You get what you pay for

The Chief Executive of Big Society Capital, Nick O’Donohoe, has called on local authorities to boost their use of Social Impact Bonds (SIBs) to fund their services in the face of shrinking public funding. At BDO we’re fascinated by the potential of social investment to transform local services, which we highlighted in our 2011 report. What are SIBs and should local authorities make greater use of them or are the barriers to great?

The rise of the SIB

Under an SIB a commissioner agrees to pay for measurable improved outcomes of social projects. This prospective income is used to attract the necessary funds from investors which will offset the costs of trying to achieve the desire social outcome. If that result is achieved, only then will the investor be paid at a pre-agreed rate of return.

There’s no doubt that the social investment market in the UK is growing. It increased in size by 21% between 2010/11 and 2011/12, with the number of SIBs now up to 14 from just one in 2010. The Greater London Authority’s attempts to tackle homelessness and Essex County Council’s work with children on the edge of care are just two examples of where local authorities are already taking up the SIB challenge.

The potential

It’s clear why SIBs have attracted considerable interest from pioneering authorities. Projects which are externally financed and externally delivered inevitably have potential to draw risk away from the public sector. Furthermore, at a time when local authority finances are projected to continue falling regardless of the outcome of the 2015 General Election, using an SIB can provide resources to tackle social problems when otherwise such funds would be lacking. They also offer vital cash flow to help insulate valued local third sector providers where resources have otherwise dried up. Throw in the potential of payment-by-results to focus provider attention on ‘what works’ and stimulate innovation and it’s not hard to see that SIBs offer a welcome tonic to soothe over-stretched local authority commissioners.

The pitfalls

However of course there’s no such thing as a free lunch. Investors (even socially minded ones) expect a reasonable return rate to match the risk they are exposed to. SIBs are typically targeted at complex policy problems where it can prove hard to quantify success and a provider’s potentially successful interventions could be blown off course by events beyond their control – the family bereavement suffered by an ex-offender being a classic example. Higher risks demand higher returns, a problem that will only grow should commissioners wish to scale SIBs up from smaller projects to larger ones. This in turn could lead to tricky questions around value for money. Furthermore as the Social Market Foundation has highlighted, unless provider success results in genuine savings through increased productivity – rather than simply passing the financial buck to another part of the authority – SIBs will cost more (albeit deferred) money due to the need to provide investors with the agreed return.

Where from here?

The potential pitfalls of SIBs do not mean local authorities should throw the baby out with the bathwater. Despite a lack of overwhelming evidence at this early stage, what we do know suggests that SIBs can work well. An SIB pilot with short-term offenders released from HMP Peterborough has cut offending by 21%. Government match-funding for commissioners such as the Cabinet Office’s £20 million social outcomes fund can give authorities confidence that SIBs in their area are financially viable as well as socially desirable. Template SIB service agreement contracts and free resources from the Government’s Centre for SIBs may help reduce the cost of creating such vehicles. Also, the Social Investment Tax Relief of 30% introduced in the 2014 Budget can only help boost available capital.

So what’s next? In our 2011 report we suggested that SIBs were at “an embryonic stage in their development.” Whilst they are not yet fully formed and each scheme needs to be rigorously evaluated to grow the pool of knowledge available, the early signs for SIBs in local government are encouraging.


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