The role of government in social impact investing

Social Impact Investment Taskforce conference – Impact investment and government: Moving from small scale to large scale.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The Rt Hon Iain Duncan Smith

It is a real pleasure to be here – and my thanks go to the Ministry of Foreign Affairs for hosting and organising the event today.

I was determined to come to Rome for this conference.

I believe the work of the Social Impact Investment Taskforce is absolutely vital, and I wanted to take this opportunity to say thank you for all your hard work over the last year.

Social investment has long been a priority of mine. It was around a decade ago that I first started pushing this agenda – through an organisation I set up called the Centre for Social Justice, aimed at forging solutions to Britain’s most challenging social problems.

In office, social investment has been a priority for the UK government too – such that the Prime Minister put social investment on the G8 agenda and established the Taskforce last year.

Through the determination and innovation of that taskforce, I believe we are making real progress towards realising the potential of the social investment market…

… nothing illustrates that better than the many exciting developments being talked about here today, from countries all around the world.

But I would also like to say a particular thank you to Sir Ronald Cohen – to whom I believe we owe a debt of gratitude.

From chairing Big Society Capital, the UK’s first social bank… to chairing the taskforce now, Sir Ronald has taken his leadership to the global stage – I know we would not be here today without his efforts.

Cultural change

Over the course of this conference, much will be said about the nascent potential of the social investment market.

Indeed, I’m sure that all of you… here on day 2… would not be here unless you were convinced of the exciting opportunity that social investment has to offer.

Yet it cannot be said too many times – I believe we cannot underestimate the difference social investment could make…

… ending what, despite the best intentions, have been the historic failing of too many governments before.

Too often in the past, tackling social breakdown has essentially been about governments pouring money into social programmes – chasing quick-wins and media headlines so that politicians are seen to be doing something.

All too rarely, however, has that spending been linked to results at the other end – measuring what impact it is achieving in terms of people’s lives.

At its heart, social investment is about turning this on its head: a complete shift in culture, whereby we focus solely on meaningful outcomes, and spend money only if what we say would be achieved, has been achieved.

As we go through this in more detail this morning, I would ask that you hold that thought…

… social investment as a change in culture – no longer about the pound, euro or dollar we put in… but the life transformation we get out of our spending.

The opportunity

For government, this opportunity is enormous – to my mind, social investment stands to make perhaps the single most significant difference to how we fund and deliver social services in years to come…

… transforming what has historically been government’s role: to pick up the pieces of social breakdown – meeting that responsibility through our countries’ welfare, health, criminal justice systems, and so on.

Social investment does not relieve government of that responsibility.

But it does open up that sphere to a whole host of groups who might never before have seen themselves as part of the solution for positive social change: be it private sector companies, high-net individuals, venture capitalists and more.

Social investment is about saying to these groups:

No longer the dichotomy between profit OR philanthropy.

Now you can use your money to have a positive impact on society, AND you can make a return.

In doing so, social investment has the scope to greatly increase the amount of funding available for social programmes – bringing in investment money on top of that provided by government or pure charity alone.

With it, that money brings the rigour, discipline and innovation of the private sector – the know-how of our most savvy entrepreneurs and businesspeople applied to tackling our society’s most entrenched problems.

In turn, for government itself, I believe social investment offers a huge opportunity to transform the whole culture of our own public spending.

No longer spending more and more on ineffective remedial policies…

… but instead investing early and investing intelligently to tackle social breakdown at its source: from educational failure to family breakdown, worklessness and welfare dependency, to addiction and problem debt.

Ultimately, because the whole premise of social investment is based on a return, linked to a given outcome, government stops paying for the process of delivering social services and starts paying for the results that are achieved…

… meaning every pound we spend goes on positive life change for the most disadvantaged in our society.

Every pound, euro, or dollar for life change: that is the opportunity of a lifetime.

Role of government

So the challenge, then, for government is twofold.

First: how do we go about attracting and leveraging investment from outside – government acting to increase both the supply and demand for capital, in growing the social investment market?

And second: when it comes to the design, commissioning, and delivery of social services, how does government itself go about harnessing social investment – transforming our whole approach to how we tackle social problems?

These are 2 distinct roles for government – today I would like to take each of them in turn, considering how best we might go about addressing the questions they pose.

I do not imagine I stand here with all the answers – far from it…

… but drawing on the experience of the UK… the insights we have gained from the emerging British market… and some of the suggestions posed by the taskforce…

… my hope is to generate thought and debate – so all of us might make progress together, our governments coming closer to performing those roles successfully.

Growing the market

Let us think first about the enabling role of government in growing the investment market – perhaps the more straightforward, but no less challenging for that.

This is a young market – in the UK, over a quarter of social enterprises started trading in the last 3 years…

… and one that is fast developing: in the UK valued at £200 million at the start of that period, set to grow to £1 billion by 2016.

Yet there is still much more to do if we are to bring social investment into mainstream – making it the norm for corporate social responsibility in the private sector, for trust funds, investment banks, and many more…

… capitalising on what the taskforce report has identified as the ‘first trillion’ of potential investment money.

£1 trillion – that’s equivalent to 4 years’ worth of delivering social services in the UK.

It’s more than the total annual social expenditure of the UK, Italy and Spain combined.

Just think what that money could mean on the ground… how many people it could help… how many lives it could transform.

Government needs to get that money flowing to where it will have the most impact.

Government as ‘enabler’

In the UK, the game-changer has been Big Society Capital – the world’s first financial institution dedicated to impact investment… together with the first Social Stock Exchange established in London…

… both of which have put Britain in the lead in terms of market structure.

To date, Big Society Capital has put £150 million in the hands of investment managers, with more than that sum again matched through third-parties… seed-funding 57 frontline organisations and growing 23 new expert intermediaries.

To help new start-ups and enterprises grow and become self-sustaining in the long-term, we’ve also introduced the world’s first tax relief on social investment – a 30% tax incentive to encourage private investment.

Research shows the tax relief could generate £480 million in investment over the next 5 years…

… at the same time as we are putting in place the right regulatory infrastructure, making it as easy as possible for the market to develop.

That is the supply side.

But as the money starts to stream, investors also need a healthy pipeline of social ventures to stimulate demand at the other end – and here too, government has a job to help the market flourish.

That is why, in the UK, we have launched an independent body – the Early Intervention Foundation – to provide advice on social finance…

… reducing uncertainty for investors and ensuring money can flow to those interventions that get results.

And it is also why we have set up a £15 million fund to help build the capacity of social ventures, already helping over 140 to become investment-ready and raise over £100 million in capital and contracts.

Such is this success that we are committing another £60 million over the next decade.

Supply and demand: an age-old doctrine of the business world, and now for government too in helping this new market to grow.

Government as ‘buyer’

But what about government’s role within this social investment market – as a participant, not just an enabler?

This brings me to the second challenge I mentioned earlier.

As perhaps the world’s biggest buyer of social services, how does government open up to social investment?

Not just to private sector companies and not-for-profits – but to social enterprises too…

… reaping the benefits – innovative, efficiency, effectiveness – in return.

In the UK alone, Sir Ronald’s findings suggest that public services provided by government could offer a market accessible to impact investors worth up to £150 billion.

If we are serious about the development of social investment, it is our job to start unleashing some of that latent potential – and that comes down to how we contract and commission services.

Let me explain.

The key, I believe, lies in identifying that any meaningful, positive improvement in a social problem comes with a value attached…

… both in terms of a social return but also a financial one, as government pays out less for costly remedial action.

In the UK, the cost of supporting child in care per year is estimated at over £60,000.

The cost of keeping a first-time young offender in jail – over £20,000.

The cost of someone sitting on jobseeking benefits for a year – £10,000.

£90,000 – that’s over €110,000, nearly $150,000.

We know the cost of failure all too well.

And as governments across the Western world rightly take steps to stabilise their economies and get their public finances in order, it matters not just how much we spend, but how we spend it.

I believe social investment offers a vital opportunity to ensure our spending has a demonstrable purpose.

This takes me back to the point I made right at the start: by putting a monetary value on positive social outcomes too… and underwriting the return… Government can then pay, not for the process of tackling the problem, but for success at the other end.

Payment by results

In the UK, we have been pioneering the use of payment by results through the Work Programme – rewarding providers for their success in supporting the long-term unemployed back to work and sustaining them there…

… with the biggest payouts of up to £14,000 for the very hardest-to-help.

A payment by results system like this works best when the timescales for delivering measurable outcomes are short and the metrics relatively straightforward – the Work Programme has shown just how well it can succeed.

The point of social investment is that it allows us to apply the same principle to programmes that deliver over a longer period as well.

Here too, the UK government is a world leader in putting this into practice.

Social impact bonds

We now have 17 social impact bonds now up and running…

… working hard to find solutions to some of our most pressing and complex social problems: from supporting rough sleepers… to caring for the elderly… and promoting adoption.

As you know, the social investment model allows freedom for providers to determine their own approach…

… meaning we are seeing projects that challenge the status quo… that harnessing inspirational leadership… that are tailored to very specific local needs.

But what the bonds have in common is what I call the ‘fidelity guarantee’ – an assurance that what you pay for is delivered, nothing more, nothing less.

Why is fidelity so important?

The reason lies in the failure of past programmes – introduced by government, but which haven’t worked.

This isn’t necessarily due to a problem with the programme itself – rather too often, it is because in implementation that programme ends up being modified – tinkered with to the extent that what was paid for, isn’t what is delivered.

Social investment puts a stop to this… bringing the discipline of the private sector to bear in policing social programmes from beginning to end.

If the project changes and the bond falls, no results mean no pay-out.

This, in itself, stands to save money historically wasted on underperforming projects, by ensuring that what works is delivered properly…

… or to use a British phrase, that ‘it does exactly what it says on the tin’.

But what’s more, social impact bonds shore up government finances through investors bearing the risk. They pay upfront to deliver services, taking the burden off the taxpayer.

Government only pays out for the results that are achieved…

… funding positive life change out of the reduced costs of social breakdown.

Innovation Fund

Already, we are seeing the success that social impact bonds can bring.

Take the 10 projects financed by my Department’s £30 million Innovation Fund…

… which are testing cutting-edge programmes to improve the employment prospects of our most disadvantaged 14-24 year olds.

In less than a year, over 14,000 young people have been helped and over 13,000 positive outcomes achieved – developing meaningful track record, which in years to come could be replicated on a national or even international basis.

Off the back of this success, in the UK, we have pooled £70 billion to develop new social impact bonds – including a new £16 million Youth Engagement Fund.

My hope is that this will be the start of a new wave of social investment across the country…

… over time, turning the tide in the whole culture of government spending – whereby we commission outcomes and pay for what works…

… investing in proven programmes that change lives.

Cohesive society

If we can get this right, I believe the effect it could have on society is dramatic.

The disparity between the top and bottom of society is in many cases larger than it has ever been.

We have a group of skilled professionals and wealth creators at the top of society who have little or no connection to those at the bottom.

Yet in so many cases what divides the 2 is little more than a different start in life.

I believe social investment gives us an opportunity to lock not just wealth back into our most disadvantaged areas – but something else as well.

Just imagine a social enterprise working in a particular deprived neighbourhood – be it in London or Los Angeles, Milan or Moscow.

Investors buy into it and as with any investment, will want to see it flourish.

Because they are risking their money – money that could otherwise be reaping a return elsewhere – those investors will want to see that social programme succeed, bringing a whole new rigour to how it is delivered: the discipline and fidelity I mentioned earlier.

But what’s more, the same investors will want to take an interest in that community where they would otherwise be totally detached… brought back into contact with our most disadvantaged individuals and families, for mutual benefit.

In doing so, these wealth creators could have a powerful influence on the communities themselves…

… a human interface between 2 polarised worlds…

… bringing success to the doorstep of failure, and two ends of our society closer together – bringing the city to the inner city, and Wall Street to poorer streets.


Now is the time for us to seize the moment, and make this change a reality.

It is no small task. And it cannot be done by government alone.

But alongside the other major players in this global market… the private, public and social sectors all committed to the cause… together we can make it happen.

I believe this is the dawn of a new opportunity.

Let us see it in together, for it holds promise for a brighter future – driving success, securing a return and changing lives.

This, surely, is worth investing in:

the prospect of sound public finances…

… at the same time, a stronger and more cohesive society.

Published 4 November 2014