Social Impact Bonds: what’s that coming over the hill?

Social Impact Bonds: what’s that coming over the hill?
acquiringbusiness4good, by Lauren Scott
16.05.12

Social impact bonds seems to be all the rage at the moment – have you heard about the Peterborough prison project which has been put together by Social Finance? Its aim is to reduce re-offending amongst a certain category of offenders. Or the SIB which has been created by Perth YMCA in collaboration with the Department of Work and Pensions, where the project is aimed at supporting young people? But what exactly is a SIB?

The easiest way to explain a SIB is that it is an arrangement between 3 people – an investor, the public sector (the “commissioner”) and an organisation which is tasked with delivering the desired outcome. The investor agrees to invest money, and that money is used to fund interventions related to a social issue. The investment is paid back by the commissioner to the investor, plus a return, if social outcomes are achieved to a pre-agreed level. The level of return increases with the level of improvement in the social outcomes.

In short, it’s really a way for the public sector to ‘forward fund’ such projects (which has to be attractive in light of savage public spending cuts), and arguably it also allows the public sector to shift the risk. For philanthropic investors, it is easy to see that if a project is a success then it ticks various boxes, including the ability to direct their investment to projects which they want to support, and the benefit of a financial return in the event that the project achieves the desired outcome (though there is a risk that is the project fails to deliver, then the investors are likely to lose their money). And for the organisation tasked with delivering the service? Well, they are able to secure the funding up front without having to rely on financial support from the public sector.

There is no denying that the legal and contractual arrangements to set up a SIB-funded project are a little complex, but the nettle needs to be grasped (and models will inevitably emerge). If one stops to think, the scope for using SIBs is wide – there are a whole range of projects which could be supported by SIBs (where the outcomes are capable of being empirically measured). Improvement in health, encouraging people back into work, and early years care are just a few which spring to mind.

There are however some who feel that the whole concept is distasteful and that investing in a SIB is effectively investing in another person’s misery. This might be the wrong way to look at it. Charities and other social enterprises cannot continue to rely on public funding, and so they will simply have to find innovative funding alternatives. We know that SIBs are on the agenda of the Scottish Government’s Finance Committee, charities and their advisers are becoming more aware of SIBs and more and more SIB-funded projects are springing up. Momentum is gathering!