Tomorrow (August 7), the UK government will announce the first results from the world’s first social impact bond (SIB), known informally as the Peterborough bond after the UK city where the payment-by-results programme of short-sentence offender rehabilitation backed by the ‘bond’ was introduced.
It will be the first real test of the social investment market in the UK, which is often called a leader in the field. The UK set up the world’s first social investment bank, Big Society Capital, brought in tax incentives to encourage retail investors to support the market and pioneered the world’s first SIB in 2010. Since its creation, nearly all conferences with social investment on the agenda have featured the Peterborough bond in its discussions.
Peterborough, a mid-sized UK city an hour north of London was known previously for little more than its cathedral and train station on the main UK east coast line into London. Since 2010, it was given the added honour by social investment backers of pioneer city for a new wave of public-private partnerships in difficult areas of social provision. Its influence led to a wave of similar SIBs being launched around the world, most notably the SIB backed by Goldman Sachs in New York in August 2012, the U.S.’s first, covering the $9.6m costs of a programme designed to reduce youth recidivism among young men incarcerated on Rikers Island. Until, that is, the Peterborough SIB was surprisingly axed by the UK government in April this year, just over half way through its proof-of-concept trial period. The UK Ministry of Justice (MoJ) announced that it would be replaced with an “alternative funding arrangement” four years into its planned six-year run.Little was said at the time regarding the investor capital that had backed the fledgling programme. The Peterborough SIB involved a group of private investors putting nearly £5m into The One Service, a coalition of social organisations trying to reduce reoffending among short-sentence offenders in the area. At its launch, the MoJ agreed to pay investors a return if The One Service met set targets on reoffending, initially to be judged in three tranches, now two because of the scheme reduction. If it failed to reach the targets, the investors could lose all of their money. The idea was that lower reoffending would save the government money, and that part of the savings, if achieved, would go to the investors. The scrapping of the programme was met with a tinge of schadenfreude from some sections of the UK social investment community who had long criticised the lavish attention on social impact bonds. Some argued that there was too much money being ploughed into a new and untested mechanism (at least £100m in funds are available in the UK to help develop SIBs). Others felt the programme allowed investors to profit from social need, and had been overhyped by the UK government as a panacea for social ills. Social Finance, the organisation that developed the SIB concept and arranged the Peterborough bond, went on a public relations offensive. A spokeswoman said the project was not being shut down because of problems with the SIB model, but because it has demonstrated its effectiveness: “Offenders have found the offer of support that is voluntary, proactive, non-judgemental and flexible to be invaluable,” she said. That rather perplexing logic partly reflected the sense that the Peterborough social
impact bond had ostensibly fallen foul of the political cycle. In the investment industry parlance, this is sometimes called “appropriation”, the danger of a political change locally or nationally causing SIB contracts to be changed or not honoured. The UK SIB programme was set up under the Labour government in 2010 by then Home Secretary, Jack Straw. That same year, the Labour Party was ousted from power by the Conservative-Liberal Democrat coalition government. The latter continued to back the SIB programme. Subsequently, however, the MoJ began developing a new nationwide funding model to support released offenders that the government now says is not compatible with the Peterborough SIB funding model.
The new programme, Transforming Rehabilitation, will contract out support of low and medium risk offenders around the UK to the private and voluntary sector instead of the public sector. One of those contract areas includes Peterborough.
The One Service will continue to deliver services up until the new contractor starts working. After that, the new service deliverer can leave The One Service structure in place and merge it with its own service, or scrap it.
Speaking to Responsible Investor, Toby Eccles, founder and development director at Social Finance, says the new legislation underpinning Transforming Rehabilitation includes a responsibility for supervising short-sentence prisoners (those sentenced to less than 12 months in prison) after release – an exact mirror of the group supported under The One Service: “This new obligation from government to work with short term-offendersdemonstrates the success of the Peterborough social impact bond. We are proud to have contributed to this,” he said.
Indeed, Chris Grayling, the Secretary of State for Justice, last year held up the Peterborough scheme as a good model for private and voluntary sector partnership in prisoner rehabilitation. He said Transforming Rehabilitation would be a major opportunity for the social investor sector, and hinted he wanted to use the social impact bond model to a UK parliamentary committee.
Six months after Grayling’s statement, Eccles was raising concerns to the same parliamentary committee about the MoJ’s plans, saying the process was happening too quickly to allow social investment to form a major part of the programme. Elaborating on this at the time, a spokeswoman for Social Finance sought to distance Peterborough from the government programme: “Peterborough was set up to address a gap in provision for short-sentenced offenders. The government’s Transforming Rehabilitation programme is primarily about restructuring present probation services, on which Peterborough offers little of relevance.”
You could be forgiven for being confused!
Four months later, the Peterborough social impact bond was cut short. The MoJ now has very little to say on future social impact bond projects. A spokeswoman told Responsible Investor that other SIBs were being led by a different government department.
But, she did reveal that the MoJ will provide results on the Peterborough bond tomorrow (7th August) that will finally tell us whether the investors – all UK charitable
foundations – will get a return. If the Peterborough project succeeds in reducing reoffending among a cohort of 1,000 short-term offenders by at least 10% compared to results in a national control group, the investors will receive their money, which can be to a maximum of thirteen per cent internal rate of return of invested capital per annum, depending on the scale of the reduction in reconvictions. If there are no reductions in reconvictions, investors lose their initial investment. The stakes are high, but potentially very profitable.
Early indicators suggest the project is working. RAND Europe, a not-for-profit research institute, commissioned by the UK Ministry of Justice to evaluate the SIB, wrote in April: “Data show that the frequency of reconviction events among offenders released from Peterborough has declined by 11% over the period of the pilot while the equivalent national figures have risen by 10%. For the Peterborough pilot, success will be determined based on comparison with a control group of comparable offenders from across the country, which is not available for these interim results”.
So, the world’s first-ever SIB may prove to be a success, which begs the question why the MoJ isn’t leaping at the chance to implement more?
Some have speculated that it comes down to costs. It is understood that the Peterborough project benefits from a large number of volunteers. There are questions as to whether other SIBs in the same field can attract this level of unpaid support. Another reason could be the cost and time it takes to set SIBs up, often involving lengthy negotiations to decide on outcome payments, bring in investors and construct the service.And on close inspection the Peterborough social impact bond has been heavily subsidised with grant funding, according to former Labour politician Leslie Huckfield, now a social investment practitioner. In a recent paper, Huckfield wrote: “The Big Lottery Fund (a UK grant maker funded by the UK’s National Lottery) is providing underwriting for payments under the programme – this may be up to 20 per cent.” The MoJ isn’t the only body to have gone silent on SIBs. Responsible Investor contacted the investors into the Peterborough SIB, but none wanted to speak.
What is the future for social impact bonds? In 2011, Sir Ronald Cohen, founder of Social Finance and former chair of Big Society Capital, and now chair of the global G8 Social Impact Investment Taskforce, told Parliament that SIBs were going to be huge: “In a couple of decades we are talking about tens of billions around the world,” he said, adding that in the future pension funds and even insurance companies would be investors.
His predictions have partly come true. The USA, Germany and Australia have launched SIBs. Belgium, Canada and Israel are looking. A variant on the theme – development impact bonds – for developing countries are taking off. And despite scrapping the first-ever SIB, the UK government is backing it heavily with money elsewhere. Just five days after the MoJ announcement, Deputy Prime Minister Nick Clegg announced a £40m SIB to support the young unemployed.
With continuing appetite from governments around the world for finding shared public/private social solutions, SIBs are still on the policy agenda; but not
without their detractors. Recently, a bi-partisan group of US congressmen introduced the first-ever bill proposing a social impact bond framework at the federal level and asked the US Treasury to set aside $300m in funding. In the same month, a proposal for a social impact bond in Rhode Island was stalled by trades unions. There is similar union opposition to SIBs in Australia.
On the investor side, some have raised concerns that mainly charitable foundations have backed SIBs, though this is slowly changing.
Eccles says: “Support for SIBs has come from both the left and the right. It has appeal across the political spectrum. There are pockets of concernsespecially wrapped up by a wider political agenda – this will happen. And one always expects a long migration with a structure trying to build a track record in investment management that is the only thing that matters. In New York the first investment bank has invested (Goldman Sachs). This shows there is wider investor appetite. The momentum will continue.”
Peterborough, it seems, will only remain in the social investment spotlight until its SIB results are unveiled tomorrow. After that, it looks set to return to its mainline train station status. The journey of social impact bonds though remains intriguing, albeit fraught with potential political and economic barriers to progression.