including relations with the commissioners

• Managed SIB: an organisation such as Social Finance manages the whole process

Direct SIB St Mungo’s owns the SPVSource evaluation report

Intermediated: New Horizons SIB

Peterborough One Service: Managed SIB

Whose Initiative?

• Social Finance and other intermediaries very active. Laying the ground by feasibility studies and sector reviews, proposing SIBs

• SIBs have been initiated by parent ministries and departments (e.g. London homelessness, Essex, New South Wales)

• Some have been proposed by social enterprise service delivery organisations, some by consultants and individuals

Social Innovation

• SIBs do not specify the intervention model referring only to outcomes

• Most of the practices were already known, but often had not been applied at scale or in combination.

• In Peterborough, complex service delivery model for One Service. Which was adapted to meet needs. • Mind brought in to deliver mental health support• Ormiston commissioned to deliver support services to families of offenders• Drop in service set upu and course delivered in maintain family ties in prison.

• Much of the innovation is in the packaging, coordination and integration of services. Role of coach, navigator and relationship based support a common thread

Measurement and Results

• Impressive attention to defining results and result indicators

• Use of external evaluators on throughout the contract rather than ex-post.

• SIBs are as robust as Social Experiments in using indicators, measuring added value and distance travelled, and using Randomised Control Groups (e.g. Peterborough)

• Evaluators have looked in detail at creaming/cherry picking and parking issues.

• Peterborough achieved 8.4% reduction in reconviction events at its first evaluation compared to the matched comparison group (payments would have been triggered by 10%).

Examples of result (outcome) indicators

• Peterborough One service: Reduction in the frequency of reconviction events within 12 months after discharge. The mean number is compared with an equivalent matched comparison group.

• They use a propensity scoring method based on regression analysis with specific predictive variables from the whole prison population (e.g.demography m/f age etc, historic offences, conviction, sentence etc.)

• Street Impact: five weighted indicators for allocating funding• Reduced rough sleeping 25%• Sustained stable accommodation 40%• Sustained reconnection (out of UK) 25%• Employability and employment 5%• Better managed health 5%

Investors: mostly from the social investment community, but some banks• Peterborough £5million: Barrow Cadbury charitable trust, Esmee Fairbairn

Foundation, Friends Provident Foundation, Henry Smith Charity, JahanssonFamily Foundation, Lankelly Chase Foundation, Monument Trust, PanahpurCharitable Trust, Tudor Trust

• Rikers Island 9.7m USD raised from Goldman Sachs Urban Investment Fund with 70% guarantee from Bloomberg Philanthropies

• Massachussets 27m USD of potential success payments (from Fed and State). Financing SIB:• Goldman Sachs $9 million in senior loan from Social Impact Fund (part of UIF). • The Kresge Foundation and Living Cities $1.5 million each in junior loan financing.• $3.7 million from Laura and John Arnold Foundation, $2 million from New Profit,

and $300,000 from The Boston Foundation in grants

Different structures for rates of return

• Peterborough (recidivism) capped interest return of 13% if the reoffending rate drops beyond 7.5% but capital is lost if target not achieved.

• Essex 8% for medium performance

• New South Wales 10-12% return and losses capped at 25% of capital

• It’s all about me (adoption SIB) 4% annual rate of return

Different perspectives on risk

• Commissioner: procuring the service

• in house, the department carries the risk (e.g. of poor delivery)

• pay a service provider for outputs, risk shared

• pay for outcomes/results – risk transferred to service provider

• Service provider (mostly social enterprises) for a payment by results contract:

• finance from own resources, service provider takes the risk

• via a bank loan, service provider – shared risk

• via an investor who will be repaid if results achieved. Risk can be managed using a SIB

• The investor,

• Direct SIB – the service provider carries the risk if results are not achieved, the investor is lending and is repaid first with the loan secured against the enterprise’s assets (or unsecured if SPV)

• Intemerdiated SIB – risk is shared within the SPV among investors. Repayment is dependent on structure of SIB .

• Managed SIB –investors carry risk but have upside if results are achieved and exceeded

What about the social enterprise service provider?• The level of risk depends on the model• In a direct SIB the risk can be high (no payment if results are poor) but

higher returns if results are good. • In an intermediated SIB the social enterprise is shielded from the risk by

the SPV. But is contracted and can have contract terminated for non-performance. They are paid for service delivered (similar to input funding model)

• Ditto for Managed SIB. • Advantages of SIBs for social enterprises

• Able to bid into larger payment by results contracts

• Disadvantages of SIBs for social enterprises• Tied to very tight performance targets

A Faustian pact?

Effectiveness & efficiency

(results/outcomes)

Transparency, complexity & accountability

Some questions on social impact bonds

• Governance: Is it transparent? To whom is it accountable?

• Scope: when are these types of bonds appropriate and when not?

• Social innovation: What types of intervention does it deliver on the ground? Do they lead to ‘cherry picking’ or ‘parking’

• Measurement: Who benefits (and who loses) and how do we measure results?

• Finance: Which model and why? How much cost and time to set up compared to other options? How are the payments triggered? Where does the money go? Who will invest?