Fond of the social impact bond?

In an age of government austerity, there is particular focus on spending public money wisely to achieve desired social outcomes. New schemes will involve variants of payment by results and outcome based commissioning. Another similar tool is the Social Impact Bond (SIB). It involves targeted interventions to prevent social problems occurring and the consequent public spending, for example truancy resulting in NEETs and the cycle of re-offending resulting in greater criminal justice costs. Investors fund interventions up front and are paid by the national government in proportion to the spending cuts achieved. The model is likely to work best with the following conditions:

• Timing: reasonable gap between interventions and results, say seven years or less.
• Causation: there is a demonstrable strong causal link between interventions and outcomes.
• Savings: there is a potentially large cost saving for identifiable government departments.
  

An example is an SIB vehicle put in place for St Giles Trust, along with other organisations, to provide support to 3,000 short-term prisoners over a six year period. If successful, investors will receive a return from 7.5% up to a maximum of 13% in proportion to the government savings.

With great expectations of such projects come great risks that must be allayed. The Young Foundation's paper identifies 4 risks:

• Execution risk: there is the difficulty of the outstanding results of a local project run by passionate people that can not replicated on a larger scale. Selection of providers with the ability to scale is imperative.

• Measurement risk: even if a provider can show that the results are statistically significant because the sample size is large enough, and that there is no systematic bias judged by comparison to a control group, there is still the underlying danger of gaming the measure. For example, the apparently robust measure of reoffending is vulnerable because it is measurement of the criminal justice process and not fundamental change of an ex-offender. A pressurised manager could hit targets by persuading the police not to prosecute their users of relatively petty offences for exceptional reasons or by reducing the detection rate of criminal activity by their clients, for example, by moving to a different part of the country where they are less well known to police. Fundamentally, the contractor must be trusted or measurements must be changed to capture the change in an ex-offenders' maturity, social ties and personal identity.

• Basis risk: the reality may be that there are no great savings. For example, the local authority does not save money if a provider prevents young people from going to prison because young offender institutions are funded by the Ministry of Justice. Likewise, to save on prison costs a whole wing of a prison may have to close before government achieves any actual savings. Carefully agreed outcomes and sharing of rewards may make the difference here.

• Unintended consequences: where a current provider of services affecting the target group is not included in the SIB and withdraws support for what could be a host of reasons. For example, in the Peterborough prison example, prison staff not included in the SIB may obstruct its progress so that their lack-lustre performance is not highlighted by the new initiative's success.

I have high expectations that the Peterborough project will be a success and pave the way for greater uses of social impact bonds in the criminal justice system and beyond. The next challenge will be to introduce this at a micro level by overcoming high transaction fees through a simplified model.

The Big Society Bank - how did we get here, and where are we going now?

A lack of capital looking to invest in the sector has long been the complaint of many working in and around Social Enterprise. The Coalition Government’s ‘Big Society Bank’ proposals are designed to address this issue, and the recently created Big Society Investment Fund is the first step in these proposals becoming a reality.

It would be fair to say that the Bank has had a long gestation period. It's now approaching five years since these proposals first saw the light of day, and whilst their final emergence into the world has been widely welcomed, there remains a significant amount of uncertainty around what the Bank will actually deliver and when. This post explores the long and winding road that got the Big Society Bank to where it is today and outlines where the project stands at present.

The bank is the brainchild of Sir Ronald Cohen, private equity trailblazer turned social finance evangelist. The current proposals build on the conclusions of the 2005-2007 Commission for Unclaimed Assets that he chaired. The Commission recommended the establishment of a Social Investment Wholesale Bank in order to address the undersupply of finance to the social enterprise and third sectors. The proposals received support both from the then Labour government and from opposition parties. However in the years that followed, whilst the plumbing was put in place, including an Act of Parliament, changes to the banking code, and in 2009 a detailed Cabinet Office report, little progress was made on the wholesale bank’s establishment. The financial crisis and bank bailouts caused the issue to slip down the agenda of Gordon Brown’s administration.

In March 2010 the proposals were given new life when David Cameron announced his support for Cohen’s bank. In line with his wider ‘Big Society’ agenda, Cameron christened it the ‘Big Society Bank’. Since taking office in May 2010, the Coalition government has continued to push forward these proposals. Whilst other Big Society advisors have fallen by the wayside, Ronald Cohen has continued to be a driving force behind the Big Society Bank proposals. Despite his energy, progress has been slow. After a cabinet office report on the vision for social investment in February this year, a Cabinet Office briefing paper outlining how the Bank would work was eventually published in May.

The paper states that the Big Society Bank will:

• Expand the amount of capital available to the social investment market


• Improve social entrepreneurs' ability to access it


• Develop a market of investors who wish to support it


• Support financial innovations that allow organisations to be rewarded for delivering social outcomes [ref. Social Impact Bonds, another of Cohen’s progency]


• Support the development of community-led, social enterprise initiatives to improve opportunities for young people, and


• Act as a ‘social investment champion’ - promoting information sharing and networking, publishing research and investing in sector capacity building

All of these objectives (except the one around youth services, which presumably stems from this 2007 idea) can be found in the 2009 Cabinet Office paper - which actually explored them in far greater depth - and leave Cohen’s vision pretty much completely intact, seeing off proposals for the bank itself to become a direct investor in social enterprises.

The May 2011 proposals were welcomed by the Minister for the Cabinet Office, Sir Francis Maude, and the Bank retains the government's support. Work is ongoing with a small team in the Cabinet Office assigned to deliver the policy. The current hope is that the bank will fully open for business in Spring 2012 - half a decade after the initial proposals were published.

However, even now, large questions remain unanswered - how much money will the bank have to invest? Who will it focus on and what will be the cost of the capital it offers? And, most obviously, why has it all taken so long? A future post will explore these and other key questions that are yet to be addressed about an institution that will undoubtedly have a transformational effect on social enterprise in the UK.

How Social Enterprises might change the (business) world

Social enterprises suggest a new way of doing business which provides lessons for private sector organisations and charities alike, operating efficiently whilst putting the beneficiary, the ‘social’, in a prime position.

What’s social?

Here at On Purpose we’re regularly asking “What puts the ‘social’ in social enterprise?” Is it social ownership (like Co-op), social impact, profit distribution for community goals and an involvement of beneficiaries in the spending decisions of the organisation (like HCT), or is it the general spirit of the enterprise? With no strict rules for defining social enterprises, any of these criteria could potentially fit the bill. But to be a social enterprise, no organisation can neglect the ‘enterprise’ either. Social enterprises try to take the best of business practices, operating efficiently and professionally to further their stated aims; aims which combine profit-making and social concerns.

Why bother?

But why not just have a regular business enterprise (as the BBC recently wondered)? The financial crisis reminds us that in spite of the public origins of various businesses, and of banks in particular, some have become strongly divorced from their most important resource, their customer base. Social enterprises tend to be much more locally entrenched, and prioritise social concerns too, which promises an ongoing emphasis on customers, who are inherently identified as key beneficiaries (looking beyond shareholders).

What’s next?

The social enterprise market is young but growing rapidly - various developments are expected in 2011 - from better financing, to better measurement of social impact, use of scale and engagement of marginalised populations. More broadly, I for one hope to see larger businesses learning from social enterprise’s practices (especially via social ‘intrapreneurs’), mainstreaming their Corporate Social Responsibility initiatives to cover all business practices, and, dare I suggest it, even considering becoming social enterprises!

The case for talent

Sir Ronald Cohen was recently praising, in the Daily Telegraph, the virtues of the innovative social impact bond and predicting the rise of social finance.

Along with it, he emphasises both the importance of attracting the best people to social enterprise and the commitment that many people feel towards this field: 

"Some of the most talented people are being drawn to it [social finance and social enterprise]. We are appealing to peoples' sense of social obligation and of social mission.

"About a fifth of recent Harvard Business School graduates have been drawn to social enterprise type organisations."

The social enterprise field is, of course, already populated with hugely inspirational and talented people. Like all industries though, it will only continue to be as good as the talent it is able to attract, develop and retain. 


Social enterprises need to offer the career prospects, development opportunities and salaries that compete with other top employers, not only during a recession, but also once the big private and public sector guns start hiring again. 


Managing a social enterprise is a difficult undertaking. It requires not only solid commercial skills but also well-honed social sector know-how. Developing leaders who spend significant amounts of time in social enterprise from an early age, who know and can manage the tensions, quirks and intricacies that are unique to these organisations has to be a priority for the sector. 


Neglecting to develop the next generation of talent risks social enterprise delivering on its promise; bringing in the best and brightest minds will mean that innovations like the social impact bond will be but the first steps towards a brighter, fairer and more inclusive economy.