Social impact bonds
Social impact bonds (SIBs) are designed to help reform public service delivery. SIBs improve the social outcomes of publicly funded services by making funding conditional on achieving results. Investors pay for the project at the start, and then receive payments based on the results achieved by the project.
Rather than focusing on inputs (eg number of doctors) or outputs (eg number of operations), SIBs are based on achieving social ‘outcomes’ (eg improved health). The outcomes are predefined and measurable.
This guide provides introductory information to help commissioning organisations (government departments, local councils and other public service organisations) that are beginning to consider developing a social impact bond. It will also be useful for those are considering investing in a social impact bond, and for organisations that want to deliver a project funded by a social impact bond.
For more detailed information on developing social impact bonds, visit the Centre for Social Impact Bonds Knowledge Box. The Centre for Social Impact Bonds has produced a template legal contract for social impact bond and payment by results agreements. This is a free resource for all SIB developers in the UK and a guidance document on contracting social impact bonds.To gain access to this contract, learn more about the Social Outcomes Fund or receive additional support, contact the Centre for Social Impact Bonds at the Cabinet Office.
The purpose of social impact bonds
SIBs provide a number of benefits for commissioners, service providers and investors:
- they allow commissioners to attract private investors to fund early and preventative action on complex and expensive social problems
- they enable new services to be tried without commissioners having to pay if they don’t work
- they can help services to adapt so that they have a greater emphasis on prevention
- they can allow greater flexibility for those providing the services to adapt and change the service according to their experience
- they can help charities and social enterprises bid for and manage ‘payment by results’ (PbR) projects - projects where the government pays the provider of the service for the results achieved
Payment is based on what the project or service has achieved, not the processes or work that has been done. For example, payments for the social impact bond at Peterborough prison are based on whether or not the project has lowered the rate at which prisoners reoffend, rather than the cost of the project or the number of people working on the project.
Because payment is based on results rather than process, there is more room for innovation and greater freedom to demonstrate solutions that work. The result is better outcomes for the public and reduced costs to Her Majesty’s Government.
The diagram below shows how SIBs work: initial funding is paid for by investors to cover the costs of the project. The provider carries out the project, and the investor is paid by the government according to the results achieved, at specific points agreed in the contract.
How to decide whether a SIB is likely to be appropriate
An organisation commissioning a service or project could consider a SIB when:
- the desired outcome is clear and measurable (eg reducing recidivism)
- the quality of outcomes can improve
- there is a desire to increase evidence of effective programs
- government is looking to transfer financial risk
- there is a desire to catalyse the market for innovative financing
- a large proportion of savings are cashable or funding is available for this outcome
Carrying out a feasibility study
Before a SIB-funded social service begins, commissioners should examine its expected costs and savings by carrying out a feasibility study. A feasibility study analyses the proposed SIB to determine its prospects for success. It considers the strengths and weaknesses of the proposal, the opportunities and challenges of the project and the resources required for success.
Commissioners should decide if it’s possible to carry out the feasibility study internally or if external help is needed, eg an intermediary or consulting support. Intermediaries can provide useful specialist knowledge of SIB design and project management support.
As part of the feasibility study, the commissioner (or other party if they’re leading the project) should identify who’s likely to be interested in or affected by the project, and engage with them early in the process.
Defining measurable intended outcomes for the project
When identifying outcomes for a SIB, consider if:
- the outcome can be measured easily and accurately
- the outcome can be linked directly to an intervention
- achievement of the outcome saves money, either by directly reducing costs or by avoiding likely future cost
- some of the money saved is cashable, eg cash savings that could reduce what needs to be spent, like a reduction in legal costs; other savings are not directly cashable but are highly socially beneficial, like an improvement in exam results
Commissioners should make sure that any perverse incentives - elements of the contract that encourage behaviour that would undermine the overall aims of the project or service – are properly considered and managed.
Identify the cohort for measuring the outcomes of the project
It’s important that the performance of the project is accurately measured. This involves carefully identifying the characteristics of the group of people who should participate in the programme (‘the cohort’), and a source of comparison data – either a control group or baseline data.
The provider should not be able to selectively pick and choose who they work with, and the payment tariff should take the make-up of the cohort into account. It can be useful to include specific payments for results relating to groups within the cohort where it is likely to be more difficult to achieve the intended outcomes of the project.
Define the financial outcomes of the project
The feasibility study should assess how the payments between the investor, provider and commissioner of the service will be structured, based on the costs, savings and intended outcomes of the project.
The SIB developer should calculate the potential costs of the service, along with the potential savings and the proportion of these that are cash savings. The SIB developer can then allocate the costs and the savings to the relevant commissioning beneficiary. If other government bodies benefit from the SIB, they might be interested in co-commissioning the SIB.
It’s also useful to identify the timings of the costs and savings. This will help determine how much working capital is required from the investor and when it will be possible to pay outcomes payments.
Commissioning and procurement
The procurement process will need to be approached differently depending on the SIB proposed, and depending on the specific circumstances of each project.
Identifying and working with potential investors
Investors risk losing money if the service doesn’t achieve its outcomes. SIBs are not traditional bonds - they carry equity-like risk. This means the investor can be exposed to all the downside risk: eg they can risk losing the initial investment.
Any non-government organisation can become an investor in a SIB. Investors in SIBs in the UK have mainly been charitable trusts and other social investors.
The commissioner should be prepared for questions from investors, which may include:
- does the proposed social outcome match the investor’s ideals?
- does the project meet the specified investment criteria?
- what’s the risk of them having to provide extra money during the contract?
- where’s the evidence that this proposed solution works?
- how good is the provider’s track record in this area?
- how trustworthy is the provider?
- what risk will be taken on? (they will use this to decide the rate of return they expect on their investment)
- what controls will there be over delivery?
Social investors and intermediaries may want some influence over the way the project is delivered, given that they’re taking much of the risk. This can be achieved in a number of ways, like:
- buying a share in the provider organisation and/or taking a seat on the board
- attaching a number of conditions to an investment, such as rights to take control of or terminate the project in the event of sustained under-performance
- engaging an intermediary to manage provider performance throughout the contract
Social investors may use performance management techniques to make sure projects are rigorously managed according to strong social values. This may include:
- a rigorous data collection system
- basing decisions on data
- tracking and reporting impact
- detailed periodic financial and performance reporting
If providers are not achieving outcomes, there are several potential ways commissioners can intervene:
- providing training and support to help the provider develop their skills and systems
- redistributing the workload to share with another provider
- replacing providers if outcomes aren’t being achieved (depending on the terms of the contract)
Sources of funding for SIB projects
Social Outcomes Fund
In November 2012, the Cabinet Office launched the £20 million Social Outcomes Fund to deal with the difficulty of aggregating benefits and savings which accrue across multiple public sector spending ‘silos’ in central and local government. The fund is used to provide a ‘top-up’ contribution to outcomes-based commissions (PbR or SIBs) that are designed to deal with complex and expensive social issues. This will catalyse innovative new projects in areas where no single commissioner can justify making all of the outcomes payments, but where the wider benefits mean that a SIB is value for money. Reporting and assessment of performance data is a condition of funding, and will also generate evidence on the effectiveness of the project to overcome these barriers in the future. It operates only in England, with funding available to:
- government departments
- local councils
- other commissioning bodies, like police forces or the clinical commissioning groups
Commissioning Better Outcomes
In July 2013, The Big Lottery Fund launched the £40 million Commissioning Better Outcomes Fund to support the development of more innovative approaches to improving social outcomes. This is to enable more people, particularly those most in need, to lead fulfilling lives, in enriching places and as part of successful communities. This fund will top up outcomes payments in SIB propositions in a similar way to the Social Outcomes Fund. In addition the fund offers between £10,000 and £150,000 of development funding to purchase technical support to develop SIB propositions that have passed the EoI stage.
Each fund has a distinct focus within the overarching aim of growing the SIBs market. The Cabinet Office’s Social Outcomes Fund aims to fund SIBs that lead to new and innovative approaches to public services, which address complex issues using outcomes based commissioning. And as the two funds have the same broad aim there is a single shared application process to make it easier for customers.
Other funding sources
Big Lottery Fund (BIG) is the largest distributor of National Lottery ‘good cause’ funding.
Innovation Fund is run by the Department for Work and Pensions and has already financed 10 SIBs.
The Investment and Contract Readiness (ICR) Fund is a £10 million fund, managed by The Social Investment Business, on behalf of the Cabinet Office.
Social Incubator Fund is a Big Lottery Fund fund that will be open to applications in 2013.
Mutuals Support Programme is a £10m fund that contracts for professional commercial and legal services to assist promising mutuals.
Big Society Capital has a directory of social finance investment organisations in the UK that provide finance and support to the social sector.
Funding Central is a website for charities, voluntary organisations, and social enterprises providing access to thousands of funding and finance opportunities, tools and resources.
Business support finder is the government online access point for business support in England.
Bridges Social Impact Bond Fund provides investment and support to charities and social enterprises to deliver programmes designed to improve social outcomes in areas such as education, employment, housing and care for vulnerable young people.
Support for commissioners, investors and providers
Help, support and advice is available to commissioners, investors and providers setting up a social impact bond.
Centre for Social Impact Bonds
The Centre for Social Impact Bonds is a team within the Cabinet Office that promotes the development of more and better SIBs. Its main tasks are to:
- increase awareness and understanding of SIBs through online resources and at workshops and conferences
- support SIB developers by providing strategic advice and analytical support
- reduce transaction and set-up costs by developing standard tools such as template contracts
- help SIB developers to estimate cross-cutting benefits by making more data publicly available about the costs to government of providing specific public services
- connect SIB developers with experts
- connect SIB stakeholders
The Centre for Social Impact Bonds works closely with the Social Outcomes Fund. Contact us at firstname.lastname@example.org if you:
- would like feedback on a SIB proposal
- are looking to connect with external stakeholders (investors, providers, commissioners, or intermediaries) to develop your SIB idea
- have questions about the Social Outcomes Fund
For more information on SIBs and to keep up-to-date with all SIB-related activity, follow the Centre for Social Impact Bonds’ blog.
Other sources of support on social impact bonds
Social Finance provides advisory services to social impact bond developers. Social Finance has produced a technical guide to commissioning social impact bonds.
Third Sector Capital Partners provide advisory services to social impact bond developers.
Private Equity Foundation has expertise in developing and managing social impact bond structures that support disadvantaged young people through education into employment.
Triodos Bank provides corporate finance advice and capital raising services.
KnowHowNonprofit has a range of tools and advice for people looking to set up a social business.
BuySe is a UK-wide business directory for social enterprises that allows them to promote products and services.
Social Enterprise Mark provides a certification and online networking community for social enterprises that can demonstrate they use their profits to improve society.
Social Enterprise UK is a national body for businesses that trade for social and/or environmental aims.
UnLtd gives support to social entrepreneurs.
School for Social Entrepreneurs supports people by helping them to establish, scale and sustain social enterprises and social businesses.
Locality is a leading network for community-led organisations.
Social Firms UK is a national support organisation for social enterprises.
Plunkett Foundation helps rural communities get involved in community-ownership.
Pub is the Hub is a not-for-profit organisation offering advice and support to licensees, rural pubs, and community services.
Striding Out provides professional coaching, training and networking support.
Co-ops UK is a national trade body that works to promote, develop and bring together co-operative enterprises.