Evidence Submission: Social Impact Bonds

Payment by Results (PbR) emerged in the NHS in 2003 with a simple objective: establish a tariff based hospital payment system that provides care providers with an incentive for improved performance. 1 The same premise underpins Social Impact Bonds (SIBs). 2

SIBs emerged in 2010 and have since been lauded as the answer to some of the UK’s most intractable social problems including, for example, recidivism, youth unemployment and even substance abuse. 3,4 Established by Social Finance with the Ministry of Justice in 2010, the first SIB pilot seeks to reduce the rate of reoffending by more than 7.5% among former and current short sentence prisoners of (HMP) Peterborough Prison. 5

The operational architecture of SIBs is shown in figure 1: a public body invites organisations to develop an intervention in order to, for example, reduce the number of children entering care. The intervention is paid for by issuing bonds to private investors.  If it meets pre-defined outcome targets, a proportion of the government savings are used as a reward for the investors. Conversely, if the targets are not attained, the commissioning body does not pay a dividend.

Figure 1: An example of a Social Impact Partnership [5]

The benefits of Social Impact Bonds

Applied correctly, SIBs have the potential to:

• transfer risk from the government to private investors, thereby encouraging experimental pilot interventions that may not be financed otherwise.2,5,6
• create an outcome-driven system whereby government expenditure is used to fund long-term preventative interventions. 2,5,6
• align public sector funding with private sector incentives so that there is a mutual benefit from improved social outcomes 7.
• mobilise and increase the amount of (private) capital available for early intervention programmes which can offer good value for money8.
• improve the cost-effectiveness of public service provision, a deficiency which has been widely documented in the UK. 8,9

The risks of Social Impact Bonds

An effective SIB requires the determination of: i) a robust outcome metric ii) a clearly defined client group and iii) an appropriate comparison group/counterfactual. Such requirements may create a context where:

• public bodies are liable for excessive risk premiums. 10,11
• vulnerable populations are exposed to the withdrawal of essential services if safeguards are not in place to prevent the collapse of SIB contracts. 10
• service providers which do not have the funds or expertise to design interventions with a reliable counterfactual. For example, the SIB contract for the Peterborough pilot required more than 300 hours of legal advice and over two “person-years” of Social Finance’s resources.  (11)
• service providers have an incentive to avoid (or cherry pick) specific cohorts – such as reoffenders with substance abuse problems – which are unlikely to meet the success rates required for private investment 10,12.
• contextual circumstances and localised conditions mean that it is difficult to determine accurate outcome metrics for reoffenders including those, for example, with substance abuse problems. Studies of the Drug Intervention Programme (a core component of the England’s drug strategy) showed significant variability not only in the content, delivery and duration of keyworker sessions but in the capacity (and characteristics) of clients to benefit from the programme. 13,14

Since its inception, PbR has expanded to cover various forms of acute health care and fundamentally changed the direction of financial flows within the NHS. Whether SIBs  can be an equally powerful mechanism of the “Big Society” and create viable markets for social change is yet to be proven.

Evidence submission  by: Rory Alexander Moody, Graduate Fellow, Prince’s Foundation for the Built Environment

Conflict of Interest: The author declares no conflict of interest.

References

1. Department of Health. A Simple Guide to Payment by Results. London: Department of Health, 2010 http://www.dh.gov.uk/prod_consum_dh/groups/dh_digitalassets/@dh/@en/@ps/documents/digitalasset/dh_120254.pdf. Accessed 28 May 2011.

2. Social Finance. Towards a new social economy: Blended value creation through Social Impact Bonds. London: Social Finance, 2010. http://www.socialfinance.org.uk/sites/default/files/Towards%20A%20New%20Social%20Economy%20web.pdf. Accessed 21 May 2011.

3. Travis, A. Will social impact bonds solve society’s most intractable problems? The Guardian, 6 October 2010. http://www.guardian.co.uk/society/2010/oct/06/social-impact-bonds-intractable-societal-problems. Accessed 19 May 2011.

4. HM Government. Putting the Frontline First: smarter government. HM Government, 2009. http://www.hmg.gov.uk/media/52788/smarter-government-final.pdf. Accessed 17 June 2011.

5. Bolton, E. & Palumbo, J. Overview of the Peterborough Social Impact Bond. London: Social Finance, 2011. http://www.socialfinance.org.uk/sites/default/files/SF_Peterborough_SIB.pdf. Accessed 6 June 2011.

6. Social Finance. A Technical Guide to Developing a Social Impact Bond: Criminal Justice. London: Social Finance, March 2011. http://www.socialfinance.org.uk/sites/default/files/Technical_Guide_Criminal_Justice.pdf. Accessed 5 May 2011.

7. Loder et al. Financing social value: implementing Social Impact Bonds. London: The Young Foundation, 2010. http://www.youngfoundation.org/files/images/01_10_Socail_Impact_Bonds_FINAL.pdf Accessed 4 May 2011.

8. Allen, G. Early Intervention: The Next Steps. An Independent Report to HM Government, 2011. http://www.dwp.gov.uk/docs/early-intervention-next-steps.pdf. Accessed 12 June 2011.

9. Audit Scotland. Drugs and Alcohol Services in Scotland. Prepared for the Auditor General for Scotland and the Accounts Commission, March 2009. http://www.audit-scotland.gov.uk/docs/health/2009/nr_090326_drugs_alcohol.pdf Accessed 14 April 2011.

10. Liebman, J.L. Social Impact Bonds. Washington DC: Centre for American Progress, 2011.http://www.americanprogress.org/issues/2011/02/pdf/social_impact_bonds.pdf Accessed 21 May 2011.

11. Rand Europe. Lessons learned from the planning and early implementation of the Social Impact Bond at HMP Peterborough. Ministry of Justice, 2011.  http://www.justice.gov.uk/downloads/publications/research-and-analysis/moj-research/social-impact-bond-hmp-peterborough.pdf. Accessed 23 May 2011.

12.  Easton, M. The name is Bond: Social Impact Bond. London: BBC, 19 January 2011. http://www.bbc.co.uk/blogs/thereporters/markeaston/2011/01/the_name_is_bond_social_impact.html. Accessed 7 June 2011.

13. Best et al. What treatment means in practice: An analysis of the delivery of evidence-based structured interventions in criminal justice drug treatment services in Birmingham, England. Addiction Research and Theory, 2009; 17: 678 – 687.

14. Best et al. Research for Recovery: A Review of the Drugs Evidence Base. Edinburgh: Scottish Government Social Research. http://www.scotland.gov.uk/Publications/2010/08/18112230/16. Accessed 12 June 2011. Accessed 15 June 2011.