Social Impact Bonds

Social
Impact Bonds
are an
innovative way
of attracting
new investment
that benefits
individuals and
communities

Social Impact Bonds are a form of outcomes-based contract in which public sector commissioners commit to pay for significant improvement in social outcomes (such as a reduction in offending rates, or in the number of people being admitted to hospital) for a defined population.

Social Impact Bonds are an innovative way of attracting new investment around such outcomes-based contracts that benefit individuals and communities. Through a Social Impact Bond, private investment is used to pay for interventions, which are delivered by service providers with a proven track record. Financial returns to investors are made by the public sector on the basis of improved social outcomes. If outcomes do not improve, then investors do not recover their investment.

Social Impact Bonds provide up front funding for prevention and early intervention services, and remove the risk that interventions do not deliver outcomes from the public sector. The public sector pays if (and only if) the intervention is successful. In this way, Social Impact Bonds enable a re-allocation of risk between the two sectors. The diagram below is an example of a typical Social Impact Bond structure.

 Social Finance launched the first Social Impact Bond in September 2010, called the One* SIB, in the Criminal Justice sector. Social Finance now wants to support the development of a market for Social Impact Bonds. This will involve structuring a series of Social Impact Bonds to develop a successful track record, attract a broader range of socially-motivated funders and open the market to private individuals.

Vulnerable Children

Local authorities are currently being asked to make significant savings in children’s services. In this environment, the public sector struggles to find the funds for early interventions aimed at improving future outcomes (which would reduce the need for acute services in the long-term). Preventative services are difficult to fund for two main reasons: firstly, there are a great many demands on increasingly tight public sector budgets. Reducing funding from acute services, such as residential care placements for those with complex needs, to pay for prevention work would be controversial. Secondly, prevention services are often perceived as financially risky, since their impact is sometimes difficult to predict.

Social Impact Bonds provide a way of financing the upfront investment required in the provision of preventative interventions in children’s services. Public sector payments are only made once the outcomes and savings are achieved. Some possible areas of intervention that a Social Impact Bond could fund include:

  • Adolescent Intensive Intervention: The provision of interventions targeted at young people with complex needs and their families, aimed at reducing family breakdown and consequent entry into care;
  • Making better use of adoption: The provision of interventions that enables better adoption performance and provides better support to adoptive parents.

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