Harnessing the market for good

The financial and economic slowdown has pushed governments into looking for innovative ways to ease the burden on their strained coffers. One innovation has been social finance, where investors participate in projects that would normally be financed by government. The aim was to harness the power of the marketplace for the benefit social spending.

Recent developments, such as the creation of Big Society Capital, a social investment bank has made Britain a leader in this area. The bank was established with £600m from dormant UK bank accounts and investments from the country’s biggest banks. The first G8 Social Impact Investment Forum hosted by the UK in June 2013 and London’s forthcoming Social Stock Exchange, suggest that social investment is gaining in appeal.

Social investment has many forms, but it is the relatively rare social impact bond (SIB) that has drawn most attention. Designed to help reform public services, these bonds make payments to investors in the same way as conventional bonds—but this payout only comes if the social project for which the investors’ money is used, succeeds. On the flipside, if the intervention fails or doesn’t meet targets, investors lose some or all of their money.

Essex County Council is hoping to save more than £10m from its social care budget over five years via its SIB. Eight investors provided £3.1m to establish a programme of intensive support for high-risk teenagers and their families, which is delivered by charities in the area. The programme hopes to support 380 young people over five years and if it meets set targets around minimising the time young people spend in care, investors will be repaid by the Council with interest of as much as 8-12 per cent per year—though if it fails the local authority does not pay.

The first of these complex investment vehicles was launched by Social Finance in 2010. There are now over a dozen in existence—but for all the hype that surrounds them, are these bonds everything they’re cracked up to be?

There are many plus points to social bonds. They are a clever way of using market mechanisms to tackle entrenched social problems.

Last month’s interim re-conviction figures from the Peterborough and Doncaster prison SIBs paint a mixed picture, and we are yet to see whether the Essex Council SIB is managing to reduce the number of children going into care.

However SIBs are expensive to develop and can entail a huge amount of risk. At present, only a few grant-making trusts and individual philanthropists are involved, representing a limited pool of capital. A recent attempt by Allia, a charitable organization matching investors seeking financial products with a social goal, to develop the Future for Children bond, designed for the retail market and financial advisers, ended when the level of subscriptions fell below the amount needed for cost effective management of the bond.

The findings also highlight the need for greater clarity on regulation and more transparency about the expected financial return of the product. This relates to a broader criticism that the complexity of social impact bonds is discouraging potential funders, although 90 per cent of the social investment market is composed of simple secured loan finance to the charity sector.

SIBs offer a new model of service delivery and financing, and clearly have potential; but they are no silver bullet and will only ever be suitable in certain circumstances.

We need to keep a close eye on those already in existence, and monitor their progress. Meanwhile it’s important not to forget the rest of the social investment market, which can play an incredibly important role in offering non-profits access to long-term, affordable finance. 

Abigail Rotheroe is a consultant at NPC