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/

Procurement precedents for social impact bonds (SIBs)

There are many ways to procure for a SIB. The following examples of procurement processes have been chosen to demonstrate variation. The advantages and disadvantages of each are context specific – if you are developing a new procurement process you might want to think about whether each variation promotes or hinders your objectives.

I the word ‘procurement’ to refer to any of the means by which governments might ask external organisations to deliver a service under contract.

Please refer to the source information if you are producing further publications – I have tried to faithfully summarise each procurement process, but my interpretations have not been checked with the parties involved. Happy to accept corrections or suggestions.

Ontario, Canada

Deloitte won the initial RFP is currently in the final stages of that contract, with an Ontario Government decision expected in the next few months. An interesting feature of this process is the parallel ‘internal’ and ‘external’ streams, where public servants are proposing their outcome ideas at the same time as people in the market are also proposing. External ‘registrations’ of interest were called for in the following priority areas:

  • Housing – Improving access to affordable, suitable and adequate housing for individuals and families in need.
  • Youth at Risk – Supporting children and youth with one or more of the following: overcoming mental health challenges, escaping poverty, avoiding conflict with the law, youth leaving care, Aboriginal, racialized youth, and other specific challenges facing children and youth at risk, for example employment.
  • Employment – Improving opportunities for persons facing barriers to employment, including persons with disabilities.

procurement Ontario

New South Wales, Australia

In New South Wales we suffered from locking ourselves out of developing the idea with organisations over the 6 months it took to run RFP and negotiate the contracts for the next stage. We did not agree a maximum budget or referral mechanism until the joint development stage – we asked for organisations to come up with these as well as a full economic and financial model in their RFP. None of us who were involved in designing the procurement process feel we got it quite right, yet given the opportunity, we would all redesign it in different ways! (See NSW Treasury page on ‘Social Benefit Bonds’)

procurement NSW

Procurement timeline:

November 2010 NSW Government commissions a feasibility study from Centre for Social Impact
February 2011 SIB Feasibility Study report submitted  and published
March 2011 State government elections and change of government (left to right)
September 2011 (due Nov) SBB Trial Request for Proposal released
March 2012 3 consortia announced joint development phase begins
March 2013 Newpin Social Benefit Bond contracts agreed
June 2013 Benevolent Society + 2 banks Social Benefit Bond contracts agreed

New York City, USA

An interesting feature of the New York City SIB development process was that service delivery partners were procured for first, and started delivering services while being involved in developing a SIB for future financing of the service.

procurement New York City

New Zealand

The New Zealand process appears to be the only one where the government procured for the intermediaries and service providers separately. It is not yet clear what the benefits of this might have been or how they will be matched up.

procurement New Zealand


Several US states have followed a similar procurement process to Massachusetts, which first involved a Request for Information from organisations external to government. This approach allows the market to shape government thinking and recognises that there may be social issues and intervention types that government hasn’t previously considered. Some jurisdictions have accomplished this with less formal consultations e.g. Queensland Government’s cross-sector payment-by-outcomes design forum and Nova Scotia Government’s cross-sector SIB Working Group.

procurement Massachusetts

Massachusetts Selection Criteria:

  1. Government leadership to address and spearhead a public/private innovation.
  2. Social needs that are unmet, high-priority and large-scale.
  3. Target populations that are well-defined and can be measured with scientific rigor.
  4. Proven outcomes from administrative data that is credible and readily available in a cost effective means.
  5. Interventions that are highly likely to achieve targeted impact goals.
  6. Proven service providers that are prepared to scale with quality.
  7. Safeguards to protect the well-being of populations served.
  8. Cost effective programs that can demonstrate fiscal savings for Government.

Department of WOrk and Pensions UK

The Department of Work and Pensions developed a ‘rate card’ for payment per individual outcome for their procurement. They asked organisations to choose a subset of outcomes to deliver, nominate a price per outcome and the intervention that would achieve them. A social impact bond structure was not mandated – seven out of the ten chosen programs involved external investors. The following process occurred twice in 2012:

procurement DWP

DWP Rate Card: DWP pays for one or more outcomes per participant which can be linked to improved employability. A definitive list of outcomes and maximum prices DWP was willing to pay for Round 2 is:

DWP rate card

Saskatchewan, Canada

This process may be followed if an unsolicited proposal is received. An interesting feature of the Saskatchewan SIB is that the investor has also signed the contract with government.

procurement Saskatoon

Essex, UK

The process of developing the Essex social impact bond is described in Social Finance’s Technical Guide to Developing Social Impact Bonds. Social Finance worked closely with Essex County Council to research and develop a SIB, with the final step being procuring for a service provider.

procurement Essex


Governments need to think about which information need to be included in a procurement document. For example, if it is desired that organisations external to government come up with completely new service areas, then a procurement process that does not state the social issue to be addressed or contracting department might be suitable. But information and constraints that are known should be included in a tender document. It’s simply irresponsible to have a criminal justice organisation spend time working on a response offering intensive services for 30 female offenders if there was never any possibility the SIB was going to be in justice, or with female offenders, or with a small group of people.

The Peterborough Social Impact Bond (SIB) conspiracy

If you think Social Impact Bonds are the biggest thing to hit public policy EVER, then you were probably horrified at the cancellation of the final cohort of the flagship Peterborough SIB. How is it possible? What does it mean?

Since the news was broken in April this year (2014), I’ve had questions from as far afield as Japan and Israel trying to discover the UK Government’s TRUE agenda. More recently, at the SOCAP Conference in San Francisco in August, it was raised again. Eileen Neely from Living Cities, which has provided $1.5 million in loan financing for the Massachusetts Social Impact Bond was discussing “shut down risk: what happens if one of the parties decide they don’t want to play.”

She said, “In the Peterborough deal in the UK, the government decided that they weren’t going to play any more… so there’s some who say ‘Oh it’s because it wasn’t going well’ and others are saying ‘It was cos it was going too well’ so whichever it is, they decided that they weren’t going to do it, that they weren’t going to go into the next cohort, so what does that mean to the investors?” Eileen made it quite clear “I haven’t talked to any of the participants there, I’m just outside, reading the articles and the blogs …”

I thought it was about time we summarised the evidence for those who continue to ask these questions. Continue reading

Social impact investment: Why are we here?

In the last two weeks I’ve been at two major social impact investing events, both of which were conducted in the language of investors, and both of which left me actively searching for the perspective of social purpose organisations. There’s a lot of discussion about what social purpose organisations need to do to get investment ready, but where’s the conversation about what investors need to do to get impact ready? SOCAP14 On September 3rd, the second night of the SOCAP conference, I attended an event held by Echoing Green, who support young social entrepreneurs. One of the young entrepreneurs was attending SOCAP.  Four of her friends excitedly asked her what it was like. She said “I don’t know. I’m still trying to figure out if it’s for me. I go to these sessions, but I don’t understand what they’re talking about.” I asked her what the issue was. She said the language and the concepts were so foreign to her that she struggled to find meaning in the proceedings. Only that morning, Sir Ronald Cohen had said, “that’s what impact investment is about: enabling social entrepreneurs whether they’re working through not-for-profits or for-profits, to raise the capital they need in order to improve the lives of others, or the environment”. How did we fail to communicate this to our target market? Continue reading

Breakdown of social impact bond investors in Australia

There are two social impact bonds in Australia that have raised investment and are delivering services. They have been called “Social Benefit Bonds (SBBs)” by the New South Wales Government, the state government that initiated them. They are the Newpin SBB and the Benevolent Society SBB and both of them work to strengthen families to ultimately reduce the need for children to be placed in care outside their homes. Investment for both deals was open to wholesale investors upon application. One parcel of investment in the Newpin SBB was transferred to a retail investor in August 2014, so is not shown on the chart. Also interesting to note is that the Benevolent Society, the charity delivering services for one SBB, has invested in the Newpin SBB, as well as in their own. A breakdown of investor types for each SBB is below.

Newpin investor breakdown(Source: Presentation by Ian Learmonth, 2013, p.14)

Bensoc investor breakdown(Source: KPMG Evaluation of the Joint Development Phase of the NSW Social Benefit Bonds Trial, 2014, p.30)

Social Investment – supplying and demanding what?

There’s a diagram/framework that keeps being used to describe the social investment market and it drives me mad! [I’m not going to point fingers, but its use is fairly widespread, to the point where some organisations use it to label their computer files…]supply and demand

This diagram assumes that your world revolves around money. When you see it, you are supposed to see a very logical display of: the supply of money; the demand for money; and the things that help these two connect.

But social finance is about more than money. It’s about people and changes in their lives. Social purpose organisations use the words ‘supply’ and ‘demand’ to talk about housing, food, services, blood…

As social finance/social investment/impact investing become more widely discussed and practised, our use of language is central to its development. Whatever our perspective, we need to use as little jargon as possible, communicating meaning effectively. We should ask people to explain what they mean, reduce our use of acronyms and assume that the world view of others is not our own.

The diagram above can be useful if we all understand what it means, for example:

investors and investments

It’s still a little money-centric, but it involves fewer assumptions. Is it clear enough?

Update July 2014

Until now, the bulk of social/impact investment reports have been written by investors, for investors, with a few written by policy makers trying to encourage investors. We’re just starting to see the emergence of publications on social/impact investing written for social purpose organisations. Big Lottery Fund has published Social Investment Explained, beautifully written David Floyd at Social Spider and Nick Temple at Social Enterprise UK, with support from Dan Gregory. It sets the benchmark for communication – its language and structure make it accessible to the organisations that are the basis of the existing and potential market.

NSW Newpin social benefit bond – returns to investors


(Social Ventures Australia: Newpin Social Benefit Bond)

The NSW social benefit bond (social impact bond) for UnitingCare Burnside’s Newpin programme is attracting interest from a range of investors, including NGS Super – the first time we’ve seen a pension/superannuation fund sign up to a social impact bond. The Newpin programme is for families with children aged 0-5 and results are measured on the proportion of children in out-of-home care (which includes foster care, institutional care and placement with extended family) that are returned to their families by the courts. This is called the restoration rate.

Eureka Report’s A high-yield bond with social benefits recently revealed the social and financial returns over the seven year social benefit bond as follows:

Restoration rate (r) Return to investor (IRR)
≥ 70% 15%
65% ≤ r < 70% 12%
60% ≤ r < 65% 7.5%
55% ≤ r < 60% 3%
•minimum 5% yield over first three years
•no minimum yield after three years
•75% of capital returned if bond redeemed at four years
•50% capital returned if redeemed after four years

The Newpin restoration rates were 74.5% last year. Their approach to this social benefit bond, to measure their results for a similar cohort for the year prior to the bond, gives social investors information with which to judge the social and financial risk of the investors. Providing this information attracts investors beyond the die-hard philanthropists who have backed the programme from the start.

Funds were raised from 59 investors by Social Ventures Australia (SVA) with a minimum investment of AU$50,000. The SIB was oversubscribed. Below is a breakdown of investment by investor categories as presented by Ian Learmonth, Executive Director, Social Ventures Australia at the 2013 Social Finance Forum in Sydney/Australia.

NewPin SIB investors

How do we get super funds involved in social investment?

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”.Image

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.

NPC looks at getting involved in social investment from a charity perspective

Funders might assume that charities will be excited about the recent growth in social investment markets. New Philanthropy Capital (they do the best work!) produced A guide to social investment for charities in November 2011.


Charities need to think carefully before taking on social investment: they need to understand the risks and take steps to mitigate them, and be clear how the investment will create social benefit and improve the lives of their beneficiaries. For charities that have considered the risks fully and are confident of a future income stream, social investment can be an effective way to enable them to do more for the people they help.