What if government doesn’t refer enough people into your social impact bond (SIB)?

One of the problems faced when developing a SIB is how people end up as part of the intervention cohort. If the process involves government or some other body referring participants to the service delivery organisation, how does this service delivery organisation manage the risk that not enough people will be referred, or that the wrong kind of people (i.e. those with little potential for change) will be referred?

Referral mechanisms that are used can be split into the following three categories:

  1. Eligible: eligibility criteria are defined and everyone who meets it is considered part of the SIB
  2. Self-selected: either the delivery organisation chooses participants or people choose to join
  3. Referred: government refers individuals into the program

All of these mechanisms involve some eligibility criteria that participants must meet to be included.

Examples of each mechanism are listed below.

Eligibility – everybody eligible is considered part of the intervention cohort and measured

Peterborough: All male prisoners exiting HMP Peterborough after serving less than 12 months sentence.

Other examples: New York City, New York State

One of the key benefits to government of this approach, is that the responsibility and incentive for convincing people to participate in the program lies with the service provider. It is also more suitable for a rigorous measurement approach where the intervention cohort is compared to another cohort, as the potential for bias in the selection process is reduced.

Self-selection – either the service delivery organisation chooses people to be part of their program or participants choose to join, usually with some eligibility criteria that must be met

DWP Innovation Fund: Service delivery organisations were asked to propose which young people they would work with and how they would attract them. “Your proposal must clearly demonstrate how you are identifying and working with the most disadvantaged and socially excluded young people, the vast majority of whom would otherwise not achieve educational and employment outcomes” (DWP, Round Two Specifications). Some programs asked schools or other organisations to refer students to them.

One of the key benefits of this approach is that the service delivery organisation is in control of how many participants are included in the program, so if they need more people they can do something about it themselves. They can also make sure that the participants have the type of needs that their program was designed for.

Referred – Government refers people it consider suitable for the program, usually using some eligibility or referral criteria

Australia The Benevolent Society: Referrals are made by the Department of Family and Community Services according to the processes and criteria set out in an operations manual.

Other examples: Essex County Council, Australia Newpin

This referral system is sometimes preferred by government, as it gives them control over who participates in the program, but it means that providers are exposed to the risk that not enough people are referred.

But how do we make sure enough participants are referred to a SIB?

Let’s look at two SIBs where this issue has been responded to.

Educating/marketing to government referrers: Essex County Council

The Essex County Council SIB relied on referrals from the council, however they weren’t getting enough of the right type. In order to fix this, the delivery organisation went in to educate and encourage council staff about the program and who they should refer to it.

“We discovered that Essex weren’t referring enough children who would most benefit from the intervention, due to a combination of things, including competing priorities of senior staff and referral staff not knowing the program existed, or who and how to refer. Solving this problem would not usually fall in the remit of a service provider, but our performance managers went into the council to do a marketing push and went right up to a senior level to change the way they were referring.  The board is also considering whether to add an additional ‘marketing’ function to the service, to ensure that the barriers to referral are continually being addressed proactively” (Andrew Levitt, of Bridges Ventures, deliveringthepromise.org).

Incentives for government to refer (or penalties if they don’t): The Benevolent Society

The Australian Social Benefit Bond delivered by the Benevolent Society has a second part to its payment formula that corrects for a lack of referrals. The first part is related to the improvement that the program makes against its three outcome metrics: Out-of-home care entries; Safety and Risk Assessments; Helpline Reports. The second part is where the improvement is adjusted according to whether adequate referrals have been made and whether the children in the program can be compared against children not in the program. It’s called the ‘Performance percentage’.

While payments will not be made until 2018, we can use the 2014 preliminary results to understand how the metric works.

IMPROVEMENT PERCENTAGE
Measure Improvement Weighting
Out-of-home care entries 17% 66%
Safety and Risk Assessments (70%) 17%
Helpline Reports (3%) 17%
Improvement Percentage (1%)

In 2014, the program made a minus one percent improvement against its outcomes.

The second part of the payment metric combines the improvement percentage with two metrics that address the risk related to (1) the measurement and (2) the referral methods.

  1. The counterfactual for this program is a propensity-score-matched control group, so to manage the risk of children not being able to be matched, a fixed improvement of 15% is assigned to each unmatched child.
  2. The SIB has set a number of children the Department of Family and Children’s Services guarantees to refer. For each child under the guaranteed number, an improvement of 40% is assigned. You can see below that in the first year of the program, referrals from government were 21% below where they should be, which combined with the score for unmatched children, lifted the performance percentage from -1% to 8%. This is a huge incentive for the Department to make sure they are meeting their referral guarantee.
PERFORMANCE PERCENTAGE
Measure Performance Weighting
Improvement Percentage (1%) 77%
Unmatched Children Percentage 15% (fixed) 2%
Guaranteed Referrals Shortfall Percentage 40% (fixed) 21%
Performance Percentage 8%

So the 2014 results carried a huge penalty for government falling short in referrals.

Interestingly enough, the 2015 results show the Guaranteed Referrals still falling short by 13%. This could be due to over-calculation of eligible families during the contract development, or it could indicate a continuing lack of referrals by government staff to the program. It will be interesting to watch how this mechanism works as we head towards payment in 2018.

What do we know about the Utah SIB results (without a counterfactual)?

The Utah SIB recently paid a return for Goldman Sachs, and press releases from both Goldman Sachs and United Way of Salt Lake deemed the program a success. But this was met with some criticism, most notably by the New York Times in Nathaniel Popper’s article Success Metrics Questioned in School Program Funded by Goldman. Now I would argue that success for each stakeholder is achieving whatever they wanted to achieve. So as far as I’m concerned, claiming success simply means that things happened as you wanted. But we might also assume that a government’s objectives are what it’s prepared to pay for via the SIB payment metric.

So how does the payment metric for the Utah SIB work?

For the first year results, Goldman Sachs was paid 95% of the savings to the state. Savings to the state are calculated from the number of children identified as ‘likely to use special education in grade school’[i] (110 in year 1) minus the number of children who used special education (1 in kindergarten) multiplied by the cost of a special education add-on for one year ($2607).

Is that a success?

Well, the program is doing very well at delivering on its payment metric. Of the 110 children identified as likely to use special education, only one of them is using special education in kindergarten. If this is the definition of success, then the program is definitely a success!

Utah 1

(United Way (2015) SIB fact sheet)

So what’s the problem?

Many people who aren’t involved in the SIB would define success a little differently to the payment metric. They would define the success of the program by the reduction in how many children would require special education support. What we don’t know is how many of the 110 children would have needed special education without the program. I teach my probability classes that ‘likely’ means 50%-80%. But the payment metric seems to assume that 100% of the children would have needed special education without the program, according to the savings-to-government calculation. In order to know how much the program improved things for the children involved, we need a comparison group or ‘counterfactual’, an estimate of how many of the children would have ended up using special education. A counterfactual means you can claim you caused the results, the absence of a counterfactual means you can only say you contributed to them.

What’s a counterfactual?

A counterfactual or comparison group can be constructed in several ways. “A good comparison group is as similar as possible to the group of service users who are receiving an intervention, thus allowing you to be confident that the difference in outcomes between the groups is only caused by the intervention.”[ii] Some of the more commonly used counterfactuals in SIBs are shown below.

Utah 2

If you would like to know more, I recommend this Guide to Using Comparison Group Approaches from NPC and Clinks in the UK. And for guidance on randomised control trials in public policy setting you can’t go past the UK Cabinet Office’s Test, Learn, Adapt.

The Utah SIB involved no comparison group – certainly the payment metric didn’t.

So without a counterfactual, what can we say about this SIB?

  • “Of the 110 four-year-olds had been previously identified as likely to use special education in grade school…only one went on to use special education services in kindergarten.”[iii]
  • “These results triggered the first payment to investors for any SIB in the United States.”[iv]
  • “As a result of entering kindergarten better prepared, fewer children are expected to use special education and remedial services in kindergarten through 12th grade, which results in cost savings for school districts, the state of Utah and other government entities.”[v] [note this says ‘fewer children are expected to use’, not ‘fewer children use’]
  • “109 of 110 At-Risk Utah Students Avoid Special Education Services Following High-quality Preschool”[vi] [this would be untrue if the word ‘following’ was changed to ‘due to’ or ‘because of’]
  • “Utah’s [curriculum and testing] methodology was vetted both locally and nationally by early education and special education experts and leaders”[vii]
  • “They lacked certain basic data on what would have been expected to have happened to the students without the Goldman-funded preschool”[viii]
  • “My kids have really grown. I don’t think [my kids] would be where they are if it wasn’t for the preschool. That basic step is what prepares you to succeed in school, and later, in life.”[ix]

What can’t we say?

  • “School districts and government entities saved $281,550 in a single year, based on a state resource special education add-on of $2,607 per child.”[x][we have no idea what they would have spent on this group otherwise]
  • “High-quality preschool changes the odds”[xi][we simply don’t know what the odds would have been without the preschool program, so we can’t say that they’ve changed]
  • “Fewer children used special education services and remedial services by attending the SIB-financed Preschool Program, saving money for school districts and government entities”[xii]

What other SIBs don’t have a counterfactual?

  • UK: ten DWP Innovation Fund programs (seven of which were SIBs) [the Impetus-PEF ThinkForward SIB press release shows similar difficulty to the Utah SIB in understanding the difference made to young people. While 90% of young people engaged in further education, employment or training seems a wonderful result, there is no estimate of what might have happened otherwise.]
  • UK: seven Fair Chance Fund SIBs
  • UK: four Youth Engagement Fund SIBs
  • UK: Manchester Children in Care
  • UK: It’s All About Me – Adoption SIB
  • Canada: Saskatchewan single mothers’ SIB
  • Australia: Newpin SIB (for the first three years while a control group is established)

Note that most government spending on social services is not compared to a counterfactual. Some people argue that the perceived requirement for a SIB counterfactual creates an unnecessary additional barrier to SIB development, but others argue that it’s the best thing about SIBs – for the first time we are having mainstream discussions about standards of measurement and evidence in social services.

If you know of any government-funded social programs other than SIBs that do have a counterfactual, please post a link to them in the comment box below.

Why doesn’t every SIB have a counterfactual?

  • In order to estimate the effect of an intervention with any confidence, you need a large sample size. This is called ‘statistical power’ – I’ve tried to explain it in SIB Knowledge Box: Statistical Power. If a program is working intensively with just a few people, as is the case in Saskatchewan (22 children in SIB), then a reliable comparison to a counterfactual is not possible.
  • It is more work to set up a counterfactual – a similar comparison group must be established and this can take varying degrees of effort. It also takes skill that is in short supply. Biostatisticians are one of the the best resources for this kind of work. Most government stats units do not have experience in this kind of work.
  • Without a counterfactual, results can be counted as they are achieved, rather than waiting for a statistical comparison for the group, so investors can get paid earlier and more frequently and managers can ‘track’ performance.

As always, if there’s anything in this article that needs correcting or information that should be included, please either comment below or use the contact page to send me an email.


[i] United Way (2015) SIB fact sheet

[ii] NPC & Clinks (2014) Using comparison group approaches to understand impact

[iii] Edmondson, Crim, & Grossman (2015) Pay-For-Success is Working in Utah, Stanford Social Innovation Review

[iv] Edmondson, Crim, & Grossman (2015) Pay-For-Success is Working in Utah, Stanford Social Innovation Review

[v] United Way of Salt Lake 2015, Social Impact Bond for Early Childhood Education Shows Success

[vi] United Way of Salt Lake 2015, Social Impact Bond for Early Childhood Education Shows Success

[vii] Bill Crim, 2015, When Solid Data Leads to Action – Kids’ Lives Improve

[viii] Nathaniel Popper, 2015, Success Metrics Questioned in School Program Funded by Goldman

[ix] United Way (2015) SIB fact sheet

[x] Edmondson, Crim, & Grossman (2015) Pay-For-Success is Working in Utah, Stanford Social Innovation Review

[xi] United Way (2015) SIB fact sheet

[xii] United Way (2015) SIB fact sheet

Rikers Island social impact bond (SIB) – Success or failure?

There’s been a lot of discussion over tRikershe past few weeks as to whether Rikers Island was a success or failure and what that means for the SIB ‘market’. You can read the Huffington Post learning and analyses from investors and the Urban Institute as to the benefits and challenges of this SIB. But I think the success and failure discussion fails to recognise the differences in objectives and approaches between SIBs. So I’d like to elaborate on one of these differences, and that’s the attitude towards continuous adaptation of the service delivery model. Some SIBs are established to test whether a well-defined program will work with a particular population. Some SIBs are established to develop a service delivery model – to meet the needs of a particular population as they are discovered.

1.     Testing an evidence-based service-delivery model

This is where a service delivery model is rigorously tested to establish whether it delivers outcomes to this particular population under these particular conditions, funded in this particular way. These models are often referred to as ‘evidence-based programs’ that have been rigorously evaluated. The US is further ahead than other countries in the evaluation of social programs, so while these ‘proven’ programs are still in the minority, there are more of them in the US than elsewhere. These SIBs are part of a movement to support and scale programs that have proven effective. They are also part of a drive to more rigorously evaluate social programs, which has resulted in some evaluators attempting to keep all variables constant throughout service delivery.

An evidence-based service delivery model might:

  • be used to test whether a service delivery model that worked with one population will work with another;
  • be implemented faithfully and adhered to;
  • change very little over time, in fact effort may be made to keep all variables constant e.g. prescribing the service delivery model in the contract;
  • have a measurement focus that answers the question ‘was this service model effective with this population’?

“SIBs are a tool to scale proven social interventions. SIBs could fill a critical void: other than market-based approaches, a structured and replicable model for scaling proven solutions has not existed previously. SIBs can give structure to the critical handoff between philanthropy (the risk capital of social innovation) and government (the scale-up capital of social innovation) to bring evidence-based interventions to more people.” (McKinsey (2012) From potential to action: Bringing social impact bonds to the US, p.7).

2.    Developing a service delivery model

This is where you do whatever it takes to deliver outcomes, so that the service is constantly evolving. It may include an evidence-based prescriptive service model or a combination of several well evidenced components, but is expected to be continuously tested and adjusted. It may be coupled with a flexible budget (e.g. Peterborough and Essex) to pay for variations and additions services that were not initially foreseen. This approach is more prevalent in the UK.

A continuously adjusted service delivery model might:

  • be used to deliver services to populations that have previously not received services, to see whether outcomes could be improved;
  • involve every element of service delivery being continuously analysed and refined in order to achieve better outcomes;
  • continuously evolve – the program keeps adapting to need as needs are uncovered;
  • have a measurement focus that answers the question ‘were outcomes changed for this population’?

Andrew Levitt of Bridges Ventures, the biggest investor in SIBs in the UK, “There is no such thing as a proven intervention. Every intervention can be better and can fail if it’s not implemented properly –it’s so harmful to start with the assumption that it can’t get better.” (Tomkinson (2015) Delivering the Promise of Social Outcomes: The Role of the Performance Analyst p.18)

Different horses for different courses

Rikers New York City

The New York City SIB was designed to test whether the Adolescent Behavioral Learning Experience (ABLE) program would reduce the reoffending of the young offenders exiting Rikers Island. Fidelity to the designated service delivery model was prioritised, in order to obtain robust evidence of whether this particular program was effective. WYNC News reported that “Susan Gottesfeld of the Osborne Association, the group that worked with the teens, said teens needed more services – like mental health care, drug treatment and housing assistance – once they left the jail and were living back in their neighbourhoods.”

In a July 28 New York Times article by Eduardo Porter, Elizabeth Gaynes, Chief Executive of the Osborne Association is quoted as saying “All they were testing is whether M.R.T. by itself would make a difference, not whether something you could do in a jail would make a difference,” Ms. Gaynes said. “Even if we could have raised money to do other stuff, we were not allowed to because we were testing M.R.T. alone.”

This is in stark contrast with the approach taken in the Peterborough SIB. Their performance management approach was a continuous process of identifying these additional needs and procuring services to meet them. The Peterborough SIB involved many adjustments to its service over the course of delivery. For example, mental health support was added, providers changed, a decision was made to meet all prisoners at the gate… as needs were identified, the model was adjusted to respond. (For more detail, see Learning as They Go p.22, Nicholls, A., and Tomkinson, E. (2013). Case Study: The Peterborough Pilot Social Impact Bond. Oxford: Saïd Business School, University of Oxford.)

Neither approach is necessarily right or wrong, but we should avoid painting one SIB a success or failure according to the objectives and approach of another. What I’d like to see is a question for each SIB: ‘What is it you’re trying to learn/test?’ It won’t be the same for every SIB, but making this clear from the start allows for analysis at the end that reflects that learning and moves us forward. As each program finishes, let’s not waste time on ‘Success or failure?’, let’s get stuck into: ‘So what? Now what?’

Huge thanks to Alisa Helbitz and Steve Goldberg for their brilliant and constructive feedback on this blog.

Changing a Social Impact Bond (SIB) metric mid-flight

Social impact bonds are new, so involve a lot of learning on the job. This learning is less that one SIB ‘works’ and another SIB does not, but more about the iterative adjustments that allow for more effective services, more flexible procurement processes, more alignment of incentives in contracts. One aspect of SIBs that is new for many jurisdictions is long-term contracts. Long-term contracts have many benefits to those delivering and receiving services, but in order to respond to information that comes to light over this time, they must also allow for adjustment and termination.

As its second year draws to a close, investors in Australia’s first social impact bond, the Newpin Social Benefit Bond, have been asked to approve an amendment to its payment metrics, so that they more faithfully reflect success for the children and families it serves.

The reason for this is that the metric rewards investors when children in foster care are restored to their families by the court (“restorations”). When developing the metrics, the breakdown of restorations where children would return to foster care (“reversals”) was discussed, but failed to be written into the contracts. The intention of the metrics is to reward social outcomes with financial return, which means that while restorations should result in payments, reversals should not.

The Newpin Social Benefit Bond has two different payment metrics. One that determines payment from government to the delivery charity, UnitingCare, and a different one metric to determine payment from UnitingCare to Investors.

Newpin SBB payment metrics

The problem with each metric and the amendments proposed to rectify these problems are shown below. For original contracts and a more detailed summary of metrics see the bottom of this page.

What is the problem?

  • Metric 1 NSW Government => UnitingCare: a drafting error was made that did not deduct reversals in the current measurement period, only previous measurement periods. So the government does not make payments for reversals that occurred in the previous financial years, but does make payments for reversals in the most recent financial year.
  • Metric 2 UnitingCare => investors: UnitingCare makes payments based on the cumulative rate of restoration of children to their families. This includes restorations that have been reversed and thus does not faithfully reflect success for families.

In the second year of the SIB, several reversals occurred. So all parties wanted to ensure that these were not paid for in the same way as successful restorations. Government and UnitingCare agreed to amend their metric (Metric 1). An amendment to the investor metric (Metric 2) was also sought to limit payments for unsuccessful restorations. In order to change the metrics, all 60-odd investors had to agree to it. They were also given the option of selling their investment. Using the results to the end of May 2015, the amended metric would return 7.5% interest to investors for the year, while the original contract would return 13.5% interest for the year. If investors did not agree to the amendment UnitingCare would have to pay the inflated interest and continue the service with an imbalance between payments from government and the interest paid to investors. This may have led to UnitingCare exercising their termination rights at the end of year 3. A 10% cap on reversals was proposed in order to limit the ongoing risk to investors and increase the likelihood that they would agree to the amendment.

The proposed amendment

  • Metric 1 NSW Government => UnitingCare: change to not paying for reversals that occur within 12 months of a restoration.
  • Metric 2 UnitingCare => investors: change to not paying for reversals that occur within 12 months of a restoration, but only up to a cap of 10% of restorations. If more than 10% of restorations are reversed, then reversals over this cap are treated as successful restorations for the purpose of calculating the interest paid by UnitingCare to investors.

The amendment still leaves us with an imperfect metric.

  1. If the proportion of reversals is above 10%, UnitingCare will make interest payments to investors (based on the cumulative restoration rate) which will include restorations that have been reversed, even though this does not reflect success for the families involved.
  2. If the proportion of reversals is above 10%, UnitingCare will make a success payment to investors that includes reversals over the cap, but for these reversals, UnitingCare will not receive government outcome payments.
  3. There were no reversals in the first year of the SBB and 28 children were restored from the mothers’ centres. In the second year to May 2015 (not a full year), 20 children were restored from the mothers’ centres, and 7 of these restorations were reversed, some being reversals of restorations from the previous year. The reversals at the mothers’ centres represent 15% of cumulative restorations. Therefore reversals for the second year are above 10% of restorations. If the amendment is agreed and applied retrospectively to year two, UnitingCare will pay investors for restorations that were not maintained, and for which they themselves receive no payments.

What can we learn?

There are several key lessons I draw from this experience. Note that every other stakeholder may have a completely different list!

  1. It’s important to be able to learn as you go and respond to new information, allowing for amendments, dispute and termination on fair terms.
  2. Having different metrics determining payments to the delivery agency and payments from the delivery agency means that there is some misalignment of incentives.
  3. The Newpin SBB has a mix of ‘impact-first’ and ‘finance-first’ investors. The 10% cap was a way of striking a balance between them. While the fiduciary duties of those investing through structures such as self-managed super funds and Private Ancillary Funds do not conflict with them making social/impact investments, some perceived agreeing to a lower rate of return as conflicting with their fiduciary duties as trustees.
  4. When contracting for outcomes, enormous attention has to be paid to thinking through all potential scenarios, however unlikely, to ensure the intended social outcomes are reflected in the legal terms.
  5. It is very difficult to reflect the journey of someone through social service systems with a binary measure. The definitions and metrics deem the program as either successful or unsuccessful for children and their families, with no ability to accommodate degrees of success or episodes of care over time.

Update on results to July 2015 (2.25 years of service delivery and second payment to investors)

The amendment was passed by all investors. Without the amendment, the Restoration Rate would have been calculated at 68% and the Interest Rate at 15.08%. With the amendment, the Restoration Rate was calculated at 62% and the Interest Rate paid to investors was 8.92%. If there had been no cap, and all reversals were considered unsuccessful outcomes, the Restoration Rate would have been calculated at 58% and the Interest Rate would have been 5.6%. So the investors did agree to forgo much of the interest that was due to them under the original agreement, but gained over 3% more than if all reversals were treated as unsuccessful outcomes. The difference in the investor interest was paid by the charity UnitingCare. The amount they were paid by NSW Government paid was not affected by this.

Newpin SBB metric - year 2

References

Metrics summary

  • Metric 1 NSW Government => UnitingCare: for Cohort 1 Outcome Payment = (the total number of restorations for all Mothers’ Centres and Fathers’ Centres – the counterfactual restorations) x the amount in payments look-up table. The counterfactual restorations are set at 25% for the first three years and then by a live control group. There are also payments that do not depend on outcomes and outcome payments for other cohorts.
  • Metric 2 UnitingCare => investors: Interest Rate = 3% + [0.9 x number of restorations for all Mothers’ Centres/(number of referrals to Mothers’ Centres– 55%)] subject to:
    • if the Restoration Rate is below 55%, the Interest Rate is nil; except
    • a minimum of 5% is applied over the first three years; and
    • a maximum of 15%.

*Note that investor payments relate only to Mothers’ Centres as they were considered lower risk at the time the metric was developed. The discussion above focuses on Mothers’ Centres only.

Disclaimer: Emma is a retail investor in the Newpin Social Benefit Bond. She bought her parcel from a wholesale investor when the restrictions around types of investors expired. She firmly believes that Newpin does wonderful and important work with families.  

When is a social impact bond (SIB) not a SIB? Should we care?

SIB pic

There are advantages and disadvantages to the term ‘social impact bond’ (SIB).

From the time it was coined it has caused confusion. The word ‘bond’ implies that capital is guaranteed, that interest is fixed, and that cash flows for the principal occur at the beginning and end, with ‘coupon’ or interest paid in the interim. Some SIBs are like this, particularly in the US. But some are a set of contracts and cash flows that bear almost no similarity to a bond at all. So should it be called something else? The Peterborough contract actually uses the words ‘Social Impact Partnership’, a phrase also chosen for the Western Australian paper on SIBs. But the word ‘bond’ has attracted more interest from the financial sector than ‘partnership’ might have, an observation I first heard expressed by Social Finance’s Toby Eccles. In Australia, the bulk of media on SIBs has occurred in the Australian Financial Review, which has loved ‘bonds’, but may have been more inclined to put stories about ‘partnerships’ in its sister publications for general news.

To figure out what is a SIB and what’s not a SIB, I use the definition we came up with at the Cabinet Office:

The Centre for Social Impact Bonds defines a Social Impact Bond (SIB) as an arrangement with four necessary features:

  • a contract between a commissioner and a legally separate entity ‘the delivery agency’;
  • a particular social outcome or outcomes which, if achieved by the delivery agency, will activate a payment or payments from the commissioner;
  • at least one investor that is a legally separate entity from the delivery agency and the commissioner; and
  • some or all of the financial risk of non-delivery of outcomes sits with the investor.

More recently, however, I’m seeing the words ‘social impact bonds’ and ‘social investment bonds’ refer to financial instruments that look much more like bonds. They borrow money at a fixed rate, use it to do something which generates some kind of income, and then pay the money back at the end. They don’t involve financial risk for the investor that is pegged to the non-delivery of social outcomes.

So is there a problem?

I like my world ordered, and it initially bothered me that a concept I define so tightly was being applied to something else. How are we to collect relevant literature on something if our key search terms are being used to refer to something else? Disaster! But then I remembered why social impact bonds interested me in the beginning: they interrogate and align the incentives of stakeholders in social programs. These other bonds showed innovative thinking about structuring finance to deliver social outcomes. That’s worth celebrating! Let’s put the definition aside and celebrate a few variations on the theme (NB: dates relate to announcements – most are still in development):

  1. Khazanah Nasional – social impact bond / social impact sukuk – Malaysia – April 2015

This issue is raising M$1bn (US$282m) and is rated AAA. It will fund a range of environmental and social projects, rather than just one. Instead of investors getting paid more when outcomes are achieved, this instrument pays less. “The Ihsan SRI sukuk incorporates a unique feature where the principal amount is reduced when the selected project hits certain key performance indicators. This means investors will not recover the original sum put in, although they will continue to enjoy an income from the annual distribution rates or coupons. That suggests annual returns will be key in driving demand.

  1. Richmond City (US) – social impact bonds – US – March 2015.

This is a proposal from the Richmond Community Foundation, but which Richmond City sells social impact bonds to raise money that the community foundation could use to buy homes. Local workers rehabilitate the homes, which will then be sold to people through first-time home buyer programs.  A sale of $3 million in bonds was expected in March 2015, pending final approval by the Richmond City Council. That would pay for the rehabilitation of 20 properties a year over five years.

  1. Instituto de Crédito Oficial (ICO) – social bonds – Spain – January 2015.

The funds raised from investors via the “social bonds” will distributed as loans to finance micro-businesses and SMEs. The bonds are rated and total 1 billion euros, with a term of 3 years and an annual coupon of 0.50%.

  1. IIX – Women’s Impact Bond – International – October 2014

The WIB will raise US$10 million, deployed as loans to a selected group of clean cook-stove-related businesses. The bond will have a maturity of 4 to 5 years. The WIB is a pooled fixed income security issued by a special purpose vehicle (SPV) created by IIX.

  1. Midlands Together and Bristol Together – bonds/social impact bonds – UK –July 2013

Triodos worked with Midlands Together to raise a £3m bond for a five-year term and offered investors an annual fixed return of 4 – 6 per cent secured against the company’s assets. This followed £1.6m of funding across two raises for Bristol Together, both in the form of a five year bond issue. The ‘Together’ model involves using the money raised from the bond to buy empty and sub-standard homes and works with social enterprise partners to employ ex-offenders in the repair, refurbishment and restoration. Once the properties are fully restored they are then sold and the original capital, plus any profits, re-invested back into the business and used to pay investors.

Other examples of Triodos Bond raises for environmental and social organisations are here.

Developing a counterfactual for a social impact bond (SIB)

The following was taken from a presentation by Sally Cowling, Director of Research, Innovation and Advocacy for UnitingCare Children, Young People and Families. The presentation was to the Social Impact Measurement Network of Australia (SIMNA) New South Wales chapter on March 11 2015. Sally was discussing the measurement aspects of the Newpin Social Benefit Bond, which is referred to as a social impact bond in this article for an international audience.

The social impact bond (called Social Benefit Bond in New South WaleSally Cowlings) was something very new for us. The Newpin (New Parent and Infant Network) program had been running for a decade supported by our own investment funding, and our staff were deeply committed to it. When our late CEO, Jane Woodruff, appointed me to our SIB team she said my role was to ’make sure this fancy financial thing doesn’t bugger Newpin up’.

One of the important steps in developing a social impact bond is to develop a counterfactual. This estimates what would have happened to the families and children involved in Newpin without the program, the ‘business as usual’ scenario. This was the hardest part of the SIB. The Newpin program works with families to become strong enough for their children to be restored to them from care. But the administrative data didn’t enable us to compare groups of potential Newpin families based on risk profiles to determine a probability of restoration to their families for children in care. We needed to do this to estimate the difference the program could make for families, and to assess the extent to which Newpin would realise government savings.

Experimenting with randomised control trials

NSW Family and Community Services (FACS) were keen to randomly allocate families to Newpin as an efficient means to compare family restoration and preservation outcomes for those who were in our program and those who weren’t. A randomised control trial is generally considered the ‘gold standard’ in the measurement of effect, so that’s where we started.

Child's drawing of a happy kidOne of my key lessons from my Newpin practice colleagues was the importance of their relationships and conversations with government child protection (FACS) staff when determining which families were ready for Newpin and had a genuine probability (much lower than 100%) of restoration. When random allocations were first flagged I thought ‘this will bugger stuff up’.

To the credit of FACS they were willing to run an experiment involving local Newpin Coordinators and their colleagues in child protection services. We created some basic Newpin eligibility criteria and FACS ran a list from their administrative data and randomly selected 40 families (all of whom were de-identified) for both sets of practitioners to consider. A key part of the experiment was for the FACS officer with access to the richer data in case files to add notes. Through these notes and conversations it was quickly clear that a lot of mothers and fathers on the list weren’t ready for Newpin because:

  • One was living in south America
  • A couple had moved interstate
  • One was in prison
  • One had subsequent children who had been placed into care
  • One was co-resident with a violent and abusive partner – a circumstance that needed to be addressed before they could commence Newpin

From memory, somewhere between 15 and 20 percent of our automated would-be-referrals would have been a good fit for the program. It was enlightening to be one of the non-practitioners in the room listening to specialists exchange informed, thoughtful views about who Newpin could have a serious chance at working for. This experiment was a ‘light bulb moment’ for all of us. For both the government and our SIB teams, randomisation was off the table. Not only was the data not fit for that purpose, we all recognised the importance of maintaining professional relationships.

In hindsight, I think the ‘experiment’ was also important to building the trust of our Newpin staff in our negotiating team. They saw an economist and accountant listening to their views and engaging in a process of testing. They saw that we weren’t prepared to trade off the fidelity and integrity of the NewpiChild's drawing of happinessn program to ‘get’ a SIB and that we were thinking ethically through all aspects of the program. We were a team and all members knew where they did and didn’t have expertise.

Ultimately Newpin is about relationships. Not just the relationships between our staff and the families they work with, but the relationship between our staff and government child protection workers.

But we still had the ‘counterfactual problem’! The joint development phase of the SIB – in which we had access to unpublished and de-identified government data under strict confidentiality provisions – convinced me that we didn’t have the administrative data needed to come up with what I had come to call the ‘frigging counterfactual’ (in my head the adjective was a bit sharper!). FACS suggested I come up with a way to ‘solve’ the problem and they would do their best to get me good proxy data. As the deadline was closing in, I remember a teary, pathetic midnight moment willing that US-style admin data had found a home in Australia.

Using historical data from case files

Eventually you have to stop moping and start working. I decided to go back to the last three years of case files for the Newpin program. Foster care research is clear that the best predictor of whether a child in the care system would be restored to their family was duration in care. We profiled all the children we had worked with, their duration in care prior to entry to Newpin and intervention length. FACS provided restoration and reversal rates in a matrix structure and matching allowed us to estimate that if we worked with the same group of families (that is, the same duration of care profiles) under the SIB that we had in the previous 3 years, then the counterfactual (the percentage of children who would be restored without a Newpin intervention) would be 25%.

As we negotiated the Newpin Social Benefit Bond contract with the NSW Government we did need to acknowledge that a SIB issue had never been put to the Australian investment market and we needed to provide some protection for investors. We negotiated a fixed counterfactual of 25% for the first three years of the SIB. That means that the Newpin social impact bond is valued and paid on the restoration rate we can achieve over 25%. Thus far, our guesses have been remarkably accurate. To the government’s immense credit, they are building a live control group that will act as the counterfactual after the first three years. This is very resource intensive but the government was determined to make the pilot process as robust as possible

In terms of practice culture, I can’t emphasise enough the importance of thinking ethically. We had to keep asking ourselves, ‘Does this financial structure create perverse incentives for our practice?’ The matched control group and tightly defined eligibility criteria remove incentives for ‘cherry picking’ (choosing easier cases). The restoration decisions that are central to the effectiveness of the program are made independently by the NSW Children’s Court and we need to be confident that children can remain safely at home. If a restoration breaks down within 12 months our performance payment for that result is returned to the government. For all of us involved in the Newpin Social Benefit Bond project behaving thoughtfully, ethically and protecting the integrity of the Newpin program has been our raison d’etre. That under the bond, the program is achieving better results for a much higher risk of group of families and spawning practice innovation is a source of joy which is true to our social justice ethos.

The Alternative Commission for Social Investment – learning for Australia

alt commAustralia has a real opportunity to learn from the UK social investment market. We have an opportunity to learn from and replicate things that went well. We also have a precious opportunity to correct some of the things that didn’t go so well, rather than repeat the mistakes.

The Alternative Commission on Social Investment was established to take stock, investigate what’s wrong with the UK social investment market and to make some practical suggestions for how the market can be made relevant and useful to a wider range of charities, social enterprises and citizens working to bring about positive social change. It released its report on March 27 2015. Download the report and its summary of recommendations at the bottom of this webpage http://socinvalternativecommission.org.uk/home/.

This is an important report because it is a reflection on the UK Social Investment market by social enterprises, using information gathered from social enterprises, investors and research. It was funded by a grant from the Esmee Fairbairn Foundation, the CEO of which is Caroline Mason CBE, former Chief Operating Officer of Big Society Capital (she remains on their advisory board).

The Commission is a response to growing recognition in the UK that the social investment market is not meeting the needs of the organisations and individuals it seeks to serve. “There is a real feeling that the social investment community isn’t listening to the people on the front line” – Jonathan Jenkins, Chief Executive, Social Investment Business.

The five key underlying questions the Commission addressed are:

  1. What do social sector organisations want?
  2. Can social investment, as currently conceived, meet that need?
  3. What’s social about social investment?
  4. Who are social investors and what do they want?
  5. What can we do to make social investment better?

Particularly relevant lessons for Australia from the Alternative Social Investment Commission’s report are:

1. Minimise the hype: e.g. “Best available estimates are that the domestic market could reach A$32 billion in a decade (IMPACT-Australia 2013)”. This is not a forecast, but the most optimistic of goals. We can track the progress we do make, rather than set ourselves up for failure and disappointment. We can likewise cease talk of social investment filling the gap left by funding cuts unless there is any evidence that this has occurred.

2. Increase investor transparency: information on investments made will help organisations seeking finance navigate investors more efficiently. It will also help coordinate efforts and highlight gaps between investors.

3. Don’t just replicate the mainstream finance market for social investment: some mainstream finance models don’t transpose well to social investment – we can develop a social finance market that is fit-for-purpose and takes advantage of modern technology. There are lots of left-field suggestions in the report.

4. Understand the market we seek to serve: we can avoid some of the ‘us and them’ mentality that has arisen in the UK by seeking and listening to the voice of the investee in order to develop social investment that is useful to them.

5. Fill the gaps: similar to the UK, there is a funding gap for small, high-risk, unsecured investments. If this is the type of investment we are going to talk about all the time, let’s provide it.

6. Redefine social investors: social investors don’t have to be just rich people and financial institutions. In order to achieve the three points above, we should encourage and highlight social investments by social purpose organisations, individuals who are not ‘wholesale’ or ‘sophisticated’ investors and superannuation funds. Individual investment currently occurs in Australia through cooperatives, mutuals and small private investment. Crowd-sourced equity funding reform is being considered by the Australian Treasury and may reduce the regulatory burden and cost associated with making investments available to individuals who aren’t already rich.

This paper enables us to learn from the mistakes of the UK market. It should also encourage us to embrace our own failures and learn as we go. We can build an Australian social investment market that better meets the needs of social purpose organisations and the communities they serve.

There are actually lots of great ideas in the paper not elaborated on here – heaps of ideas for organisations and initiatives that could translate well to Australia.

If you would like to read my analysis of how each of the 50 recommendations applies to the Australian context, please download this PDF table of recommendations. Or see each numbered recommendation below with my comments in colour.


Priority recommendations for Australia

2.       Explain if and how social value is accounted for within your investments – do you expect investees to demonstrate their impact as a condition of investment? Do you offer lower interest rates based on expected impact? Are you prepared to take bigger risks based on expected impact? (Big Society Capital, SIFIs)

  • For organisations specialising in social investment this should be doable and helpful for their potential investees. A range of interest rates across investments and information about why some are higher than others could also be very helpful.

23.    Minimise all forms of social investment hype that might inflate expectations and under no circumstances imply that social investment can fill gaps left by cuts in public spending (Cabinet Office, DWP, MoJ, HMT ministers and officials, Big Society Capital, Big Lottery Fund, NCVO, ACEVO, Social Enterprise UK)

  • The repetition of statements like “Best available estimates are that the domestic market could reach A$32 billion in a decade (IMPACT-Australia 2013)” should be discouraged. Cuts in public spending may be a driver for social investment, but there is no basis for the promise that their effects will be mitigated by social investment.

24.    Avoid treating the development of the social investment market as an end itself – social investment is a relatively small phenomenon overlapping with but not the same as ‘access to finance for social sector organisations’ and ‘increasing flows of capital to socially useful investment’. These wider goals should be prioritised over a drive to grow the social investment market for its own sake– (Cabinet Office, Big Society Capital)

  • All those who are involved in ‘building the market’ should clarity their efforts in terms of their contribution to these wider goals. Many already do. The second goal may need some rewording.

30.    Provide opportunities and support for citizens to invest in socially motivated pensions (HM Treasury)

  • There exists some opportunity for citizens to invest in socially motivated superannuation, but this could be broadened across more superannuation funds.

32.    Social investors should better reflect and understand the market they are seeking to serve by getting out and about, meeting a broader range of organisations – particularly organisations based outside London – recruiting from the sector and cutting costs that deliver no social value – (SIFIs)

  • Social investment organisations in Australia may have less of a problem with this than in the UK, but certainly there is little evidence of the financing needs of potential investees in social investment policies and strategies so far

36.    Don’t replicate expensive models from mainstream finance, do explore how to use social models and technology to keep costs down (Big Society Capital, SIFIs)

  • There is opportunity to develop a social finance market that is fit-for-purpose, rather than simply transposed from conventional finance

46.    Ignore hype about the social investment market – (Umbrella bodies, SSOs)

  • The hype is still so pure in Australia that many social sector organisations are repeating it, with very few doubting its validity yet

50.    Understand that just being socially owned may not be enough – you don’t have to care about impact frameworks but need to recognise that an investor will want to know how you are managing your success at what you claim to do (SSOs)

  • Some definition of success and measure of progress may be required- it’s worth being aware of this and preparing when approaching investors

34.    Focus on additionality and filling the gaps esp small, patient risky, equity-like – (Big Society Capital, Key Stakeholders, SIFIs)

  • Even in our nascent market, these gaps are emerging.

42.    ‘Crowd in’ people who aren’t rich – support models of social investment that enable investments from people with moderate incomes and assets, and remove barriers that prevent smaller investors from accessing tax breaks such as SITR (HMT, Cabinet Office, Big Society Capital, SIFIs)

  • Currently occurring largely via cooperative models. For other models, reliant on private investment, regulatory change (currently being considered) or full prospectus issuing. Tax breaks are not currently available but may become so.

44.    Back yourselves and invest in each other – Social sector organisations should consider cutting out the middleman and developing models where they can invest in each other, where legal and appropriate – (SSOs)

  • There are examples of this occurring, but potential for more. Australian social purpose organisations are wealthy by UK standards and there is greater potential for this here.

Directly applicable to Australia

1.        Publish information on all social investments across all investors – with investees anonymised if required (Big Society Capital, SIFIs, the Social Investment Forum)

  • All self-identifying social investors (institutions, foundations and individuals) could be encouraged to do this. Could also be useful for it to be collated somewhere as a database. Consideration would need to be given for negative consequences. Has begun to a certain degree e.g. SEDIF progress report 2013 http://docs.employment.gov.au/node/32639 and WA Social Enterprise Fund Grants Program http://www.communities.wa.gov.au/grants/grants/social-enterprise-fund-grants-program/Pages/default.aspx  The suggestions from delegates at roundtables are useful. They called for upfront transparency from social investors on:
    • what they will and won’t fund
    • where the money goes
    • the terms of investment
    • how to present a case for investment
    • what the application process will involve.

6.       Be clear about terminology – what specifically do you mean by, for examples, ‘social investment’, ‘impact investment’, ‘finance for charities and social enterprise’ – and consistent across government departments (Cabinet Office, Big Society Capital, SIFIs, Big Lottery Fund, Umbrella Bodies)

  • Many people who use these terms currently define them, but it may still be useful to encourage this practice as the Australian market develops

7.        Clarify how much is in dormant bank accounts – look at other unclaimed assets, insurance, Oyster cards, Premium Bonds, and other products. (Cabinet Office, Big Society Capital)

  • Australian governments could research unclaimed public funds that could be put to good use

9.       Publish details of investments made on your website – to enable Social Sector Organisations to understand the size and type of investments you make (SIFIs)

  • Organisations, families and individuals that make social investments could be encouraged to do this

10.    Be transparent about costs – be clear about what fees you charge and why (Big Society Capital, SIFIs)

  • Some social investors do this already but it could be encouraged generally as good practice

25.    Consider the ‘wider universe’ of socially impactful investment including additional research on the £3.7 billion investment in SSOs primarily from mainstream banks (Umbrella bodies, Researchers, Big Society Capital, Mainstream Banks)

  • Australia has very little research on socially impactful investment at all, so this is a good consideration as we develop new research projects.

26.    Consider how SSOs can be better supported to access mainstream finance through guarantees and other subsidies, and through information and awareness-raising (HMTreasury, Cabinet Office, Big Lottery Fund)

  • Unsure who might take this on, but good to consider for organisations that want to support social sector organisations.

28.    Promote greater focus on socially motivated investment in HMT, BoE, and FCA and BIS – (Politicians, Cabinet Office)

  • Key institutions for mainstream investment market should be involved in or at least invited to social investment initiatives.

31.     Work together in equal partnership with the social sector to develop a set of principles for what makes an investment ‘social’ – (Cabinet Office, Big Society Capital, Big Lottery Fund, SIFIs, Umbrella bodies, the Social Investment Forum, SSOs)

  • This could be one that Impact Investing Australia could lead.

37.     Explore alternative due diligence models including developing common approaches to due diligence for different types of social investment – (Social Investment Forum, SIFIs, Big Society Capital)

  • Social investment organisations may have some learning to share – unsure.

39.    Support the development of a distinctively social secondary market for social investments where early stage investors will be able to sell on investments to investors with similar social commitment but less appetite for risk (Cabinet Office, Big Society Capital, Access)

  • This does not exist in Australia (although there are instances where it has occurred) – could be a good idea to build/test with our tiny market in anticipation of growth. Not obvious who would take this forward.

45.    Large asset-rich social sector organisations should consider supporting smaller organisations to take on property either by buying it for them or helping them to secure it by providing a guarantee facility where legal and appropriate (SSOs)

  • This may already occur – seems logical

49.    Identify what is ‘social’ about the investment approach that you are hoping for from investors: are you expecting cheaper money, higher risk appetite, more flexibility, more ‘patient’ capital, wrap around business support? (SSOs)

  • This should help both investees and investors define each deal and subsequently, the market

Possibly applicable to Australia

11.     Be clear about what is ‘social’ about you approach to investment – what is it that you are doing that a mainstream finance provider would not do – and why is it useful? Mandatory statement of fact sheet. Report on overheads. (Big Society Capital, SIFIs)

  • It is not obvious who would make this mandatory or why. But the question is interesting and a standardised ‘fact sheet’ could help potential investees navigate the investor market.

22.    More funders should consider their possible role in social investment wholesaling including British Business Bank, Esmee Fairbairn, Unltd, Nesta, Wellcome Trust (Funders)

  • There may be potential for some wholesaling, perhaps by superannuation funds or other large funds with a social investment remit

33.     Employ more social entrepreneurs and others with social sector experience – take on more staff with direct, practical experience of using repayable finance to do social good and enable them to use that experience to inform investment decisions (Big Society Capital, SIFIs)

  • This may be something to keep in mind as employment by social investment organisations increases, as does number of people with repayable finance experience, but might be a bit early and this may not be a problem here

38.    Support the development of Alternative Social Impact Bonds options include: (a) models which enable investors from the local community to invest relatively small amounts of money with lower expected returns making them less expensive in the long-term to the public purse, more attractive and replicable; (b) a waterfall approach that sees X% of performance above a certain level reinvested in the enterprise the community (Cabinet Office, Big Society Capital, SIFIs, SSOs)

  • The paper doesn’t expand on these suggestions. (a) is relatively clear and in Australia relies on either regulatory change or small private investments (b) is not expanded on in the report and is thus unclear –  may already be happening under a couple of different guises

43.    Create a ‘Compare the market’/’trip advisor’ tool for social investment – enabling organisations to rate their experiences and comment – (Umbrella bodies and SSOs)

  • While nice in theory, there may not be enough social investors and deals made for this to be meaningful. Could be a good thing to start and build over time

47.    Go mainstream – if looking for investment, consider banks and other investors and not just specifically social investment (SSOs)

  • The bulk of financing for social purpose organisations in Australia is mainstream banks and investors

48.    Before seeking investment, work out whether you are looking for repayable investment or whether you are looking for a grant – (SSOs)

  • There is no clear evidence that this solves a problem we have in Australia

Unsure of applicability

8.       Publish asset management strategies – including details of how endowments are invested in a socially and environmentally responsible manner. (Big Society Capital, SIFIs)

  • Unsure what effect would be in Australia

27.    Apply an added value test before supporting funds and programmes designed to develop ‘the social investment market’, be clear about the likely social outcomes that social investment offers that could not be better delivered another way (Cabinet Office, Big Lottery Fund)

  • Very difficult to be clear that social outcomes could not be better delivered in another way and would not like to discourage simultaneous initiatives

29.    Consider providing guarantees for social investment via crowdfunding platforms based on clear position on what ‘social investment’ means in this context (Cabinet Office, Access)

  • At the moment Australians cannot invest in Australian organisations via crowdfunding platforms

35.     Consider the risk of the social investment market failing to make a significant number of demonstrably social investments at all alongside the risk of some of those investments being unsuccessful (Big Society Capital, SIFIs)

  • This is very broad and how it might be implemented is unclear

Not applicable

3.        Explain who Big Society Capital (BSC)- backed market is for – Be clear about how many social sector organisations can realistically expect to receive investment from the BSC backed market (assuming it works). If it’s 200, be honest about that (Politicians, Cabinet Office, Big Society Capital)

  • No Big Society Capital equivalent

4.       Explain what Big Society Capital (BSC)-backed market is for – Be clear on policy positions on crowding in/crowding out – is the point of BSC to bring mainstream investors in or grow the social investment market to crowd them out? (Cabinet Office, Big Society Capital)

  • No Big Society Capital equivalent

5.        Explain the relationship between Big Society Capital and the Merlin banks – What is the banks role (if any) in governance and strategy? Under what circumstances would they receive dividends? (Cabinet Office, Big Society Capital)

  • No Big Society Capital equivalent

12.    Reconsider the role of Big Society Capital – prioritise building a sustainable and distinctively social investment market over ‘crowding in’ institutional finance into a new market doing – (Big Society Capital, Cabinet Office)

  • No Big Society Capital equivalent

13.     Consider splitting the investment of Unclaimed Assets and Merlin bank funds. Unclaimed Assets, allocated by law to Social Sector Organisations, could be invested on terms that better meet demand than currently, while Merlin bank funds could be invested in a wider group of organisations, with a focus on positive social value – (Big Society Capital, Cabinet Office)

  • No Big Society Capital equivalent

14.    Consider demarcating the unclaimed assets spending as ‘social investment’ and the Merlin funds as ‘impact investment’ – (Cabinet Office, Big Society Capital)

  • No Big Society Capital equivalent

15.     Particularly consider investing some Merlin funds in CDFIs & credit unions that provide finance for individuals and mainstream businesses in response to social need (Big Society Capital)

  • No Big Society Capital equivalent

16.    Bear more transactions costs – particularly those costs which are imposed on SIFIs through demands for extensive legal processes (Big Society Capital)

  • No Big Society Capital equivalent

17.     In the event that it becomes profitable, before paying out dividends to shareholders Big Social Capital should allocate 50% of profits into a pot of funding to reduce transaction costs for SIFIs enabling them to reduce the cost of finance for SSOs (Big Society Capital)

  • No Big Society Capital equivalent

18.    Be more flexible in supporting SSOs to engage with public sector outsourcing and be supported by policymakers to do so learning lessons from the experience of the MoJ Transforming Rehabilitation fund (Big Society Capital)

  • No Big Society Capital equivalent

19.    Consider democratising Big Society Capital board – Or at least be more open and clear about who has controlling stakes and vetoes within its structure . Consider how to make both board and staff team more representative of the sectors that they serve (Big Society Capital, Cabinet Office)

  • No Big Society Capital equivalent

20.    Change the name ‘Big Society Capital’ to something less politically charged – (Big Society Capital, Policymakers)

  • No Big Society Capital equivalent

21.    Consider whether all remaining funds in dormant bank accounts need to be invested in Big Society Capital or whether remaining funds could be used in other ways – for example, creating local or regional social investment funds controlled by local people (Cabinet Office)

  • No Big Society Capital equivalent

40.    Consider the practicality of establishing a simple registration and regulation system for organisations eligible for social investment – as supported by unclaimed assets – with unambiguous criteria for registration of organisations who consider themselves to be ‘social’ but not use a recognised social corporate structure – (Cabinet Office)

  • It is not obvious what this registration would enable in Australia as our market currently exists

41.    Listen to the people – find out what (if anything) citizens in general think about social investment (Cabinet Office, Big Society Capital, SIFIs)

  • Australian citizens in general may not think about social investment, more than likely they’ve never heard of it. It is not obvious who would collect this information and what they would do with it

Response

Civil Society Finance, 27 March 2015, Social investment problems include ‘too much hype and hubris and not enough transparency’ says report
Third Sector, 27 March 2015, Growing the social investment market requires more investor transparency, report says
Social Investment Business, 27 March 2015, Jonathan Jenkins Responds to the final Report from The Alternative Commission on Social Investment

Unit costs – what do they mean?

unit costs

Both the G8 Social Impact Investment Taskforce report and Impact Investing Australia’s report to the G8 have called for publication of unit costs of government services, in order to encourage social innovation and social investment. The assumption behind this seems to be that:

  1. If people know the cost of delivering something, then
  2. They might develop a preventative social program that allows these costs to be avoided, which
  3. Saves the government money, and
  4. Delivers better social outcomes for the population.

Well this may be true for things like employment services, where the government saves cash by not paying unemployment benefits. But you might not get a lot of enthusiasm from some other parts of government. And that’s because a reduction in demand for government services doesn’t necessarily mean that government saves money. In order for this to happen, costs must be able to be recouped i.e. they must be marginal, reflecting the additional cost to the system of more people requiring more services. Marginal costs represent what can be saved if this government service isn’t required. So it all depends on how government spending currently occurs.

Let’s take a look at types of unit costs and how they are calculated. And then see what this means using the reoffending unit cost examples from the NSW Government’s Office of Social Impact Investment:

Unit cost How is it calculated NSW example  What does it mean? What’s it useful for?
Average operating cost Divide entire budget, (including the cost of things like the head of the department and their staff) by service units e.g. total nights spent in custody in one year It costs Corrective Services NSW $189 per day to keep an inmate in custody. Savings may result in response to reduced demand if a prison or wing of a prison closes, but only if staff are sacked and the prison is not maintained. Useful for governments to benchmark their costs against other governments or identify trends in their expenditure over time.
Cost of time and other items Work out how much time is spent on something and the salaries of the people spending that time. Add in any incidentals like photocopying, petrol, travel. It costs NSW Police $2,696 to finalise an offending event in court. This represents time that could be spent on other tasks- If the number of crimes drops, Police are more likely to reallocate their time, than be sacked. Time, rather than money, is saved. Useful for governments to analyse ways to better allocate human resources.
Capital expenditure Look at budget for new buildings in response to increasing demand. This was not a cost given by NSW Government, but new prisons can cost several hundred million. If demand can be reduced by a certain proportion and maintained for a certain period of time, a new prison may be avoided and the amount budgeted for it maybe saved. Useful for looking at long-term government budget allocations and thinking about the best ways to spend a given amount of money.
Marginal cost (sometimes referred to as cashable savings) The cost of things purchased specifically for one more unit of service  i.e. new trainers, toothbrush, appointments with psychologists, water for washing clothes, food for one more person. It costs Corrective Services NSW $19 per day for every additional inmate in custody Every time a unit of service is avoided, the government can avoid spending this much money. Useful for people outside government to understand their potential impact on government expenditure.

If we assumed that cash recovered from NSW marginal costs were used to fund preventative services, we would:

  • take the $19 per day marginal cost
  • multiply it by the 49% of unsupervised parolees that reoffend within 12 months[1]
  • multiply it by the average 1.8 proven offences they commit in within 12 months[2]
  • multiply it by the 31% of those proven offences that are sentenced to prison[3]
  • and multiply it by the 8 out of 12 months we expect these people to spend in prison from those sentencing (average sentence is 486 days[4] and average time of entry during 12 months post-release is around four months after release[5]).

Then we’d have $3.48 per person per day to spend on our services over the first 12 months. Not a lot.

This doesn’t mean that it’s not worth spending money on preventative services for people who are released from prison. It just means that we need to realise that this isn’t a ‘no brainer’ for government and that it’s a serious spending decision that has to be weighed up against other uses for the cash. It’s certainly not the hugely misleading [6] calculation put forward in the G8 Social Impact Investment Taskforce report:

“Say, for example, that a £10 million, five-year SIB for reducing recidivism delivers an 8% financial return and significant social impact by succeeding in rehabilitating 1,000 youth offenders, each of whom would have cost the UK government £21,268 a year. Using the Unit Cost Database gives a value for the social outcome in just the first year of £21 million, and an associated social return per annum of about 15% (internal rate of return) for the SIB” (p.16).

In order for unit costs to be useful, we need to be informative and realistic about what they represent. Marginal costs will reduce as demand falls. But people quoting average operating costs back to government as if they represent savings? Not so helpful.

[1] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0003/168339/Statement_of_Opportunities_2015_WEB.pdf p8

[2] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0003/168339/Statement_of_Opportunities_2015_WEB.pdf p8

[3] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0003/168339/Statement_of_Opportunities_2015_WEB.pdf p8

[4] http://www.bocsar.nsw.gov.au/agdbasev7wr/_assets/bocsar/m716854l11/nswcustodystatisticsdec2014.pdf p22

[5] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0006/168873/Market_Sounding_-_Reducing_reoffending_and_return_to_custody.pdf p12

[6] Six fallacies of this calculation can be read here http://www.themandarin.com.au/5274-will-publishing-unit-costs-lead-social-investment/

Delivering the Promise of Social Outcomes: The Role of the Performance Analyst

I’ve wanted to write about performance management systems for a long time. I knew there were people drawing insights from data to improve social programs and I wanted to know more about them. I wanted to know all about their work and highlight the importance of these quiet, back-office champions. But they weren’t easy to find, or find time with.

Dan
Dan Miodovnik, Social Finance

I worked at Social Finance in London for three months in late 2013, a fair chunk of that time spent skulking around behind Dan Miodovnik’s desk. I’d peer over his shoulders at his computer screen as he worked flat out, trying to catch a glimpse of these magic performance management ‘systems’ he’d developed. At the end of my time at Social Finance, I understood how valuable the performance management role was to their social impact bonds (SIBs), but I still had no idea of what it actually entailed.

Antonio Miguel, The Social Investment Lab
Antonio Miguel, The Social Investment Lab

Then early 2014 Antonio Miguel and I took a 2-hour bullet train ride through Japan while on a SIB speaking tour. On this train journey I asked Antonio to open his computer and show me the performance management systems he’d worked on with Social Finance. Two hours later, I understood the essential components of a performance management system, but I didn’t fully grasp the detail of how these components worked together.

So I proposed to Dan that we join Antonio on the beaches of Cascais in Portugal in August 2014. My cunning research plan was to catch them at their most relaxed and pick their brains over beach time and beers. Around this time I saw a blog written by Jenny North, from Impetus-PEF that mentioned performance management. A call with her confirmed that they were as enthused about performance management as I was. So I drafted a clean, six-step ‘how to’ guide for constructing a performance management system. I hoped that a quick edit from Dan and Antonio, a couple of quotes and I’d be done.

Interviewing Dan and Antonio blew me away. Only when I heard them talk freely about their work did I realise the magic wasn’t in their computer systems, it was in their attitudes. It was their attitude to forming relationships with everyone who needed to use their data. It was their attitude to their role – as the couriers, rather than the policemen, of data.

They told me that there were plenty of ‘how to’ guides for setting up systems like theirs, but that the difficult thing was getting people to read and implement them.

Isaac Castillo, DC Promise Neighbourhood Initiative
Isaac Castillo, DC Promise Neighbourhood Initiative

They suggested I throw out my draft and interview more people. People who were delivering services and their investors. I didn’t just need to understand the system itself, I needed to understand what it meant for the people who delivered and funded services. I gathered many of these people at San Francisco’s Social Capital Markets (SOCAP) conference and several more from recommendations. One of these recommendations was Isaac Castillo, who works with the DC Promise Neighbourhood Initiative’s collective impact project. He is now managing not only his team of performance analysts, but the service delivery team too. It’s revolutionary, but it makes complete sense.

Interviewing these people has been a most humbling experience. It has revealed to me the extent of their dedication, innovation and intelligence. It has also revealed to me how little I knew, and in turn, how little we, as a sector, know about these people and their work. I am honoured to share their stories with you – please read them at deliveringthepromise.org.


This research is published by The Social Investment Lab (Portugal), Impetus-PEF (UK) and Think Impact (Australia).

logos in row

Malaysian Innovation: Building a Social Impact Bond (SIB) Pipeline

Agensi Inovasi Malaysia, part of the Malaysian Government, has embarked on a journey towards Social Impact Bonds that reflects the Malaysian social and policy context. There are three innovative features of their program, ‘Social Service Delivery’, worth highlighting:

  1. Explaining SIBs as a public-private partnership for social good
  2. Creating a market of new interventions to contract via a SIB
  3. Exploring Islamic finance as a source of SIB funding

Let’s explore each of these innovations in turn.

Explaining SIBs as a public-private partnership for social good

Social Impact Bonds were first implemented by an organisation called Social Finance in the UK in 2010. The idea has since generated interest all over the world. The concept can be overwhelming for stakeholders, who seek to understand how far away this model might be from their current reality. In Malaysia, Social Impact Bonds have been framed as the logical next step after the recent introduction of other long-term partnerships and privately financed initiatives (PFIs) towards new infrastructure such as buildings and roads. The 2010 New Economic Model for Malaysia from the National Economic Advisory Council called for ‘academia, business, the civil service, and civil society’ to ‘work together in partnership for the greater good of the nation as a whole’ (Part 1, p. 68). Social Impact Bonds are one vehicle by which these recommendations will be delivered. They are an arrangement where a non-government organisation delivers an intervention that is first financed by private investors who stand to be repaid with interest from government funding if a social outcome is achieved. There are incentives for each stakeholder to be involved (see the Agensi Inovasi Malaysia diagram below).

Diagram of objectives of program

(Agensi Inovasi Malaysia)

Creating a market of new interventions to contract via a SIB

Most jurisdictions that have developed a SIB have first scanned their market for investors, intermediaries and proven or promising social delivery organisations. And then they’ve thought about how to run a procurement process that brings the best of these players together, along with an intervention to achieve a priority outcome for Government. Although procurement approaches have varied, all have rested on the ability of the market to delivery suitable interventions that can be managed by organisations with sufficient capabilities to produce the desired social outcomes. Agensi Inovasi Malaysia has enhanced their opportunity to engage with capable service providers by holding a competition for new ideas in priority areas, and then incubating and collecting evidence on these new initiatives, with the end goal of a Social Service Delivery contract. This is not only a way to provide services that are suitable for the first Social Impact Bonds in Malaysia, but creates a pipeline of evidenced programs for the future.

Social impact bonds emerged in the UK in 2010, with 23 currently in operation. Development plateaued, however, during 2013 and 2014 (see chart below).

SIBs launched white background

In the latter half of 2013, attention turned to the development of a pipeline of SIBs to bring to market. Big Lottery Fund and the UK Cabinet Office are working together on “a joint mission to support the development of more SIBs” through their social outcomes funds totalling £60 million. Social Finance, in partnership with the Local Government Association, has been commissioned to support applicants to their funds and there is also a program of grants for organisations requiring specialist technical support to apply (Big Lottery Fund).

Agensi Inovasi Malaysia will potentially avoid the problems of the UK, by seeding and supporting a pipeline of interventions up front. This pipeline has been created through the ‘Berbudi Berganda: Social Impact Innovation Challenge’ which called for social organisations to submit their ideas for interventions to tackle the priority issues of:

  • youth unemployment
  • homelessness
  • elderly care.

The top 12 organisations won funds and support to implement their ideas, the impact of which will be the subject of action research over their first four months. This research will form the basis of a framework and delivery model addressing the priority issues. The pilot program timeline is below.

Apr 2014 Feasibility study
Sep 2014 Focus group discussion
Oct – Nov 2014 Social Innovation Challenge
Jan – Apr 2015 Incubation
Jan – Apr 2015 Intervention
Jan – Apr 2015 Action research and impact study
2015 Social Finance Policy Framework
2015-16 Model for ‘Social Service Delivery’

The benefits of the competition and incubation approach include:

  • focusing NGO innovation in government priority issue areas
  • government being able to work with NGOs over a longer period of time, thus gaining a better understanding of the ability of the organisation to deliver effective programs and outcomes
  • creating an evidence base that will inform the design of ‘Social Service Delivery’
  • supporting organisations to build and test interventions suitable for a Social Impact Bond.

The Agensi Inovasi Malaysia approach might require more up-front government funding than other jurisdictions have been or will be able to provide. But for a government that has limited experience outsourcing social services, it is a collaborative and supportive way to create a market of interventions that might otherwise not exist.

Exploring Islamic Finance as a source of SIB funding

The potential for Islamic finance to become a source of funding for Social Impact Bonds is significant and has not yet been explored. The Islamic religion obliges its followers to give the zakat, a portion of their wealth to ease inequality and suffering. The total given each year is estimated at 15 times that of global humanitarian aid contributions, and in Malaysia the zakat collected by Government is over US $400 million (Irin News).

Islamic finance includes Musharakah (Joint Venture Partnership), Waqaf (charitable donations), Debt Structure, and Sukuk (Islamic Bonds). A Musharakah could be used as the structure that holds the contracts with other parties. Sukuk could be used for investment, although their flexibility in terms of repayments that are dependent on outcomes will need to be determined. Waqaf could be used to fund a specific fixed cost such as legal fees, extra staff for development of a SIB, software, premises, audit, insurance, performance management or evaluation. The way this could fit into a Social Impact Bond structure is shown below.

Malaysia 2

Conclusion

Agensi Inovasi Malaysia has created a unique pathway towards Social Impact Bonds. Their approach mitigates the risks of implementing the model in a country without a history of outsourcing social services. They have framed this new contracting model in the broader policy context of public-private partnerships, which aids wider understanding of both the model and the objectives of government. By seeding and supporting new programs that address priority issues, the Government will be able to understand and evidence the impact of these new programs, before contracting them for ‘Social Service Delivery’. Finally, the exploration of the role Islamic finance can play in a Social Impact Bond has the potential to be applied in other jurisdictions and extends the ability of Islamic finance to achieve social outcomes.

This blog was written as a result of a project Emma is working on with Agensi Inovasi Malaysia. It describes aspects of their programs that she found interesting and relevant. These are Emma’s personal views and should not be taken as representative of Agensi Inovasi Malaysia or any other organisation.