Risk and reward: can social impact bonds breathe new life into public services?

A speech by the Rt Hon Iain Duncan Smith MP.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Rt Hon Iain Duncan Smith MP


It’s good to see so many people here this morning. It can be easy to lose sight of why this issue is so important, but sometimes you have moments that give you a sense of perspective.

I was recently handed a report by a charity who work with extremely vulnerable children.

The report contained a number of difficult images and stories, but some of the most powerful were sculptures and scenes created by the children who the charity worked with.

One of the scenes was produced by ten young people whose parents were substance abusers, and the caption below the photo read as follows:

“The house of children whose parents are addicted to crack-cocaine. Dad has passed out on the mattress in his own vomit, mum is crouched over a table, preparing her fix. What you don’t see is the child hidden in the corner crying.”

This is how these children chose to represent their home lives. 

The Centre for Social Justice

Some of you might be thinking: ‘That’s terrible, but it must be a pretty rare case. 

It’s probably not as rare as you think.

When I was at the Centre for Social Justice we found that some 350,000 children had drug addicted parents, and one million had parents who were addicted to alcohol.

And this isn’t just about addiction.

We found that, even during a period of growth, we had:

  • Some 4.5 million people on out of work benefits, many for ten years or more

  • High levels of family breakdown, particularly affecting our poorest communities

  • And a staggering level of personal debt, one of the highest in Western Europe, with too many condemned to the fear of violence from loan sharks on a daily basis

Perhaps most important of all, we found that poverty was about more than income alone.

Of course income is an important factor, but it is not the whole story.

Take the scene of the drug addicted mother and father that I described before - would the child’s life really have been changed if its parents had been given a couple of extra pounds a week in benefits or tax credits?

But help the parents get clean from their addiction…

…support them to stay together and work at their relationship…

…and work with them to write a CV and find a job - and that’s when you really start to make a difference.

So while income is important, we should be clear that the source of income can have very different effects.

Income through benefits maintains people on a low income, whereas income gained through work is transformational.

What is critical is that we tackle the ‘pathways to poverty’:

  • Family breakdown
  • Educational failure
  • Debt
  • Addiction
  • And worklessness linked to welfare dependency

We have to get in there early - investing money up front - to close these pathways off.

Social Investment

Now I am the first to accept that people should be wary of politicians talking about ‘investment’, when too often what they actually mean is more spending.

But we are trying to build an agenda that is a little bit different - an agenda that is about real investment, asking investors to put their money forward in pursuit of the social good while reaping a return at the same time.

These returns are potentially huge - Graham Allen’s report on early intervention cited statistics showing that it costs:

  • Around £59,000 a year on average for a youth offender to be placed in a young offender’s institute
  • Or hundreds of thousands of pounds to support an individual for a lifetime on benefits.

But it’s not enough to know how much this is costing Government at the moment.

We need to know which interventions - if made early and up front - could change the course of someone’s life so that they do not become the concern of the State for many years to come.

And we need to know what rate of return we can expect from these investments, allowing us to apply a price to social intervention and create an investment vehicle, such as a social impact bond.

Washington State Institute

This isn’t just a pipe dream - there are organisations doing this already.

Earlier this year we held a seminar with Steve Aos from the Washington State Institute for Public Policy, and the work they are doing there is fascinating.

They’ve shown that it is possible to determine a social return on investment, monetise it, and say that, for some given intervention, you get £X return for every £1 invested.

This enables them to send out a clear message that these are quantifiable and hard savings, and they have been using this approach in Washington State for over 25 years now.

There is similar work being done at the Dartington Social Research Unit, led by Michael Little.

It’s time that UK governments caught up, and this is exactly the kind of approach we are looking at now.

Work underway

But while there is work to do in building the evidence base for social investment, I’m pleased to say we are leading the way in building innovative funding mechanisms.

There are two things here.

First, through the Work Programme we have created a new payment by results regime, levering private investment up front and paying when outcomes are achieved.

This model operates well when success can be measured over the relative short-term.

For interventions that show results over the slightly longer-term we are building social investment vehicles, including social impact bonds.

Many of you will be aware of the reoffending Social Impact Bond in Peterborough - the first of its kind anywhere in the world.

We are also in the middle of procuring for the Innovation Fund, which will enable investors to back innovative projects which help disadvantaged young people.

This is about getting in there before people have left school, targeting kids from the age of 14 and up and tackling the root causes of disengagement from education and employment.

And the Cabinet Office is currently leading innovative pilot projects with four local authorities, looking at how social investment can be used to help turn around the lives of some of the most troubled families.

Need to build a market

But these are still just first steps - the question is ‘what next’?

How can we encourage social investment on a big enough scale to achieve real life change?

And I don’t just mean how can we get businesses to do this as an afterthought, or as part of their corporate social responsibility agenda - important though that is.

I mean how can we ensure that social investment becomes - as Sir Ronald Cohen has predicted it will - ‘the new venture capital’.

If we get this right, it could mean a change to the whole way that Government and the private sector work together to solve social problems.

Government could benefit from more capital up front to invest in savings to the public purse.

The private sector could get new opportunities to see returns on their investment.

And for society at large…

….for some of our most disadvantaged communities…

…potentially for those children I spoke about at the start…

…it could offer a real chance to change lives, potentially on a massive scale.

 It could offer a chance to re-engage the top and bottom of society once more.

Financial sector

You don’t need to look far to see that there are concerns in our society about some parts of the financial sector.

Without doubt there has been a dislocation between our wealth creators and those who have been left behind, and this cannot be good for society.

But I believe that this market offers a new opportunity…

…a chance to start afresh…

…and a vehicle for the wealth creators to feed that wealth back into the community.

This isn’t about transferring social ‘burdens’ from the public sector to the private sector.

It’s about sparking off a dynamic change in our poorest areas.

Get someone in to work in an area where worklessness is endemic and you have created a role model.

You have improved the prospects for a local business.

Or help someone to start their own business, and you have enabled them to start creating employment prospects for others.

This in turn helps to create more stable families, building a more positive environment for children to grow up in.

This is how a small intervention can spark off a chain of events that revives whole communities.

Building the evidence base

But this isn’t just a call to investors - there is more for Government to do as well.

Investors have told us that they need more assurance about the measurement of - and evidence base for - social interventions before they are prepared to risk substantial funds.

The Innovation Fund is important here.

One of the reasons we have built the Fund is to test the extent to which it generates savings and delivers a wider social return on investment, and we will be applying these lessons to other projects in the future.

Work is also close to completion on ‘Big Society Capital’ - a major new source of social investment - and this is something the Chief Secretary will touch on in more detail later.

But we know that there is still more that could be done…

…and myself and a number of my colleagues have been clear that we support the principle behind the proposed Early Intervention Foundation, which would provide expert advice on early intervention as well as building the evidence base on social returns.

We will be able to provide more details on this shortly.


So my message to you today is this:

Government is committed to this agenda.

We are behind it, and we are sticking to it.

And where there is more work needed to build the evidence base, we will deliver it.

But now we need you to come with us.

For those who haven’t done so already - make that first move into the market.

For those who already have, help us to grow it in the future.

We are on the edge of something exciting - now help us make it a reality.

Published 15 December 2011