Ministry of Justice (UK) innovation pilot invites the market to design new financing mechanisms

September 7, 2012March 10, 2013 Emma Tomkinson Social Impact Bonds, Social Innovation, Social Investment & Finance Doncaser Prison, Ministry of Justice, payment-by-results, Peterborough SIB, social impact bonds, UK Innovation Pilot

This pilot was put on hold (indefinitely) by the new Justice Secretary as he introduced his widespread probation payment-by-results program

In August 2011, Minister for Prisons and Probations, Crispin Blunt MP introduced the innovation pilot programme with

It has, for too long in my view, been held that Whitehall knows best. I can only imagine how dispiriting it must be for well-intentioned organisations to try to influence the government and come up against what must sometimes seem like an impenetrable barrier… The government has listened and is not shying away from creating a market for public service delivery that is open to this innovation.

The briefing presentation that went with this includes:

a request for proposals that are of sufficient size for payment and evaluation, focus on outcome measures, create incentives to intervene with the entire cohort and use measurement as a trigger for payments
an intention for at least one pilot to result
an allocation of £20m for success payments
outlines of Peterborough SIB and Doncaster Prison payment by results contracts

Following this, in December 2011, the Ministry of Justice (UK) released an open tender asking organisations to propose both innovative funding and service delivery models to tackle reoffending called Payment by results – innovation pilots. These pilots are on top of six other payments-by-results pilots they are running.

What’s interesting about this?

This is the first tender I’ve seen where a government is open to market suggestions for financing mechanism to reward outcomes. We might see new payment by results mechanisms.
Prior to this, the only government organisation to run a competitive process for a Social Impact Bond had been the NSW Government with their Social Benefit Bonds Trial. This tender goes beyond that and is open to any payment by results financing model.
Innovation = new = increased perceived risk. The Ministry of Justice has a decade-long history of tying payment rewards and penalties to their prison management contracts and was the first government organisation to implement a Social Impact Bond. It also broke ground with its Doncaster Prison payment-by-results contract, where 10% of contract payments are tied to a single reoffending indicator. It will be interesting to see how the risk of new financial mechanisms may be reduced, for example by cornerstone payments or existing programs with strong evidence behind them. Or the risk of new programs may be offset by a more established financial mechanism.
Justice is leading the field in payment by results initiatives around the globe. Employment services contracts used to be the most innovative. Which service area will be next to emerge and how far can payment by results be feasibly extended?

The official tender information on Payment by results – Innovation pilots was released in December 2011. Prequalification questionnaires were submitted in January 2012 and organisations then engaged in developing proposals.

Both lots contain the text:

We seek to develop the market for payment by results through innovative forms of finance and strong involvement from voluntary and social enterprise organisations, including smaller organisations and; as part of the payment by results programme of pilots learn what works and develop a broader evidence base to support design of future policy.
Contract duration is dependent on proposal details. We expect pilots to run for no less than 2 years and no more than 6 years. Up to 20 000 000 GBP has been identified for rewarding successful outcomes of innovation pilots. This funding for outcome payments is for the whole innovation pilots programme. The potential for a small amount of start up funding or working capital is also available. MoJ will consider providing working capital, the precise amount to be negotiated as part of the contracting process.

Lot 1 is looking for programs for short term prisoners that are an

innovative approach to tackling re-offending of offenders who have served a sentence imposed by a Court and have been released from sentences of less than 12 months.

And Lot 2 asks proponents to define their cohort for an

innovative approach to tackling re-offending of offenders; we will accept proposals that focus on offender cohort and any size cohort.

The tender will be awarded to

the most economically advantageous tender in terms of the criteria stated below:

1. Operational service delivery. Weighting 20

2. Commercial financial. Weighting 203. Partnership & stakeholders. Weighting 15

4. Commercial legal. Weighting 10

5. Supply chain management. Weighting 10

6. Implementation. Weighting 107. Human resources & organisational change. Weighting 5

8. ICT & information security. Weighting 5

9. Continuous improvement. Weighting 5

50% of profits or 100% of profits to charity? Same, same but different?

August 24, 2012July 24, 2013 Emma Tomkinson crowdfunding, Great ideas for socially responsible living!, Judging social organisations on their financial data, Social Investment & Finance looloopaper, profit, social enterprise structure, toilet paper, who gives a crap, world toilet organization

My previous blog on the Australian/US collaboration Who Gives A Crap : toilet paper that builds toilets outlined their catchy campaign and their social enterprise commitment to give 50% of their profits to the charity WaterAid. There are some negative comments on their home page about why you should buy toilet paper from an enterprise that keeps half the profit. I haven’t checked on Kleenex’s home page, but I wonder if they get any stick for keeping profit…

Well another Australian toilet paper social enterprise came to my attention today. Looloopaper is a subscription-based provider that gives 100% of their profits to charity! First comment: subscription is a good model to minimise risk and keep storage costs down. Second comment: 100%! Awesome! I’m in!

But is it possible that the team behind Who Gives A Crap and Looloopaper keep the same proportion of your well-spent toilet paper dollar, despite Looloopaper giving TWICE the proportion of profits to charity? Well, if Who Gives A Crap operates on an equity model (good for start-ups because the team only get paid once there are profits to pay them with) their 50% of profits is their income. But if Looloopaper has their team on salaries, then they get paid before profits are calculated. Different model, massively different perception!

Either way, buying from either of these gems will mean much more of your toilet paper profit goes to charity than ever before. And if you just want to donate to the toilet cause, I can’t vouch highly enough for Jack Sim’s fantastic World Toilet Organization.

12 points of interest in the New York (Rikers) Social Impact Bond

August 19, 2012August 1, 2015 Emma Tomkinson Rikers Island, Social Impact Bonds, Social Innovation, Social Investment & Finance Bloomberg, Goldman Sachs, New York, social impact bonds, US

There was no hype before the Social Impact Bond (SIB) was announced – this is in contrast to other Governments who have announced their intention well before finalising details. Perhaps the deal was developed quickly, which may well be the case with Bloomberg controlling both the philanthropic guarantee and political appetite. Or perhaps the parties didn’t want to announce before they had signed the contracts, avoiding the pressure of having to live up to an announcement of intention.
In addition to a press release, the City of New York released a briefing pack outlining the justification, partners, program and payment terms of the SIB. The terms of Government payment are clearly set out, unlike in the Peterborough SIB. For a new funding mechanism, this certainly promotes understanding.
It’s called a Social Impact Bond- Obama’s administration announced funding for “pay for success” bonds and the NSW Government has branded them Social Benefit Bonds. Using the same term as Peterborough makes it clear that they follow the same model and helps keep related literature together.
Bloomberg Philanthropies guarantees it – they’ve only guaranteed $7.2m of the $9.6m Goldman Sachs investment, but having the guarantee reduces investor risk and may be one of the key factors in getting this deal finalised. It’s not clear under what terms the guarantee is paid or what happens to it if it’s not required. The fact that it’s a grant seems to suggest that MDRC would repurpose it. This also means that like Peterborough, if outcomes are not achieved, there is no payment of public monies.
The Goldman Sachs payment to MDRC is described as a loan – people often ask of SIBs “Are they debt or equity?”. In fact, they are neither, they are multi-party contracts. Payments from Government are due to an outcomes-based contract. The private investor is really buying a futures option. Classification as debt sheds light on how Goldman Sachs will account for this investment. It also may suggest that Goldman Sachs will take a hands-off approach. If this is so, the benefit of investor skills and incentive are not transferred through to the service providers. This transfer has historically been referred to as one of the reasons for involving external investors, but we’ve yet to see a SIB where investors have a relationship with service providers.
Similar to Peterborough, there is a third-party, independent evaluator. This may prove to be an essential feature of all SIBs as they emerge.
The intermediary is MDRC, a research centre – the strengths of MDRC are in program evaluation and design. Intermediaries in other SIBs bring financial investment or service delivery experience to the SIB. In NSW, the intermediary role will be played in part by banks and not-for-profits, as well as by the intermediary Social Finance (no relation to the UK or US Social Finance).
The payment terms state that a 10% reduction in recidivism is the threshold for investors to break even, although when cost of capital is factored in, this will represent a loss. It is not clear what the 10% reduction is in relation to i.e. what the comparison group is. The SIB also uses stepped payment terms, rather than a sliding scale, which is simple and unambiguous.
There is value in being a first mover – the press releases announces the “Nation’s First Social Impact Bond Program”. There is a conflict between the kudos received for being a first-mover and the confidence gained by waiting to see how other SIBs turn out. It will be interesting to see whether SIBs become more popular and mainstream, or whether development of this model will slow once its novelty wears off.
Benefits to nonprofit providers are described in the briefing pack as “a committed funding stream not subject to budget cuts”. The literature that exists on SIBs describes the major benefit to be providers being the flexibility afforded by focusing on outcome, rather than current prescriptive Government contracts. This could be a sign that MDRC will be prescriptive in what it asks of the two providers, or that prescriptive contracts are less of an issue in this jurisdiction.
Is there conflict between innovation and evidence? The briefing pack justifies the SIB as “encouraging innovation in a time of fiscal constraints”. The idea that SIBs encourage innovation by allowing Government to pay only if outcomes are achieved might be one for the long-term market only. At the moment, the reputational risk of failure to all parties and intense media scrutiny has resulted in SIBs providing services with a strong history and evidence-base that may require strict adherence to service models. These services are so safe they would be ideal candidates for a direct outcomes-based contract with a provider. The real innovation occurring here might be in how the delivery partners have to work together towards agreed outcomes.
They’re creating a pipeline – the press release refers to an August 2 request for expression of interest for additional social impact investment projects by the City of New York. This would suggest that a pipeline of proposals will be established, but I haven’t been able to find the request anywhere. It would be interesting to see whether outcomes are suggested and priced, in the manner of the NSW Government, or whether this will be up to the market.

How do we get super funds involved in social investment?

July 23, 2012July 25, 2012 Emma Tomkinson Social Impact Bonds, Social Investment & Finance Social Benefit Bonds, social impact bonds, social investment, superannuation funds

In Australia, superannuation funds are large and growing, so they’re the ideal social investors of the future. But super funds are also highly regulated and risk averse. And rightly so – we don’t want fund managers taking huge risks with our super! So there are two options. Firstly, we can lower the risk of social investment products to suit the requirements of funds. Secondly, most superannuation funds offer their clients a choice of options with different risk and return profiles. There’s an opportunity here to allow clients to chose to invest a portion of their super in social investment options, although we may not quite be there yet…

Phillipa Yelland’s article in today’s Investor Daily, Jury still out on Social Benefit Bonds, questions whether Social Benefit Bonds are good investments, interviewing Nick Ryder from NAB and Peter Murphy from Christian Super. Ryder neatly summarises the SBB concept and notes that we’re looking at a class of investment that do “not necessarily require people to choose between being a philanthropist or an investor”.

Murphy’s reservations have to do with the SBB’s complexity, the difficulty of understanding the metrics and using Social Return on Investment (SROI) figures. These reservations reflect where the SBB scene is at in Australia right now: we have three SBBs under development in New South Wales, none in the rest of the country, and none operational. We can’t fully understand the risk to investors until the terms, structure and the metrics of the SBBs under development have been decided on. The use of SROI is a separate issue. While it will be useful and meaningful to know the full social return of the SBB investments, returns to investors and Governments are unlikely to be calculated using this method. Investor return depends on outcome change, measured in a way that is closely related to costs Government is able to avoid. SROI itemises outcome change for all stakeholders and gives each of these a value. The basis of an SBB is limited the value of the outcome change for one stakeholder – the Government body funding it.

Paul Zak’s “moral molecule” helps us understand why giving is it’s own reward

July 22, 2012July 23, 2012 Emma Tomkinson Across the sector, Social Investment & Finance risk sharing, social value

Paul Zak began studying oxytocin as a measure of trust. When oxytocin is present in our brains and blood streams, we are happier, more generous and more trusting. Great! So how do we increase oxytocin to get people to be more generous and trusting? It’s got a half-life of three minutes, but you can bring it on by hugging, dancing, sex, massage, praying… or for a more professional environment, people will produce oxytocin if they feel you trust them. Economies with a higher level of trust are more prosperous (although I wouldn’t jump to conclusions about cause and effect here).

I’m interested in what other people think the implications for this are in terms of giving and social investment. I wonder if models of funding that involve collaboration and connectedness are more likely to work because they’re boosted by this biological reaction to trust. Some risk sharing and risk management strategies may be more successful if they include a display of trust in other parties. This recognises that the way we behave with money isn’t driven exclusively by financial return, but by how much we value sharing and connecting with others.

Paul Zak is Professor of Economics and the founding Director of the Center for Neuroeconomics Studies at Claremont Graduate University. His new book is called “The Moral Molecule“. This Sydney Morning Herald article is a good summary of his work in the area and his 17 minute TED talk Trust, morality — and oxytocin is worth a watch.

My favourite bit, quoted here from the article, was the description of this experiment – flies in the face of Game Theory!

The starting point was a persistent mystery in Zak’s original field, economics: time and again, in experiments, people behave more generously than traditional economic models predict that they should. A classic demonstration of this is known as the Trust Game, in which pairs of participants communicate with each other via computer terminals: they never meet, and have no idea who the other person is. Person A is given GBP10 ($15.20), then invited to send a portion of it, electronically, to person B. Person A has a motive for doing so: according to the rules, which both players know about, any money that A sends to B will triple in value, whereupon B will have the option of sending some of it back as a thank-you. According to conventional notions of rational behaviour, the game should break down before it has begun. Person B, acting selfishly, has no reason to give any money back – and, knowing this, person A shouldn’t send any over in the first place.

Yet, in trials of the game, 90 per cent of A-people send money, while 95 per cent of B-people send some back. Analysis of the oxytocin in their bloodstreams reveals what is going on: by sending money to person B, person A is giving a sign of trust – and being on the receiving end of a sign of trust, it emerges, causes oxytocin to increase, motivating more generous behaviour in return. And it is not just receiving free money that causes people to feel oxytocin’s “warm glow”: in other studies Zak has conducted, random windfalls don’t cause nearly so much of it to be released. What counts is being trusted: trust in one person triggers oxytocin in the other, which triggers more trustworthy behaviour, and so on, in a virtuous circle. “Well, that’s except for the 5 per cent of people who are ‘unconditional non-reciprocators’,” says Zak, referring to the consistent minority of people who seem immune to this cycle. “What we call them in my lab is ‘bastards’.”

New useful social impact bond tools from Nonprofit Finance Fund and McKinsey

July 15, 2012July 17, 2012 Emma Tomkinson Social Impact Bonds, Social Investment & Finance

A couple of useful tools came out of the US recently (where they call social impact bonds “pay for success” bonds) and are hosted on the Pay For Success Learning Hub. The Rapid Suitability Questionnaire would be quite good to give participants an idea at the start of what they’ve got themselves into and what they need to do to get ready for a bond. The Capabilities Due Diligence Tools could be a bit overwhelming if looked at too early. I think their greatest value will be as an item bank from which relevant points can be pulled at different points! It’s not clear from the tools who might be submitting information to whom, although there is a clear assumption that responses will be scored and compared against other organisations. It’s not clear what process would lead to this situation – perhaps the kind of government Request for Proposal we saw in NSW? A due diligence tool to help service providers and intermediaries to ask for government information would be very useful and might include referral mechanisms, business as usual arrangements for comparison groups and historical data to estimate outcome change/effect. The two tools are described on the website as below:

Rapid Suitability Questionnaires (RSQs)

RSQs are assessments consisting of 10-15 questions that evaluate organizational suitability and readiness to pursue a SIB model. There are seven different questionnaires customized for each of the stakeholders involved in a transaction. RSQs may be used as a self-assessment or a review of potential partners and are designed to help facilitate productive conversations between the various parties involved in a SIB.

Capabilities Due Diligence Tools

Capabilities Due Diligence Tools provide a detailed framework to assess core capabilities for participation in a SIB transaction. They will identify strengths and gaps in readiness and are customized for service providers, intermediaries, and project evaluators. These tools are designed to support advanced discussions and lay the groundwork for collaboration across the multiple stakeholders involved in a SIB transaction. Each set of tools includes six downloadable modules that structure a due diligence process for assessing the readiness of different stakeholders to participate in a transaction.

Buzzbnk – crowdfunding for social ventures (UK)

July 15, 2012July 17, 2012 Emma Tomkinson crowdfunding, microfinance

Buzzbnk is a well-presented UK online crowdfunding platform dedicated to social ventures. One cool thing about this site is the ability to donate or loan. You can clearly see how far the project is towards meeting its target and how long until their deadline.