• by Dan Hird, Head of Corporate Finance, Triodos Bank
  • Sep 23, 2013

The term “Social Impact Bond” or “SIB” is very much in vogue but is often misunderstood. In its strictest sense a SIB is a form of contract between a public sector commissioner, a group of social investors and an experienced service delivery provider, whereby payments will be made by the commissioner for measurable improvements in specifically targeted social outcomes (such as reducing rough sleeping or re-offending rates etc). The main difference between a SIB and the more commonly used Government Payment By Results (or “PBR”) contract is the direct involvement of social investors in a SIB.


The investors in the SIB provide the up-front risk funding and only make a financial return when payments are made by the public sector commissioner on the basis of improved and evidenced social outcomes achieved.


Naturally the Government is very keen to promote SIBs as part of its overall public sector reform agenda because (on the face of it) many of the financing risks are transferred from the taxpayer to the private social investors. If the improved social outcomes aren’t achieved, then the taxpayer doesn’t pay anything and investors stand to lose their investment. However, if improved outcomes are achieved, then everyone wins – including the beneficiary of the service, the taxpayer (who is paying for a positive result) and the investor (who gets a return or gain on their investment).


The UK is undoubtedly a pioneer in the development of SIBs but these are still early days and to date, there are only around 15 SIBs in existence. Those who have commissioned SIBs include DWP, MoJ and one or two forward thinking local authorities including Greater London Authority (GLA) and Essex County Council. The social outcome targets for these early SIBs include; improving employment prospects for disadvantaged young people, reducing rough sleeping in London, reducing re-offending and helping children at risk of going into care.


To date a typical SIB would be a three to five year contract and might require an upfront working capital requirement of £1 - £3 million. Almost all of the early SIBs in existence to date have been financed by experienced socially motivated investors – including institutions (charitable trusts and foundations, Big Society Capital) and a handful of high net worth individuals. This initially narrow investor base isn’t surprising because SIBs are new, the risks are high and there is not yet any track record of performance.


To attract a meaningful weight of finance from mainstream investors in future, SIBs will need to become better established and lower risk. To achieve this, it seems clear that the risks need to be shared between all three parties to a SIB (i.e. the commissioner, the investors and the delivery partner) rather than borne by the investors alone. This can be achieved in a number of ways – for example the commissioner can include a significant fixed fee for service element into the contract – so that it is not entirely on a payment by results basis. In addition, the service delivery partner might need to co-invest alongside the social investors to demonstrate commitment to its service delivery plan.


Triodos have been the lead adviser on two of the SIBs currently in existence and in both cases we managed to assemble a consortium of social investors to raise the required funding. This syndicated approach to financing has the potential to work well with higher risk type investments as we found that whilst investors were motivated to support the social outcomes targeted by the SIB, no single investor wanted too much individual exposure to the deal. The parallels with the growing crowdfunding sector are significant in that the combined efforts of the many can overcome the barriers to raising finance.


Government initiatives to transform public services seem to be gathering pace and none more so that in the MoJ, where Chris Grayling has announced a complete transformation of the probation service – including substantial privatisation and establishment of long term PBR contracts designed to prioritise a reduction in re-offending. Inevitably, large private sector support service companies, such as Capita, Serco and G4S, will secure the majority of these PBR contracts as they have the financial resources to fund the working capital. However, through instruments such as SIBs, social investors have the collective potential to help high quality third sector organisations remain in the game and play a continued role in delivery of our social services.

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