Social investment: Slow and steady wins the race?

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Social investment: Slow and steady wins the race?

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A promising social investment model, Social Impact Bonds are considered by many to be a key player in the future of charity finance. So what's the hold-up?

As government funding gets more squeezed and impact becomes ever more important, so the imperative to develop alternative methods of charity finance becomes greater. A lot of noise has been made around Social Impact Bonds (SIBs), and yet, since Social Finance launched the model back in 2010, only around 30 charities have taken it up. This doesn't mean it's been a flop; it's just...all rather complicated. Which might explain why it's taking so long for the model to proliferate throughout its target market.

If you're not familiar with how SIBs work, you can read a full explanation here. But in a nutshell: investors put up money for a charity to deliver a programme, and the government pays the investors back on delivery of the programme's outcomes - with premiums often paid where results go above and beyond the stated goals. Aimed at investors seeking a social as well as a financial return, the model provides a low-risk investment opportunity, being applicable only in casual areas proven to have good outcomes.

The beauty of the model is in its symbiosis, with SIBs yielding clear advantages to all of the parties involved. It makes sense for government - because in times of constrained finance, you only want to pay for things that really work, and there's no cost to the taxpayer if a programme fails to deliver its outcomes. It makes sense for charities, because SIBs offer them the security of long-term contracts (most are three to five years in length) and reward those who perform well. And it makes sense for investors, because their money is invested at low risk and once repaid can be recycled and used again and again for good purposes.


Fledgling finance

The first SIB was developed and piloted by Social Finance in September 2010 at Peterborough Prison to help fund rehabilitation for prisoners with the aim of reducing reoffending. Now in its second phase, the programme is well on track to deliver the outcomes on which repayments hinge. Since Peterborough, the UK government has orchestrated 16 SIBs in the UK which are active today. Just this week, seven more SIBs have been announced as part of the Department of Communities and Local Government and Cabinet Office’s Fair Chance Fund. They will be active from 1st January 2015. Meanwhile, the Big Lottery Fund is gearing up to launch 30 SIBs, for which it will make up to 20 per cent of the outcomes payments, as part of the Commissioning Better Outcomes fund, by June 2016. And there are several others in the pipeline.

It is, however, still relatively early days for SIBs - certainly in terms of their replicability. Social Finance is still in the process of testing, figuring out the circumstances under which SIBs might best apply, and how you can most effectively measure outcomes in these various scenarios.

That being said, for Action for Children, one of the earliest users of SIBs, the model has been working extremely well so far. David Derbyshire, director of practice improvement at the charity, says it brings significant benefits. "We've got outcome-based contracts, which we've long been campaigning for, and the contract are long term - one of ours is five years, the other is seven. We've been campaigning for longer-term contracts for years."

Through SIBs, Action for Children is providing a service in Essex called 'multisystemic therapy', a series of interventions designed to avoid young people on the edge of care from entering care or custody, Meanwhile in Manchester, the charity provides a 'multidimensional treatment' foster care programme, which enables young people with challenging behaviour and who are currently living in residential care homes to move into specialised and eventually more mainstream foster placements.

The reason these two programmes are featured in the early days of social investment, David explains, is that they have "by far and away the best evidence base of any social care programmes with children." Much of this evidence originates from the US, where significant sums of money have been put into researching and developing these interventions over many years. "So for an investor who might be worried whether an organisation like ours will ever reach the stated outcomes and whether they will get their money back, these programmes offer the least risk."


Not suitable for all

Low-risk they may be, but Social Finance itself is the first to admit that SIBs don't work in every area. “In a SIB, investment returns are driven by performance, which means that they are most suitable for charities whose operational model can deliver clear and measurable outcomes", according to Alisa Helbitz, Social Finance's director of research and communications.

There will always be social services that need support through more traditional funding mechanisms; for example, with something like general counselling services, it could be quite hard to arrive at a tight definition of outcome that an investor would want to pin money to.

But for early intervention and prevention programmes in areas such as youth unemployment, rough sleeping, edge of care and adoption programmes, SIBs are often a viable option.

One problem, however, is that at the moment SIBs are pretty complex things to orchestrate. Each one requires a bespoke contract arrangement between each of the parties, involving a great deal of discussion and negotiation. "You'd hope that over time we can develop all sorts of templates which mean you don't need to reinvent the wheel every time," says Kevin Munday, ThinkForward programme development manager at private equity foundation Impetus PEF, which has invested in two SIBs to date and also acts as an intermediary in SIB arrangements. "There is room for some efficiency, to make sure that organisations can take things off the shelf rather than having to start from scratch."

Kevin also points to a need for clearer definitions of SIB outcomes that everyone can sign up to and measure. "In order to be really clear on what outcomes are, you need to have a common, society-wide view on what those definitions are. That requires charities and commissioners working together to arrive at really good, clear language."


Data is king

Language is one hurdle to overcome, for sure, but in terms of the time and resources required to make SIBs run smoothly, the biggest mountain to climb is data collection - as Action for Children has experienced. "Data governs the issue of when and whether outcomes payments are made, so there's a very high level of data scrutiny every month, by ourselves, the investors and by the public sector bodies concerned," says David.

“That’s a level of detail which is not normally seen in a standard contract, but is required in SIBs so that we all know whether the project is on track or not. Obviously we’ve had to allow for that in terms of the resources we need in order for these programmes to work.“ 

Teens and Toddlers, a charity that addresses the social exclusion of young people, has implemented a SIB to finance two stages of a programme which empowers young people with life skills. Diana Whitmore, the charity’s founder and CEO, illustrates the challenge that the huge data burden brings: “Each week we have on average 500 young people on the programme, and we have to track the attendance of each of them, and if they haven’t attended, capture the reasons why. That’s quite an extensive data capturing exercise in itself. Then we also have to capture their performance on the programme.”

Although this has proven to be a challenging undertaking, Diana says it has been a wholly positive one: “It has greatly improved and enhanced our outcome evaluation. It really strengthens your evidence and enables you to identify and resolve problems earlier on.”


Trailblazing finance

When it comes to the future proliferation of SIBs, there is certainly no shortage of interest from investors. There is also a finite, but reasonable pool of charities from which to draw service provision. Commitment on the part of commissioners doesn’t quite match the central government rhetoric just yet; but with a decent number of new SIBs in the pipeline, it seems some progress is being made. 

However, SIBs are still a very long way from entering the mainstream. When considering their potential, though, perhaps we should view them not just in terms of being finance models in themselves, but also as possible pioneers of other alternative finance methods. “It’s the first innovative way in which we’re seeing an alternative source of funding for the services that the most vulnerable in society need, and there may well be other, similar sources of alternative funding coming up the future, so to that end I think this is a trailblazer”, says David. 

He adds: “At a time when public spending cuts are generally hitting local authorities and other public sector spending bodies very hard indeed, social investment and other forms of alternative funding are needed in order to enable organisations to run sustainable services into the future.”


Investment potential

At the moment, investors in SIBs tend to be mainly large institutional social investors, like Big Society Capital. But, says Kevin from Impetus PEF, “lots of high-street banks like Co-op, through to niche funds like British Ventures, right down to high-net-worth individuals, are interested in investing in the space”. 

In Scotland, the YMCA SIB has managed to attracted a large number of smaller, local investors, demonstrating the potential for social investment vehicles to not just be the preserve of large financial institutions, but also ordinary people who care about local issues. This could reach right into our own households, says Kevin: “One day, you or I might be able to invest our money in a social impact ISA, and rather than get 5 per cent from Santander, you might be happy to get 3 per cent from a SIB, because you’ll know you’re doing a lot of social good, while still making some money. I think it will tease more people into philanthropy than traditional donations have.”


Outcomes first

If you’re interested in exploring the potential for SIBs to work within your own organisation, there are clearly many factors to consider. Foremost among these is that you'll first need to be crystal clear on your programme’s outcomes. “Don’t try to go down this road unless you’re confident that the programmes you’re going to run through SIBs are going to succeed”, says David. “If you’re essentially crossing your fingers and hoping that something might work, then you shouldn’t be thinking about funding it through social investment. Without having the authority or level of evaluation that is required at this early stage, you will run into difficulties.”

However, if you don’t currently have quite enough evidence to prove that your programmes reliably and sustainably generate their stated outcomes, or you’re a bit short on capacity to manage the heavy data requirement that SIBs convey, don’t give up: there is help out there from organisations, such as Impetus PEF, which work with ambitious charities to make them ‘investment ready’ - which includes effective data collection and outcomes reporting - so that they can cope with the rigours of payment-by-results contracts. 

At the very least, it’s worth keeping an eye on developments in the social investment space; it is, after all, one way to bring new money into a tightly squeezed area. On the ground at Teens and Toddlers, Diana keenly advocates the SIB model; their own bond has over-performed on its stated outcomes, making it a win-win for everybody. “I think impact investment is the future, as government funding gets more and more squeezed - and social impact bonds fit in very well with the wider move towards impact reporting”, she concludes.


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