I quite like this social impact bond idea

It has to do with the latest proposal of Social Finance, likely bidders to become the Government’s appointed Social Investment Wholesale Bank, the Social Impact Bond (SIB). The architect of the SIB is Toby Eccles and I have to say it seems a rather good idea to me.

The details are sketchy but it works something like this. A bond is by investors (probably Charitable Foundations) with an interest in achieving positive social outcomes and the payment they receive will vary in accordance with the outcomes secured. The funds will be given to “service providers” to “invest” in public services. Their role will be to meet some target (such as reduced reoffending rates for short sentence offenders) in doing so. If targets are achieved the Foundation will receive a portion of the Government’s savings–paid by HM Treasury–if not, well it is money the Foundation would have spent anyway, to try to achieve it social objectives.

By zeroing in on actual Government savings the SIB addresses a key problem in state expenditure–investments which can have impact are rarely undertaken, because the benefit is spread across departments. By working directly with the Treasury, Toby and his colleagues are onto a potential winner and deserve our praise (congratulations to be withheld until the first bond is launched and track records established).

One oddity however needs resolution. The idea that Foundations benefit from the savings seem fine, but a bit strange. The benefit should accrue to those with the greatest incentive to achieve it–the Government. I believe these SIBs should be Government issued debt, on normal commercial terms, to traditional institutional investors. If social targets are achieved then HM Treasury can pay something extra to investors which represents a portion of the savings (resulting anyway in lower Government funding costs). Eventually, if the service providers are able to prove they save the Government cash, then the coupon on these instruments will also be issued at below market rates. HM Treasury cannot lose, as it will only pay out extra a portion of real cash savings. A win-win, which we clearly need more of in these fiscally constrained times! If Foundations wish to use their monies to catalyse such activity in the sector they can make payments to investors conditional on results, cutting funding costs even farther and hopefully thereby increasing public sector investment.

I may have my sums wrong, but this feels potentially very interesting–with lots still to chew over. Well done Toby and good luck!

Rodney Schwartz