Anthony Hilton
For years, the responsibility for dealing with children in care, or youth unemployment, or reoffending by released prisoners and rough sleepers has fallen either on a few charities or on local authorities. Both struggle to cope with the demand for their services. Both are increasingly short of resources.
But this could be about to change thanks to the invention and rapid development of social impact bonds ? a product whose time has come even if most people still have no idea what they are.
Social impact bonds are about mobilising private-sector money and using it to employ dedicated experts to tackle these social problems, but with payment very much geared to results. Private investment has never really got into this area in the past because, while there is a clear benefit to society in having fewer reoffenders going back to prison or lower levels of youth unemployment, it cannot be measured in cash. Everyone benefits but there is no clear profit that could be returned to the people who paid for the project in the first place.
Social impact bonds are clever because they have found a way round that problem. Everyone knows that local authorities are so strapped for cash that they are having to cut back on their services. Many suspect, in addition, that the bureaucratic structure of local authorities makes them ill-equipped to tackle these problems in the first place. They do not have much money, and what they do have they do not spend particularly well ?but they have responsibilities to do what they can to deal with these issues.
Typically, a local authority will contract with an organisation to provide the service it can no longer afford to do, or cannot do efficiently. The money to provide the service is then borrowed from the private sector by selling social impact bonds.
The funds are used to set up and finance a team to deal with, or at least alleviate, the particular social problem. But there is no fixed rate of interest on the bonds, and indeed no certainty in many cases that the capital will be repaid. No one knows in advance what the rate of return will be because how much the bond pays in interest depends on how effectively the money is spent.
The more a programme cuts the number of reoffenders, or children having to be taken into care, the bigger the reward for those investing the money. If on the other hand, the outcomes are no better than they were under the prior regime of local authority provision, there will be no added bonus. The projects have to succeed for social impact bonds to pay out.
The scheme works financially because it allows the local authority to save money, and some of the funds can be used to give a profit to the bond holders. It often costs local authorities a vast amount of money to deliver a not-very-good service ? up to £180,000 per year to keep just one child in residential care, for example. The authorities therefore stand to make big saving if the numbers can be reduced, and they can give enough of this to the bond holders to keep them happy and still come out ahead.
This week's news is that for the first time, one of these social investment bonds is to be offered to the public. Previously, the money has come from family offices and endowments with a penchant for doing good works.
This week sees the marketing of an issue called the Future for Children Bond offered by Allia, a charitable and social investment organisation, which has a minimum subscription of £15,000 but is aimed at the retail investor. This bond is unusual in that it guarantees the return of capital ? which it achieves by splitting the proceeds of the issue so most will finance social housing with a guaranteed return, while one fifth will be used in Essex as a part of a programme which will provide support to about 380 at-risk children and their families.
By intervening before crisis point, it aims to divert about 100 young people from entering care by providing support for them in their home. The world's first social impact bond was launched only in 2010 but the UK now has 14 live and in development ? in Peterborough to reduce prisoner reoffending, in the North-West, Nottingham, the Midlands, London Docklands and Greater Merseyside to reduce youth unemployment, in Cardiff, Manchester and of course Essex in helping vulnerable children.
Some of these will inevitably be more successful than others but, to judge from the reaction of the investors, the results are encouraging. A poll by JPMorgan of 99 impact investors found that "the vast majority" of projects were meeting or surpassing their social, environmental and financial targets.
In terms of money, there are now about £280 million of social bonds in issue, a figure that is predicted to rise to £750 million in 2015 and £1 billion in 2016. That sum, or something near it, represents a serious injection of capital and expertise into a sector that has for a long time been short of both. Given that inequality is deemed by most people under 30 to be the most pressing social problem of our times, it is an innovation whose time has come.
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