2017: social impact bonds are go!

You can almost hear the engines revving and smell the oil as the government announces the approval of 25 expressions of interest for the first round of the Life Chances Fund and seeks applications for round two.

Yet when you can count on the fingers of one hand (and not need all of them) the number of social impact bond (SIB) deals that signed and became operational last year, it is worth pausing to consider what the roadblocks have been to date, whether they can be navigated and whether, if they cannot, it is the end of the road for SIBs.

Let’s begin with the rationale that underpins SIBs. The intent is to enable charities and social enterprises to innovate and develop new service delivery models that simultaneously look to prevent social problems arising (rather than dealing with their consequences), materially improve the lives of service users and check the inexorable increase in demand for public services. The risk of whether the innovation will work is (largely) assumed by social investors rather than public sector commissioners.

Various characteristics of SIBs are, in principle at least, attractive to the main stakeholders. Commissioners can utilise payment by results contracting, but without excluding civil society organisations. The social investors can use their funds to target a combination of social and financial outcomes. In the process, robust metrics for social impact are often developed.

Notwithstanding these positives, SIBs have struggled to gain widespread traction for reasons including:

  • a perception among public sector commissioners that they are risky and complicated
  • a lack of capacity among public sector commissioners to engage with new models
  • the shift required in terms of commissioning and procurement practice to engage with providers and service users to understand what interventions may deliver what outcomes, rather than buying more of the same
  • a perception among public sector commissioners that they are expensive
  • the benefit of a SIB rarely accruing exclusively to the public sector body commissioning it
  • a reluctance to ‘spend now to save later’ when immediate financial pressures are so challenging

Some of these issues have already been acknowledged and attempts have been made to address them. Government has tried to smooth the uneven impact of SIBs across pockets of the public sector with the Social Outcomes Fund and has provided resource and support through the Centre for SIBs. Providers developing SIBs have focused where possible on interventions that can deliver immediate savings for the commissioner.

Other complaints about SIBs are arguably misguided. Yes they can be complicated but, to an extent, they should be. The motivation behind SIBs is supposed to be the testing of innovative interventions to tackle challenging (sometimes wickedly so) social issues. This means working with individuals with complex needs, where attribution of impact will not always be straightforward and where a supervening event can undermine months of progress.

The impacts inevitably do not fit within the neat, artificial boundaries of organisational and budgetary responsibilities within the public sector. Nor do the timescales over which meaningful progress may be measured accord with the reporting and accounting cycles (or political ones) of public bodies.

Where there is a commitment to delivering meaningful social impact at scale... social impact bonds remain the optimal tool as, frankly, no others have been attempted

In these circumstances, it takes time to develop appropriate metrics to serve as indicators of the desired impact and to construct payment mechanisms which meet the different demands of the various stakeholders. The results can be intricate, but reflect the nature of the issues they are tackling.

Where there is a commitment to delivering meaningful social impact at scale and to developing new forms of service provision and of engagement with service users to achieve it, social impact bonds remain the optimal tool as, frankly, no others have been attempted.

The fact they are wrestling with such complexities does not mean, however, a large part of the effort in bringing them to fruition should not focus on how to simplify them in their realisation. SIBs that are genuinely trying to do something different which can make a significant difference need the support and commitment (on all sides) to be fully developed, and the characteristics, including length of contract and scale, to merit that commitment.

A proper focus on this last can to a degree answer also the perception about them being expensive: if they are of a sufficient scale, the initial costs can be better defrayed and if they are properly structured the cost of paying for the outcomes will be more than compensated by the financial savings and social benefits that accrue.

Early indications are that the response from commissioners to the Life Chances Fund has been positive. Hopefully, this will translate into projects on the ground making a material difference to people’s lives, but if this proves not to be the case this need not be fatal to the prospect of civil society delivering innovative public services and social investment supporting those activities.

It is possible to envisage a contracting model which retains many of the features of a social impact bond, but dispenses with some of the complexity. A commissioner could let a contract on an outcomes basis, in which it identifies the outcomes it seeks. It agrees to pay a monthly fee to the provider, but has the right to make deductions from those payments where agreed milestones are not achieved. There is still scope for the provider to innovate to meet the outcomes, but it is not reliant upon a social investor to make payments in the first place.

There could still be a role for social investment – either in providing a form of guarantee on individual projects if a commissioner had legitimate concerns about the ability of the provider to meet the deductions or, preferably, in providing risk capital to enable good providers with transformative interventions to take on increasing numbers of contracts on such terms.

It would still be the case that suitable metrics would have to be established and there may still be conversations to be had among public sector commissioners around who pays for and who benefits from outcomes that have multiple benefits.

These arrangements would have less proactive performance management from the social investors but (often not knowing what they might be missing) commissioners may not regard this negatively.

It may also open such contracts up to the private sector so procurement processes would need to be structured to take advantage of the flexibilities within the current regulations, particularly the light touch regime, to preserve the characteristics of SIBs which sees them create opportunities for social enterprises and social investors to deliver social value through innovative service design.

This might feel like the Mondeo option compared to the swisher SIB model, but if commissioners cannot stomach the latter, the Mondeo approach may at least allow for some of the motivations behind the SIB to be realised.

This is surely preferable to the patched up Cortina that remains public service commissioning in some quarters, but while we still can, I would hope we collectively fire up the Tesla and get large numbers of SIBs taking the chequered flag in the coming months and years, bringing material and very welcome change.

Photo credit: Tom Eversley/Unsplash