MST is an evidence-based programme with a 30-year international history that delivers family therapy focusing on improving parenting and rebuilding positive relationships so they can manage future crisis situations. The success of the five-year programme which is conducted by Action for Children will be measured by the reduction in days spent in care by the adolescents, as well as improved school outcomes, wellbeing and reduced reoffending. The US has followed suit with its own variation dubbed “pay for success” SIBs. The first programme was launched last year at Rikers Island prison and is similar to Peterborough except that the focus group is confined to adolescent men. More recently, the Rockefeller Foundation and the Harvard Kennedy School’s SIB technical assistance lab chose six state and local governments out of a total 28 applications to develop programmes.
St John’s Hospital meanwhile, says its main expertise in social impact is in later-in-life social care for the elderly where state provision is heavily rationed. “With the demography we have in the UK, that’s going to be quite a big headache,” says Money-Kyrle.
High hopes
Antony Ross, head of social sector funds at Bridges Ventures, is optimistic that institutional investors will join the SIB fray over the next three to five years as the industry develops and matures.
“Pension funds have a fiduciary responsibility to their end clients and they will want to see a clearer picture of the risk/return profile of these programmes,” he says. “The aim of the Bridges Social Impact Fund is to help open up these products to a wider investor base through demonstrating performance which we hope will result in high single digit financial returns in addition to high social impact. The investments are constrained to projects where the impact is measurable over the long term. One of the biggest challenges is gathering the right data and finding a set of metrics that everyone can agree on. Measuring progress is key and for many in the charitable sector there is a need for a cultural shift to accommodate the performance management requirements demanded by the contracts and investors.”
Attracting investors
A key attraction for investors, according to Luther Ragin, chief executive officer of the Global Impact Investing Network (GIIN), a non-profit organisation dedicated to increasing the scale and effectiveness of impact investing, is the possibility of equity-like returns in the current low interest rate environment. Private sector discipline is applied to measure and enhance performance in service provision but as with any illiquid investment, rigorous due diligence is needed. In this case, the focus is on whether the intervention can meet its stated objectives.
“People compare social impact bonds to fixed income because of the word ‘bond’ but in effect they are really pay-for-performance contracts,” says Ragin. “The goal is to create a target benchmark that can be measured. This is why SIBs are only applicable to projects that can quantify not only the impact of the intervention but the opportunity cost of not having a programme in place. In order to grow and achieve economies of scale though, SIBs will need to be structured to attract institutional investors.
“For example, 100 institutions that we surveyed have earmarked $9bn for impact investments in 2013. US philanthropy – from individuals, foundations, and others – directs roughly $300bn to the social sector each year. In comparison, the capital markets are much larger, with US investments totalling over $25trn. Looking at these numbers, one can see the untapped potential.”
One way to attract commercially-focused investors, according to Ragin, is to build in a tranche structure, first-loss reserve, or other form of credit enhancement. “In many cases, given the newness of SIBs and the uncertainty of the results, there is a need to reduce the actual or perceived risks and this could be along the lines of the partial guarantee provided by Bloomberg Philanthropies – the personal foundation of Mayor Michael Bloomberg – in the Rikers Island SIB where Goldman Sachs is an investor.”
The US-based investment bank provided a $9.6m loan to MDRC social policy research organisation, which is responsible for overseeing the day-to-day implementation of the project. In a twist that differentiates the deal from other governments, Bloomberg Philanthropies offered a $7.2m grant to MDRC to guarantee a portion of the loan, reducing Goldman Sachs’ risk to $2.4m if recidivism rate does not fall by the target 10%. The investment bank will be repaid if it does meet the goal and even stands to gain to make a $2.1m profit if the reduction rate is more.
By contrast, in the Peterborough SIB, the UK Department of Justice agreed to repay the investors their principal investment plus 7.5% if the recidivism rate slides by 7.5% over life of the bond. If the drop is higher, they will receive an increasing return capped at a maximum of 13%, but will walk away empty handed if the 7.5% objective is not reached.
At this stage it is hard to predict the success of Peterborough. A recent set of results showed there had been a more than 6% decline in the frequency of reconviction events per 100 HM Peterborough prisoners in 2010-12 compared with the earlier twoyear period 2008-10. This compares to a 16% hike nationally from 2008-10 to 2010-12.
Although the figures are encouraging, a spokeswoman from Social Finance, which manages the SIB, says they do not measure reoffending behaviour over as long a period as the SIB will be judged and are not compiled on precisely the same basis as will be used by an independent assessor during the course of 2014 to determine whether a payment is due.
General consensus is that while not conclusive, the results suggest the programme is having an impact on reducing recidivism which should persuade more government departments and local authorities to use SIBs to fund intervention programmes – but the jury is still out as to whether institutional investors will be among them.
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