Beyond Prison Walls: The Growing Influence of Social Impact Bonds in England

Why is it that whilst I struggle unsuccessfully to remember the variety of electronic passwords that bedevil my life, I have total recall of the most inconsequential trivia from 40 years ago?

In the late 1960s, when Newport, Monmouthshire became a UK regional passport office, countless thousands of citizens would receive their ticket to the world in an envelope bearing the proud imprint, ‘Newport – Home of the Mole Wrench’. As a result, Mole &Sons, who patented the self-grip pliers in 1955, became almost famous. It was great marketing. I remember still their uncertain claim to an obscure part of Welsh industrial history.

I was led to this nostalgic memory by wondering whether it is just a matter of time before a new generation of snail-mail will arrive in envelopes with the tagline ‘Peterborough – Home of the Social Impact Bond’? For a small-scale pilot of a new form of social finance it certainly receives enormous international attention. Indeed it’s now developed a new tagline for a Google world – One*SIB.

Peterborough is, of course, important. It does demonstrate a new idea. In 2010 the UK Ministry of Justice entered into Social Impact Bonds mechanism for funding public services. In effect, the government was willing to pay a return to a social enterprise if, over 6 years, it was able to reduce the rates by which prisoners serving short sentences at Peterborough prison would reoffend once released back into the community. Social Finance, a financial intermediary, issued bonds which raised around A$8 million from 17 investors, both individuals and charities. The capital now funds a range of interventions delivered by the St Giles Trust to help ex-prisoners reintegrate into society.

The conviction rates among prisoners recruited to the scheme are being measured against a national database of similar prisoners. If recidivism drops by more than 7.5% investors in the Bond will get a scaled return on their equity, starting in 2013. They will also, of course, have received a ‘social’ return on their financial commitment.

At one level the focus on Peterborough prison is useful. It does encapsulate the essential features of the Social Impact Bond – the transfer of risk from the public to the private sector for achieving reductions in public expenditure; the crucial role of government in facilitating new forms of investment for social impact; the creation of a new asset class; the opportunity for social enterprises to scale up the delivery of their mission and the imperative for carefully negotiated and measured outcomes. The bond has created a set of cash-flows to suit the need of the sponsor, the provider and the investor. Already there are some positive evaluations of progress.

The danger, which I’ve experienced at first hand, is that a discussion of the emergence of social finance too easily becomes a detailed exegesis on how to reduce the public and social costs of incarceration. We can all-too-easily become imprisoned by the particular features of the Peterborough example.

It’s worth emphasising then that the development of bonds is, month by month, spreading into a variety of new areas of public policy across England. Perhaps the prime focus of the SIB agenda in the UK is on finding new ways to fund early intervention strategies. This is driven by the growing recognition that a very small proportion of dysfunctional families places a huge burden on public expenditure. Indeed it’s estimated that 46,000 English families require A$6 billion of support each yea. That’s more than A$150,000 each.

The long-term social consequences of childhood deprivation are apparent. For Graham Allen, the Labour MP who chairs the committee that prepares the reports on Early Intervention that go to the Prime Minister, bonds are recognised as a key element of providing the financial resources necessary to achieve improved long-term social outcomes.

Certainly this is what Nick Hurd, the Minister for Civil Society, had in mind when he announced late last year that it was hoped that A$60 million could be raised in bonds for 4 pilots in Hammersmith and Westminster in London, Leicester and Birmingham.

Now rhetoric is starting to be turned into action. In December 2011, when Westminster City Council released its ‘Civic Contract’, it identified bonds as a crucial element of its funding strategy. Bonds, the Contract proclaimed ambitiously, would “allow investors to plunge their assets into bonds which then fund services for vulnerable people”. Well, maybe.

In the last month Essex County Council has become the first local authority to issue a bond prospectus. Bonds will be used to fund Multi-Systemic Therapy teams to support 170 extremely vulnerable children who, without such intensive support, are seen as likely to enter care at far greater long-term cost (and much worse social outcomes).

Within days Manchester City Council announced its intention to administer a bond to improve outcomes for adolescents with behavioural problems. The goal is to move children with the most challenging behaviours from residential homes to specially-trained foster carers provided with 24 hour support. The Council’s ambition is to create ‘a partnership with an ethical investor contracted to underwrite and provide [the] services’.

At almost the same time London Mayor Boris Johnson, together with UK Housing Minister Grant Shapps, announced that the Greater London Authority was to administer a A$7.6 million bond to support charities which sought to reduce the number of rough sleepers on the capital’s streets. Outcomes will be judged not just by the number of sleepers helped into more settled accommodation and employment but on reductions in admissions to hospital accident and emergency units.

It’s difficult to know if this ripple of impact investing is becoming a wave. Certainly the number of local authorities considering the use of bonds is increasing and their potential application is widening. One recent proposal, for example, focuses on increasing the supply of social housing. The idea is to encourage older home-owners to move into smaller accommodation and then lease their homes to councils who would provide free property management and a stream of rental income to the property owners. Bonds are envisaged as a source of investment. The possibilities are limited only by political imagination.

The underlying question, however, is whether the increasingly fragile cross-party support for Social Impact Bonds will survive the increasing pain of public service cutbacks. At present Shadow Cabinet Minister Tessa Jowell simply cautions that the devil will be in the detail of the bond agreements. Graham Allen’s cautionary remonstration is to remind the Prime Minister that bonds are intended “to create a market in early intervention and social investment … as an addition to, and not a substitute for, continued high levels of public spending in this field”.

As the use of bonds is embraced by local authorities, the scale of public opposition is likely to increase. The Guardian columnist Polly Toynbee is taking the lead. Social Impact Bonds, she opines, are “as clever as a credit default obligation”. The money raised is “fool’s gold”. If governments want to fund early intervention and other worthwhile initiatives, they should forsake the “inordinately complex financial engineering” and simply borrow money to lend to charities to do it.

As the embrace of bonds widens so the battle-lines of public debate are becoming drawn-up.

Professor Peter Shergold is the Macquarie Group Foundation Professor at the Centre for Social Impact (CSI) at UNSW and Chancellor of the University of Western Sydney. He was the founding CEO of CSI from 2008 – 2011. This article is from the CSI blog.