Public contracts are awarded on a payment-by-results basis, so investors are only rewarded if a set of agreed social outcomes are met. At a time when there’s huge pressure on the public purse, they offer a mechanism through which we can mobilise private investment to help tackle social issues affecting the UK today, harnessing the expertise of charities and social enterprises to help some of society’s most vulnerable groups.

Payment by results

Britain is blazing a trail for a new type of finance deal, which raises private sector social investment to help deliver positive social impact to disadvantaged groups. Crucially, when public funds are stretched during hard times, they unlock private finance and put it to work tackling some of our most pressing social issues – with government only paying when progress is delivered.

Social impact bonds (SIBs) are an innovative way of raising private sector funds to support a social need – from reintegrating ex-prisoners into society to helping vulnerable young adults find employment or education – which links investors’ return to specific social outcomes.

If, and only if, the targeted social outcomes are met, investors receive payments from the government which repay the initial investment plus a financial return. This potential return is what’s attractive to socially motivated investors, making it possible to raise finance.

SIBs change the focus of service provision from what has been done to what is achieved. Rather than focusing on inputs (for instance, the number of doctors) or outputs (the number of operations), SIBs are based on outcomes (improved health).

The programmes they finance are often in areas where prevention and early intervention can prevent strain on other public services, amounting to considerable cost savings over the long-term.

Helping a drug user kick the habit, for instance, will mean a significant reduction on the strain they would otherwise place on the NHS, police and other public services. In this way SIBs can theoretically pay for the return to successful investors several times over.

Capital injection

This model provides a number of advantages over conventional public sector funding. Perhaps the most significant of these is that risk is transferred from the public sector to the investors.

If the outcomes are not met, government payments are not made – ensuring the taxpayer only pays for services that have been delivered as agreed. And because investors only receive payments from the government if the social outcomes are met, there’s a real incentive for them to support the service providers to achieve the results.

Attracting private investment provides working capital at the start of the programme, which pays for a range of interventions to improve the social outcomes.

Access to this funding up front means that delivery organisations can put in place the facilities and infrastructure they need to meet the outcomes – again without having to draw on increasingly limited public funds. It also opens up the commissioning of public services to a wider range of organisations, including those which have the skills and expertise to deliver the outcomes, but perhaps lack the capital needed to develop their infrastructure.

Street impact

Triodos Bank is one of a small group of social investment specialists that are pioneering the new model. Its corporate finance team completed two payment-by-results projects last year.

In May it launched the Triodos New Horizons programme with youth service provider Greater Merseyside Connexions Partnership. The scheme helps young people in Merseyside, many of whom are young offenders, have learning disabilities, or are in or leaving care.

And in December, Triodos was instrumental in an innovative social investment bond, designed to alleviate homelessness in London. The Street Impact programme is the result of a partnership between the Greater London Authority, homeless charity St Mungo’s and a group of socially motivated investors.

St Mungo’s will deliver the Street Impact programme with the aim of helping 415 named individuals who are sleeping rough, or who have slept rough, to sustain their lives o? the streets. Each has a history which may involve prolonged or repeat episodes of rough sleeping as well as complex issues around alcohol, drug use, mental illness and physical health.

To help them off the streets for good, St Mungo’s will provide focused support tailored for each individual. This may include support with finding stable accommodation or with a tenancy, and linking in with better healthcare as well as access to skills, work and training opportunities that will help them successfully maintain a home and a better quality of life.

“We’re doing this because we want to help people rebuild their lives away from the streets.”

Mike McCall, executive director of operations at St Mungo’s

The target outcomes for this particular SIB include reducing rough sleeping by the individuals, achieving sustained accommodation, a reduction in visits to hospitals’ accident and emergency departments, supporting people into volunteering or work, or reconnections overseas for foreign nationals.

Because the individuals targeted by the Street Impact programme are named and known to the authorities, it’s possible to measure these outcomes in a meaningful way using information provided by the relevant public services. The programme recognises that these services will already have very good working relationships with most of these 415 individuals.

Street Impact is not looking to replace these but to honour and support current programmes while filling any gaps with targeted personal support to help people really sustain their recovery.

“We’re doing this because we want to help people rebuild their lives away from the streets”, says Mike McCall, executive director of operations at St Mungo’s.

“The social impact bond is a new way of working for us but we have been helping people with complicated alcohol, drug, mental or physical health histories to get their lives back on track for many years and we know that personalised, long-term support is what makes the difference. This is an opportunity to really make an impact for some of the most disadvantaged people in London.”

Impact investors

The three-year contract was commissioned by the Mayor of London’s office and will enable the St Mungo’s to earn up to £2.4m. To enable the cost of programme delivery, the Triodos corporate finance team raised £650,000 upfront working capital needed by St Mungo’s from social investors CAF Venturesome and several socially driven investors.

London Mayor Boris Johnson said, “The commitment shown by Triodos Corporate Finance is a fantastic example of a private company working with the voluntary sector and not-for-profit CAF Venturesome to help get people off the streets and into the services they need to turn their lives around.

“As we push on with the challenge of ending rough sleeping in the capital, it will be forward-thinking innovative partnerships such as this which will play an increasingly important role in achieving this goal.”

With few SIBs up and running, and none yet to run their course, they’ve yet to prove they can deliver the social outcomes. They’re certainly not a panacea for the issues a?ecting our society, and are not without potential problems of their own – we’ve seen, for instance, how targets in the NHS and education have been met while the service has su?ered as a result.

“As we push on with the challenge of ending rough sleeping in the capital, it will be forward-thinking innovative partnerships such as this which will play an increasingly important role in achieving this goal.”

London Mayor Boris Johnson

But, managed correctly, and focusing on early intervention, SIBs could be a way of getting more from our public spending, breeding efficiency rather than cutting back services.

SIBs have also demonstrated that it’s possible to raise private sector finance to support public needs. At a time when the public funds are stretched, the reality is that this money would not otherwise be available. Instead, SIBs provide a mechanism through which actively addresses social problems and helps to turn people’s lives around.