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Social Impact Bonds

Addressing social issues using ‘payment by results’
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Social Impact Bonds raise investment to address social issues. A Social Impact Bond (SIB) is a type of ‘payment by results’ contract. Like other types of payment by results contracts, a public sector commissioner agrees to pay for outcomes delivered by service providers. If the ou­­tcomes aren’t achieved, the commissioner doesn’t pay.

A SIB is different because the providers do not use their own money to fund their services. Instead, money is raised from social investors, e.g., Bridge Ventures Social Impact Bond fund, who get both a financial and social return if the outcomes are achieved. If the outcomes are not achieved the social investors could lose their investment.

Social Impact Bonds provide investment to fund preventative services which address social issues that are of social and financial interest to a ‘public sector commissioner’ e.g. a Local Authority.

For example, in 2010, HMP Peterborough became the site of the world’s first SIB. The SIB raised £5m external investment to fund a programme aimed at reducing re-offending rates among male short-sentenced prisoners leaving Peterborough Prison.

In the UK over half of adults who enter prison on short-term sentences (less than 12 months) will go on to re-offend within a year of release. The Ministry of Justice manages the outcomes of criminality, but the Peterborough SIB aimed to tackle the problem at its root by providing rehabilitation support in the community, including employability, housing and substance misuse, to prevent re-offending. It is estimated that the cost of imprisoning a single person in the UK is £40,000 plus an extra £40,000 for each year they spend in prison. Thus breaking the cycle of re-offending stands to make considerable cost savings as well as having a social impact for the offenders, their families and the local community.

SIBs are an increasingly important way of delivering services both the UK and overseas. Although the number of SIBs being developed in the UK is increasing, evidence of their effectiveness is still fairly limited.

Key benefits and challenges

We’ve learnt, through our research and evaluation of Commissioning Better Outcomes, that SIBs have several advantages. For example, commissioners, investors and service providers report that SIBs:

  • lead to more innovative and flexible service delivery
  • lead to better contract management, creating more efficient delivery
  • help align interests between commissioners, service providers and investors.

We’ve also identified some challenges, such as SIB development can be slow and relatively complex. Breaking down barriers and relationship building between the government, investors and service providers within the SIB model will be crucial to developing and launching more SIBs.

Commissioning Better Outcomes aims to support the development of more SIBs and related models in England. You can read more about the programme and the evaluation we have commissioned on the Social Investment publications page. These documents also contain detailed examples of SIBs currently operating.

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