Analysis of the opportunities and challanges of social impact bonds in Western Europe

(1)

ANALYSIS OF THE OPPORTUNITIES AND

CHALLENGES OF SOCIAL IMPACT BONDS IN

WESTERN EUROPE

BSc Thesis Economics and Finance University of Amsterdam

July 2015

Author: Walter Sarin Student Number: 10272992 Supervisor: Robin J. Doettling

(2)

1

Abstract

Social Impact Bonds are a new form of financing gaining popularity all over the world. Due to the novelty of the model, there are several opportunities and challenges faced by all parties involved. This report analyses these opportunities and challenges through a literature review, case studies, and interviews. The report is specifically focused on the role of institutional capital in the future of Social Impact Bonds. Before Social Impact Bonds can be viewed as a

mainstream investment there needs to be a positive track record and standardization of the model. If this can be achieved, Social Impact Bonds can become an important impact investment financing vehicle.

JEL: G230

Statement of Originality

This document is written by Student Walter Sarin who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

(3)

2

Introduction

Impact investing is a quickly growing trend throughout the world, and impact investors seek to invest not only for financial return, but also to create a positive impact. While the exact

definition of impact investing is still evolving, The Global Impact Investing Network (GIIN) defines impact investing as “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return (GIIN, 2014).

One new form of impact investing is through the use of Social Impact Bonds (SIBs). While they are not a traditional bond, since payments are hinged on achieving specific social outcomes, Social Impact Bonds aim to connect private capital with social service providers to achieve a social outcome (Liebman, 2011). It does this through an agreement between three parties: a commissioner, private investors, and a social service provider. The whole project is then managed by a Social Impact Bond intermediary. The resulting investment vehicle is a payment-by-result funding mechanism (Disley, Rubin, Scraggs, Burrowes, & Culley, 2011). At the moment, investors are showing interest in Social Impact Bonds, but as it is still a relatively new funding mechanism there are several challenges and opportunities that need to be addressed before SIBs can be fully accepted as a mainstream investment vehicle by the more traditional investing community. Therefore, through qualitative research this report aims to identify opportunities and challenges in the development of Social Impact Bonds and whether they can become a mainstream financing vehicle for retail, sophisticated, and institutional investors. This is done through a literature review, analysis of case studies, and interviews with various parties involved with Social Impact Bonds in Western Europe.

As impact investing is becoming more mainstream, the opportunities to invest across all asset classes are growing. As of 2014, impact investment made up around 0.5% of all

investments made worldwide (Global Sustainable Investment Alliance, 2014). During the period between 2012 and 2014, impact investing saw a global growth of 26.1% (Global Sustainable Investment Alliance, 2014). This research, however, is focused on the European investment market, which saw an increase of 146.3% in impact investing. Finally, when looking at the

(5)

4 broader category “sustainable investing,” there was growth of 61.1% in the same period (Global Sustainable Investment Alliance, 2014). These numbers support the claims of a quickly growing investment market, and there are no sign of slowing down as shareholders and individual

investors are beginning to demand sustainability in their investments (Koekoek, 2015) Since Social Impact Bonds are a new and innovative form of fundraising, there is an absence of peer reviewed academic literature regarding the subject. This is especially the case with regards to literature that aims to look to the future of the SIB market. Due to the novelty of Social Impact Bonds, most interventions have not started paying out yet. For this reason, along with strict confidentiality agreements within the investment sector, empirical analysis is difficult to perform with regard to Social Impact Bonds.

Methodology

This report aims to establish how the SIB market in Western Europe will develop, and it is specifically focused on the Netherlands, Belgium, and the United Kingdom. This is done through the following three ways: a literature review, case studies, and interviews.

The first section is a literature review of existing research and reports, which will provide the background information on Social Impact Bonds. This section will outline what a Social Impact Bond is, as well as when and why to use them. It will also serve as the guideline for the case studies and interviews.

The second section consists of case studies analyzing two separate Social Impact Bonds. The first case that is analyzed is the HMP Peterborough SIB which was issued in attempt to reduce recidivism in Peterborough. The second is a pilot program for a Development Impact Bond (DIB) which focuses on reducing Rhodesian sleeping sickness in Uganda. These two cases were chosen due to a distinctive contrast, as the former is the first ever SIB to be commissioned, while the latter represents a possible future for this developing market. Furthermore, the contrast between these two cases highlights the market opportunities within the industry, and can offer insight into potential opportunities in the progress of the Social Impact Bond structure.

(6)

5 Finally, there is an overview of interviews with different parties who have performed diverse functions within the SIB market. These interviews were performed by myself over the period of June and July 2015, and this is the main research and focus of the thesis. The

interviews consist of ABN Amro which invested in the first Social Impact Bond in the

Netherlands, Bridges Ventures which manages a SIB fund in the UK, Social Finance which is a Social Impact Bond intermediary in the UK, and Kois Invest which both structured the first Belgian Social Impact Bond and acted as a matchmaker. The interviewees answered questions related to their respective company’s involvement with impact investing and Social Impact Bonds, as well as their personal views on the development of the Social Impact Bond market. Finally, throughout the interviews focus was also placed on whether there is space in the Social Impact Bond market for institutional investors.

Theoretical Framework

What are Social Impact Bonds?

Social Impact Bonds are a new form of financing instrument that aim to align the objectives of government (or commissioner), service providers, and private investors. Also known as a payment-by-result instrument, the Social Impact Bonds are focused on the delivery of a pre-determined set of social outcomes in exchange for a financial return (Social Impact Investment Taskforce, 2014). This financial return is conditional upon the meeting of specified outcomes.

A Social Impact Bond can be used to raise finances for a social issue that has been identified by a government, foundation, corporation, or individual. This party acts as the commissioner and is the one that issues the SIB, as well as pays out if the project is successful. The social issues chosen for Social Impact Bond projects are generally projects which will create a large social impact, but for which government funding is currently not available (Mulgan, Reeder, Aylott, & Bo'sher, 2011). Instead of the funding coming from the government, an impact investment intermediary brings together private sector investors and social sector service

providers. These investors provide the necessary capital for the service provider to implement and run a program designed to mitigate the social issue. If at the end of the project the agreed

(7)

6 upon outcomes have been met, the investors are paid back their original investment plus interest from the government. A simple version of a Social Impact Bond which outlines the relationship between the participants as well as the structure of the bond can be seen on the following page in

Figure 1.

One core feature of a SIB is upstream prevention and early intervention. The government often cannot afford to take these preventative measures as funds are committed to expensive remediation programs. Even if the government decides to partake in these preventative programs, then it assumes the risk of failure and having to stand for both prevention and remediation

(Social Finance, Inc., 2012). Prevention and early intervention is what leads to savings of public money, and the investors are then repaid from the savings that were generated from the Social Impact Bond project.

(8)

7 Figure 1

(9)

8 Why use Social Impact Bonds?

The Young Foundation has identified nine advantages of using Social Impact Bonds. The first advantage is that SIBs can lead to savings of public money. This is the ultimate goal of Social Impact Bond projects, and it achieves this by attempting to fix inefficient and costly social issues which can lead to cost savings for the commissioner. SIBs are also a way for government to shift spending from remediation to preventative services (Social Finance Limited, n.d.b). Preventative interventions lead to government savings through improved social outcomes (Mulgan, Reeder, Aylott, & Bo'sher, 2011).

A second advantage is that SIBs can correct poor incentives within public policy. Those who possess the ability to affect social outcomes often lack the correct incentives to deal with the issues. SIBs connect investors, government (or commissioners), and social service providers through a contract that is beneficial to all parties in order to prevent moral hazard and adverse selection (Mulgan, Reeder, Aylott, & Bo'sher, 2011). SIBs also help align public sector spending with improved social outcomes (Social Finance Limited, n.d.b).

Thirdly, SIBs are a way to unlock new sources of funding. SIBs bring in private investors to the preventative and early intervention sectors which have traditionally been financed by public money.

The fourth advantage of using SIBs is that they promote evidence based action. Impact measurement is one of the key aspects of SIBs, and they have rigorous standards set in order to measure the actual impact being done through the programs they finance. This helps straighten out “what works,” and what does not (Social Finance Limited, n.d.b).

A fifth advantage is real risk transfer. If a Social Impact Bond project fails to deliver the agreed upon results, the commissioner will not repay investors. This leads to the transfer of the risk of failure of the project from the government to private investors.

The sixth advantage is that SIBs allow allocation of funds to projects which create the greatest amount of impact. Funding does not always flow to areas with the greatest social needs, and often more emotionally appealing projects gather more funding. SIBs are bringing new funding to previously under-funded social issues, thus allowing for greater impact.

(10)

9 The next advantage is that SIBs offer commercial investors a new way to seek returns. Commercial and private investors also get the opportunity to create impact with these new investments. These investors also have the chance to very specifically choose what kind of projects they wish to invest in, and therefore what kind of impact they want to create.

SIBs also provide an advantage to charitable funders. Firstly, they allow charitable money to be sourced towards a very specific impact. Secondly, they also allow charities to increase their mission related investment.

Finally, SIBs allow social service providers to benefit from guaranteed funding from private investors, where previously service providers struggled to attract stable funding. Social Impact Bond projects often work with several service providers, creating an opportunity for them to collaborate (Social Finance Limited, n.d.b).

Besides the list of advantages mentioned above, each participant in a Social Impact Bond has incentives to be part of the program. In the below section these incentives are outlined for each participant.

Outcome payer/Commissioner: Through a SIB program, a government or commissioner gets an improved social outcome, which tends to result in savings of public money. Even if a program does not end up providing cost savings, taxpayers still benefit in other ways. Payment-by-result contracts represent a fundamental change in how governments pay for social services, and instead of paying for inputs, the government now pays for outcomes (Liebman, 2011). Social Impact Bonds promote evidence based action that results in spending less on inefficient approaches, and more on approaches that have proven to be successful. It also increases the incentive to monitor and control the project to ensure that it is efficient (Liebman, 2011). Intermediary: At the moment the intermediary tasks are usually performed by not-for-profit organizations, like Social Finance UK, which have been specifically founded to promote and aid social investment and Social Impact Bond growth. Through Social Impact Bonds, intermediaries are given a voice regarding which services to offer and how to achieve the improved outcomes (Liebman, 2011).

(11)

10 Service provider: Social Impact Bonds provide service providers with a steady source of capital. Most service providers would struggle to raise sufficient capital to provide services while only receiving payments after successfully completing a project. In addition, with regards to payment-by-result schemes, service providers would struggle to absorb the risk of not meeting outcome targets. Through a SIB program, however, this risk is transferred from the service provider to the investors (Liebman, 2011). This transfer of risk does not remove a service providers incentives to perform. Service providers also still face a higher risk than standard government contracts. Many governments renew grants without extensive performance measures, however if at the end of a SIB program targets are not met, funding will cease and the provider will need to seek out new sources of funding (Liebman, 2011).

Investors: In the current state of the Social Impact Bond market in Western Europe, SIBs should not be looked at for purely financial reasons. The risk/return profile does not match up to that of traditional return-focused investments, and there will always be a project that can provide equal or greater return (Millest, 2015). Investors considering SIBs have to be highly motivated by a social return while being willing to be a thought leader and innovator and moving the SIB market forward, all while being prepared to realize a smaller financial return (Koekoek, 2015). The investors also provide a form of quality control of service providers. This is because service providers must convince the investors that the program they are running can meet the required performance targets. This means that the private investors have a strong incentive to monitor the performance of the service providers, as if performance targets are missed, the money they have invested will be lost (Liebman, 2011).

(12)

11 Criticisms of Social Impact Bonds

Social Impact Bonds are not without criticism. As a relatively new financial instrument there are still several inefficiencies that need to be resolved within the SIB model. The first criticism is that SIBs are unnecessarily complex. Social Impact Bonds require several different parties to come together and agree on an optimal scheme to solve a problem. Due to the complex nature of the instrument, there has to be sufficient monitoring and enforcement mechanics to prevent perverse incentives and moral hazard. The financing for a social intervention could instead have been raised through a more simple and streamlined instrument, thus saving time and effort (Mulgan, Reeder, Aylott, & Bo'sher, 2011).

Another criticism is that the government cost of capital is significantly lower than the market cost of capital. It is therefore counter intuitive that the financing for a social project should come from private investors when the government can provide the funding at a cheaper rate (Mulgan, Reeder, Aylott, & Bo'sher, 2011). In addition to this, the government also has a much greater risk bearing capability than private investors

A third criticism identified by the Young Foundation is that through Social Impact Bonds there is a risk of locking up charitable and philanthropic money in government agendas.

Essentially using this money to make up for a lack of government spending (Mulgan, Reeder, Aylott, & Bo'sher, 2011).

Finally, under standard economic theory, a contract which pays out entirely based upon performance is rarely optimal. Rarely are the outcomes solely dependent on the efforts of a service provider. Instead, there are other factors that are beyond the control of the SIB program. In these cases, optimal contracts ideally involve a fixed or cost-based payment component, as well as a performance-related component (Liebman, 2011). Social Impact Bond intermediaries have to ensure that the contracts between the different participants do not create moral hazard, or incentives to not see out the project to its fullest.

(13)

12 When to use Social Impact Bonds

At the moment there are four dominant sectors in the SIB market. These are: NEETS/youth engagement, children and young people, criminal justice, and homelessness/adults with complex needs. As Social Impact Bonds grow in popularity and develop a better track record they are expected to break through into larger, more general sectors such as healthcare, education, and poverty alleviation (Social Finance Limited, 2014a). Similarly, development impact bonds are also being used to finance development projects in developing countries.

SIBs can be a good source of financing in situations where there are misaligned incentives to deliver preventive services that can lead to saving of public money (Mulgan, Reeder, Aylott, & Bo'sher, 2011). The Young foundation has developed a seven step model which can be used as a guideline for deciding whether SIBS can be a good source of funding for an intervention attempting to correct a social issue and improve social well-being. These seven steps can be seen in Figure 2.

(14)

13 Figure 2 (Mulgan, Reeder, Aylott, & Bo'sher, 2011)

(15)

14

Case Study #1 – Peterborough Reduction in Recidivism

What is the social issue?

In September 2010, the UK Ministry of Justice issued the first Social Impact Bond pilot to raise funds for a program that aimed to reduce the reoffending rate of offenders that were released from HMP Peterborough. The focus of the intervention was prisoners who have served a sentence of less than 12 months (Disley & Rubin, 2014). Before the program, the reoffending rate of these short-term prisoners was around 60% within a year of their release (Ministry of Justice, 2013).

What impact is created?

The goal of the project was improve social wellbeing in the community by reducing recidivism. Who are the investors, intermediaries, issuers, payers?

Investors: Social Finance, the intermediary, raised £5 million from 17 investors. The investors consist of mostly charities and foundations, and include the Barrow Cadbury Charitable Trust, Esmée Fairbairn Foundation, Friends Provident Foundation, The Henry Smith Charity,

Johansson Family Foundation, Lankelly Chase Foundation, The Monument Trust, Panahpur Charitable Trust, Paul Hamlyn Foundation and the Tudor Trust (Disley & Rubin, 2014). Intermediary: The intermediary of the Peterborough pilot was Social Finance, a not-for-profit organization specializing in finding new ways to tackle social problems (Social Finance Limited, n.d.a). The main responsibilities of Social Finance was to bring together government, investors, and service providers. Social Finance was also tasked with providing funds to and managing the One Service (Disley & Rubin, 2014).

Service provider: The funds raised from the Social Impact Bond were directed to a program called One Service. One Service is a program relying on a mix of paid caseworkers and

volunteers from St. Giles Trust and Sova. Ormiston Children and Families Trust also provided the One Service with paid specialist practitioners. Also involved were specialist trainers from John Laing Training, recovery workers from Mind, and gym volunteers from YMCA (Disley & Rubin, 2014).

(16)

15 Commissioner/Outcome payer: If the project run by One Service ultimately is successful, the Ministry of Justice and Big Lottery fund are the parties repaying investors (Ministry of Justice, 2013).

What is the program?

Staff from the One Service reached out to prisoners in order to offer support and prepare them for release. Prisoners were also offered support for up to 12 months after their release. One Service provides its services on an individual level, determining a mix of activities based on individual needs (Disley & Rubin, 2014).

Payment structure

The size of the outcome payment is dependent on two factors

1. An undisclosed value for reach reduced reconviction event. This has been negotiated and agreed between Social Finance and the Ministry of Justice in advance. (Disley & Rubin, 2014)

2. The number of reduced reconviction events. This is based on the difference in mean reconviction events between the HMS Peterborough cohort group and a control group. (Disley & Rubin, 2014)

In order to have a limited liability, the Ministry of Justice has placed a cap on the

outcome payments. Once this cap is reached, the payments will cease increasing with decreasing reconviction rates (Disley & Rubin, 2014).

Outcome payments will be made if there is a 10% reduction in the number of

reconviction events over 12 months compared to a control group, or if the SIB’s three cohorts achieve an average reduction of 7.5%. Payments are capped at £8m, which would see a rate of return of 13% for investors. The aim is to make reductions in court, police and prison costs as a result of reduced re-offending, for which reconviction events are a suitable intermediate proxy (Ministry of Justice, 2013).

(17)

16 Compare to seven steps – is a SIB an appropriate vehicle

1. The intervention is preventative in nature and sufficient funding is currently unavailable  The Ministry of Justice manages the outcomes of criminality in the UK, and

instead of spending money on reoffending prisoners, funds from a Social Impact Bond were directed towards a program that aims to solve the problem at its root (Ministry of Justice, 2013). The intervention is preventative in nature, as its goal is to prevent prisoners from returning to prison after they have served their sentences.

2. The intervention improves social wellbeing and prevents or ameliorates an undesirable outcome

 Social wellbeing is improved for prisoners by helping them return to a normal life outside of prison. The prisoners’ respective communities also benefit through less criminality.

3. The specific impacts of the intervention can be quantified



 Figure 3 (Ministry of Justice, 2013)

 The above diagram summarizes how the intervention is quantified. At the end of the predetermined period, prisoners who have been enrolled in the program will be compared to a control group, and the difference in reoffending will be

measured. Payments are made either if there is a reduction in 10% of reoffending compared to the control group, or if the Social Impact Bonds three cohorts average a 7.5% reduction in reoffending (Ministry of Justice, 2013).

4. A sufficient number of people will benefit from the intervention that the impact can be robustly measured

(18)

17  As the Peterborough pilot Social Impact Bond is the first ever to be issued,

scalability is not its main concern, it was instead designed to test the structure of the investment vehicle. Nevertheless, a total of 3000 participants are involved in the One Service scheme. These 3000 participants are split in to three different cohorts of 1000 prisoners each. Each cohort commences once the previous one has been completed. Cohorts close either after a period of two years, or once 1000 prisoners have been discharged (Ministry of Justice, 2013).

5. It is possible to identify a specific government stakeholder that will achieve savings or lower costs as a result of actions undertaken by others

 The UK government estimates that the cost of imprisonment for a single offender is around £40,000 per year. Therefore, a reduction in recidivism offers the UK government a chance to save public money (Ministry of Justice, 2013). The savings will come partially from reduced administrative costs associated with the intake of prisoners, as well as reduced prison costs from housing prisoners.

Anticipated savings have been calculated at around £44 million, and savings of up to £90 million could be made if the One Service produces a higher than expected reduction in recidivism (Ministry of Justice, 2013). The Ministry of Justice is the specific government stakeholder which will benefit from lower recidivism.

6. The savings for the specific government stakeholder are significantly greater than the cost of the intervention and any transaction costs

 Capital Requirement: £5M, Savings: ~£44M-£90M (Ministry of Justice, 2013). 7. It is possible/likely that government would enter into an arrangement to pay some

proportion of the savings back to the SIB

 If the One Service is successful in its mission of reducing reoffending rates, the Ministry of Justice and Big Lottery Fund have agreed to repay investors their principle plus interest based on the degree of success (Ministry of Justice, 2013). Results for the first cohort of 1000 prisoners was released on August 7th, 2014. A

reduction of 8.4% in reconvictions relative to a control group were achieved, meaning the project is on course to pay out in 2016. Based on the performance, investors can expect to regain their capital plus a positive return on their investment (Social Finance Limited, 2014b).

(19)

18

Case Study #2 – DIB – Reduction of Rhodesian Sleeping Sickness in

Uganda

What is the social issue?

Rhodesian Sleeping Sickness is currently threating 9 million people in rural Uganda. The human infective parasite is hosted by cattle. Cases have usually been contained to the south-east portion of the country, however, the movement of cattle is expanding the affected areas. Rhodesian sleeping sickness is the most acute form of the disease, and it is both expensive and difficult to diagnose and treat. Due to this, the disease is often fatal (Center for Global Development, & Social Finance, 2013).

What impact is created?

The DIB Inception Program is a pilot Development Impact Bond that will create baseline information, systems, and infrastructure, which will act as a base for designing the full instrument and eventually making DIBs publicly available. If the program is completed

successfully, prevalence of the parasite that transmits the disease can be reduced to a point where it is of low risk to humans. Models suggest that the program has the potential to reduce sleeping sickness prevalence for over 5 million people, and thus improve the health, livelihoods, and economic wellbeing of these people in Uganda (Department for International Development). The Department for International Development (DFID) lists a range of outcomes which will be delivered by the DIB Inception Program. This list includes the following:

a. An assessment of cattle numbers and parasite prevalence in target regions;

b. A pilot which tests and costs the method for treating cattle across a geographical area; c. A calibration of payment triggers;

d. Testing of the independent verification systems that will be used to accurately record the data on which the payments will be made;

(20)

19 f. The baseline evaluation report, including the objectives, design and data required to

launch the full evaluation in parallel with the full program (Department for International Development).

Who are the investors, intermediaries, issuers, payers?

Investors: Potential investors may include:

 Health and agriculture focused trusts and foundations (Center for Global Development, & Social Finance, 2013)

 High net worth individuals and Africa focused impact investment funds (Center for Global Development, & Social Finance, 2013)

Intermediary/Service provider: The DIB Inception Program will be carried out by Social Finance UK and its partners.

Commissioner/Outcome Payer: The DIB to fight Rhodesian Sleeping Sickness is one of the first of its kind, and therefore it is anticipated that donor agencies, like DFID, who have a long history of investing in, understanding, and piloting innovative solutions to address similar problems in developing countries, would be the most likely organization to pay for outcomes within this contract. While there is significant potential benefit to the program in terms of both human and livestock lives, it is unlikely that this will be cashable in the short-term. A large part of the benefit of this program would be avoiding potentially costly and catastrophic cross-over of the two sleeping sickness strains (Center for Global Development, & Social Finance, 2013).

What is the program?

The treatment of Rhodesian Sleeping Sickness in humans requires early detection and treatment. This, however, is costly and difficult. Since cattle act as a host for the parasites, a key part of the program focuses on regularly treating the cattle with insecticide. Focus will also be placed on preventing the two strains of sleeping sickness (Rhodesian and Gambian) from merging. The Uganda Trypanosomiasis Control Council (UTCC) and its secretariat the Coordinating Office for Control of Trypanosomiasis in Uganda (COCTU) have responsibility for sleeping sickness interventions and data collection and coordination of preventative action in Uganda. Therefore, it

(21)

20 is important the UTTC/COCTU are involved in the DIB program and that a high level of

cooperation is reached (Center for Global Development, & Social Finance, 2013).

The program will also collect data to determine a base for designing an official Development Impact Bond. This data is needed in order to accurately measure impact and to introduce payment by results. The work will be done through a survey to determine the number of cattle and the prevalence of the parasite in Uganda. This will be followed by a small pilot to test the intervention assumptions (Department for International Development).

Payment structure

The outline of the payment structure can be seen in Figure 4. Outcome payments will only be made once a threshold of 65% of cattle treated in high risk districts has been reached. Payments can be made at the end of years 1, 2, and 3, and could be capped at the cost of intervention plus a small return. Payments at the end of years 4-8 would provide a risk-related return if the project is successful (Center for Global Development, & Social Finance, 2013).

(22)

21 Figure 4

(Center for Global Development, & Social Finance, 2013).

Compare to seven steps – is a SIB an appropriate vehicle

1. The intervention is preventative in nature and sufficient funding is currently unavailable  Previous efforts to treat Rhodesian sleeping sickness have lacked both the scale

and sustainability to make a difference in the long term. These efforts have mostly been in response to epidemics, but have not ventured into early response territory. Instead of treating infected individuals, the proposed DIB will target cattle with an aim to reduce the affliction rate. This will in turn lead to less infected people (Department for International Development).

2. The intervention improves social wellbeing and prevents or ameliorates an undesirable outcome

(23)

22  Rhodesian sleeping sickness has a significant economic and health impact on

sub-Saharan Africa. Around 70 million people are currently at risk of infection. The disease also affects livestock productivity, with around 50 million cattle and 70 million smaller animals affected each year. The total cost has been estimated to be between £1 billion and £4 billion per year (Department for International

Development).

3. The specific impacts of the intervention can be quantified

 Outcome payments are based on a certain percentage of cattle being treated by a previously specified time. After the predetermined amount of cattle has been treated, surveys will be conducted to see if the intervention has been successful and the parasite is less prevalent (Center for Global Development, & Social Finance, 2013)

4. A sufficient number of people will benefit from the intervention that the impact can be robustly measured

 If successful, the program can improve wellbeing of 5 million people in Uganda. In addition to people being at risk, 50 million cattle and 70 million smaller farm animals are also affected each year. These animals also benefit from the

intervention (Department for International Development). Success can also lead to around 80,000 disability-adjusted life years (DALYs) being averted. DALYs are explained by the World Health Organization as “the burden of disease, and can be thought of as a measurement of the gap between current health status and an ideal health situation where the entire population lives to an advanced age, free of disease and disability” (World Health Organization, 2015)

5. It is possible to identify a specific government stakeholder that will achieve savings or lower costs as a result of actions undertaken by others

 An estimated 9 million people are at risk of Rhodesian sleeping sickness in Uganda alone. Based on estimates, there will be cost savings of around £30 million per year from eradication of the sleeping sickness. If additional benefits of healthy livestock are taken into account, there are potential benefits of £300 million over the next 20 years (Department for International Development). These benefits would fall mostly to the Ugandan government. Foreign governments

(24)

23 could also benefit as they might have to pledge less aid money to fight Rhodesian Sleeping Sickness if the intervention is successful.

6. The savings for the specific government stakeholder are significantly greater than the cost of the intervention and any transaction costs

 Capital requirement : $20-30m (Center for Global Development, & Social Finance, 2013) Savings: £30 million per year (Department for International Development)

7. It is possible/likely that government would enter into arrangement to pay some proportion of savings back to the SIB

 Potential outcome payers include mostly DFIs. It is anticipated that donor agencies like DFID would be willing to act as the outcome payer for this pilot Development Impact Bond (Center for Global Development, & Social Finance, 2013).

The inception program for the Development Impact Bond is currently in the pipeline and has not yet commenced at the moment of writing. Currently, the target for implementation is set for October 30, 2015, and the project has spent 85.76% of its budget of £1,730,350 (Department for International Development, 2015).

What Does the Future Hold for Social Impact Bonds?

In order to get a view of the future of the SIB market, I interviewed four different parties over the course of June and July 2015. The first interviewee is Ruben Koekoek, Innovation Manager at ABN Amro in Amsterdam. Ruben leads the Social Impact Bond efforts for ABN Amro, and together with the municipality of Rotterdam, Ruben worked on the first Social Impact Bond in continental Europe (Koekoek, Ruben Koekoek, n.d.). The second interviewee is Alice Millest of Social Finance UK. She is an associate at Social Finance UK, which works as an intermediary for Social Impact Bonds based in the UK. The next interviewee is Mila Lukic of Bridges Ventures. Mila works for Bridges Venture’s Social Sector Funds team, focusing on Social Impact Bonds (Bridges Ventures, n.d.). The fourth interviewee is Pierre-Louis Christiane, who works as an investment analyst at Kois Invest. Pierre-Louis is in charge of managing the reporting and deal flow of the first Belgian Social Impact Bond. The interviewees were asked

(25)

24 questions pertaining to the future of Social Impact Bonds in general and with regards to the future of institutional involvement in Social Impact Bonds.

Overall, the interviewees stated that the Social Impact Bond market is still in a

developing stage and there is a lot left to do before they will be seen as mainstream investments. There is a large amount of interest in SIBs, but before institutional investors can get involved, the SIB model has to be both standardized and simplified. Finally, the SIB market is growing

quickly and there are many opportunities for development.

Institutional interest in Social Impact Bonds

The investors for the first Social Impact Bonds were mostly foundations and philanthropic organizations. For many of these foundations the plan was never to continue funding Social Impact Bonds in the long term, instead they viewed the SIB mechanism as a tool for encouraging new money to come into social change, explains Alice Millest. There are, however, cases where a SIB is still the most useful structure to affect change.

Alongside developing the Social Impact Bond model, one of the key motivations for these foundations and philanthropic organizations to invest in SIBs was to build a track record. Once a track record exists, it is easier to attract new types of investors. This is one of the most important preconditions for institutional investors to seriously look at SIBs, since at the moment the return on offer does not reflect the risk they are taking (Millest, 2015).

According to Alice, another important facet of attracting institutional interest is to simplify the investment structure of Social Impact Bonds as much as possible. This sentiment of attempting to standardize and simplify the model as much as possible is echoed by Ruben Koekoek, Pierre-Louis Christiane, and Mila Lukic. The SIBs that will initially be the most attractive to institutional investors are the ones with a large amount of evidence based

interventions. These evidence based interventions with a large number of randomized control trials supporting it will aid in making institutional investors more comfortable with the risk they are taking on by supporting a SIB project (Millest, 2015).

(26)

25 Institutional investors, like pension funds, are being put under pressure to make

environmentally and socially responsible investments by the pension holders. If this interest from the end customers grows to become large enough, it will eventually feed through to the pension fund manager, and pension funds will increasingly look for impact investing opportunities. This is a change in thinking and movement towards a likeness of a private wealth model where family offices and private banks understand that their clients’ money can be used effectively in a way that is aligned with their philanthropic interests (Millest, 2015).

Social Impact Bond funds are also another way to attract institutional capital. Bridges Ventures is an example of a fund that applies knowledge of private sector investors who have invested into SMEs for a long time in a venture capital/private equity way, but uses it to work with social enterprises (Millest, 2015). Due to the fact that the Bridges Ventures Social Impact Bond Fund is relatively new, they are still not able to demonstrate a long track record of success or a completely ironed out investment structure for institutional investors. They do, however, have local authority pension funds who have already invested in them. At the moment the mentality of the pension funds is still one of “testing the waters,” and the investments from these pension funds are coming from corporate social responsibility-like pods, since the fund is not set up to provide market-like returns (Lukic, 2015). While pension funds have fiduciary duties to maximize returns, pods like the aforementioned CSR pods do exist. The funding from these pods is dedicated towards projects that deliver a social impact along with lower returns up to a

threshold each institutional investor is comfortable with. The fund approach also allows investors to diversify their portfolio while being able to address social issues through targeted

interventions (Lukic, 2015). Scalability

One bottleneck keeping institutional investors from investing in SIBs is the issue of scalability. The time, effort, and cost required to monitor the relatively small amounts of money placed into SIBs is often not worthwhile for institutional investors. Bridges Ventures Social Impact Bond Fund is one way of solving this problem. At £25 million split between 14 different Social Impact Bonds, the fund offers larger investors an opportunity to place more money in SIBs than possible by investing in a single project (Lukic, 2015). In order to attract these larger investors, the SIB projects have to scale up in size. All interviewees agreed that this is somewhere the market is

(27)

26 currently heading. Alice Millest believes there is a future in the current attempts of trying to create a Social Impact Bond platform in the UK. This platform would allow different

commissioners to buy into a tariff for a particular service. This would allow for a large amount of commissioners to buy into and benefit from the same SIB. This promotes SIB growth until it can become a national product on a larger scale that a commissioner can buy (Millest, 2015).

While SIBs are trending towards larger sizes, it does not mean smaller, more local, SIBs will cease to be relevant. Both types should be able to co-exist. Ruben Koekoek expresses this fact, while maintaining that in order for small projects to be worthwhile the SIB model has to be standardized due to the expensive and complicated nature of the Social Impact Bond structure. Mila Lukic also stresses this point, explaining that it is absolutely necessary to do larger projects in the future. This is due to the fact that it is hard to justify the actual transaction costs of social impact bonds, and economies of scale can solve this problem. According to Alice Millest local SIB could be implemented through the aforementioned national platform. This is because essentially the only tasks being performed on a central level is the raising of the money and analysis of the data. Just because there is a national platform, does not mean the impact would be any less local or any less effective. In Belgium, where the SIB market is in an earlier stage, standardization is not possible yet. According to Pierre-Louis Christiane, due to institutional difficulties in Belgium it would be very difficult to attempt to replicate a SIB model. At the moment each SIB has to be looked at from a case-by-case basis until a sufficient track record exists.

Length of contracts

Currently there are no standard lengths of SIB contracts, and it very much depends on each individual case. Generally, in the Netherlands and Belgium, where the SIB markets are less developed, contracts tend to be shorter. Pierre-Louis Christiane explains that in Belgium the only SIB contract was two years in length. He believes that attempts should be made to try to lengthen these contracts as it is easier and more reassuring for social service providers to have a longer contract, as it means longer guaranteed funding. Alice Millest also agrees that longer contracts is a positive facet of Social Impact Bonds. The length of the contracts also depend the maturity

(28)

27 trade-off, as it is subject to how long investors are willing to put their money at risk for.

Therefore, attracting institutional investors, who are more willing to put their money at risk for longer, is one way to increase contract lengths. From a social issue perspective, longer contracts are also a benefit, as it provides a longer time to prove that an intervention is working (Millest, 2015).

Investment logic

From a purely return-based view, there is no financial logic to be involved in a Social Impact Bond. The fact that SIBs are very new and innovative at the moment means that there is more risk involved compared to traditional investment (Koekoek, 2015). At the moment, the intention behind SIBs is not to provide competitive market- rate returns, however that does not mean that a Social Impact Bond cannot be a good investment case. At the moment, there will always be a product that can offer equal or better return, meaning potential investors will need to be driven by the fact that they want to achieve a social outcome (Millest, 2015). Investors need to be motivated by the fact that they want to be thought leaders and they want to see the market grow. This is the reasoning behind ABN Amro’s investment into the Dutch SIB, explains Ruben Koekoek. If ABN Amro’s venture into SIBs is successful, it is something they would consider making into product for their clients in the future.

Retail market

In early 2013, Allia Ltd., a social venture charity based in the UK, attempted to create the first Social Impact Bond directed at retail investors, the Future for Children Bond. However, after being on offer for over two months, including one extension, Allia decided not to proceed with the retail Social Impact Bond, as sufficient subscription was not acquired (Rotheroe, Lomax, & Joy, 2013). Allia identified several reasons for the failure of the bond, including marketing, adviser, and product perspective failures.

With regards to the future of SIBs in the retail market, both Ruben Koekoek and Alice Millest are optimistic, though both point out that the market is not yet ready. As previously

(29)

28 stated, Social Impact Bond projects have to both grow in scale and the model has to become more standardized before the retail market can be considered.

Allia also learned several lessons from the failure of their Future for Children Bond. The first lesson was that transparency regarding returns of the SIB are important. Ruben Koekoek notes that at the moment the SIB market is very closed off. Information is not widely shared, and the market needs to move towards a higher level or transparency. The second lesson learned was that the marketing of new and innovative products like the Future for Children bond is likely to be time consuming and resource intensive, while also requiring coordination between all of the different parties involved. The third lesson is that the market is currently not ready and the necessary distribution channels do not exist. Fourthly, regulatory clarification is required before advisers feel confident recommending Social Impact Bonds to their clients. Finally, as also stated by Ruben and Alice, the product needs to be standardized and simplified before presented to the retail market (Rotheroe, Lomax, & Joy, 2013).

Cross-issue integration

When issuing a SIB the social benefits created by the intervention can often benefit several parties, not just the original commissioner. Mila Lukic believes that the SIB market will

eventually evolve into cross-issue integration. This means that it is not necessarily one provider, one issue, but a fully local focus where you have an integrated local authority with the

commissioning group tackling the social issues at their roots. It is about figuring out how to have an integrated approach between the different commissioners within one locality (Lukic, 2015).

Mila continues to state that the biggest issue with the integrated approach is measuring the benefits received by the different commissioners. To address this issue, Big Lottery Fund and the Cabinet office have respectively created the Commissioning Better Outcomes Fund as well as the Social Outcomes Fund. These funds exist to address the fact that the benefits of many projects are not only tied to one commissioner. The public savings are not only sitting with one commissioner, so the two “top-up” funds came about to top up the funding from a single commissioner. For example, in the Ways to Wellness program, the overall project size is 10 million, however 7 million is coming from the Clinical Commissioning Group (CCG) and 3

(30)

29 million is coming from the Social Outcomes Fund with the recognition that the benefits accrue to not only the CCG, but also to the National Health Service, the local authority, etc. The top up funds generally deploy funding for 5 years, and beyond that a sufficient track record should exist proving benefits are shared between commissioners, so that for the next round the project needs to be co-commissioned (Lukic, 2015).

Innovations within the model

The Social Impact Bond model, being so new and innovative, is not set in stone. There is still room for more innovation and improvement. According to Mila Lukic, one new way of

structuring SIB contracts is the recycling of capital. For example, if the total cost of a program is 7 million, the actual investment size might only be 2 million. This is because you expect

outcomes to start coming through before the end of the project, and this capital coming in is put straight back into the project. Ruben Koekoek mentions that for the Dutch Social Impact Bond launched together with Start Foundation, a forecast of the social results was made. ABN Amro created a model to calculate the time required before a person is out of benefits, they then dug into the past of the service provider and looked at their previous results. Based on that they could make a prediction of that chance of success. Pierre-Louis Christiane mentions that first-loss guarantees are another new structuring feature of SIBs. For example, the Social Impact Bond which aimed to reduce recidivism in Riker’s Island in New York, received an investment of $9.6 million from Goldman Sachs. Of this $9.6 million, $7.2 million was guaranteed by Bloomberg Philanthropies (Ministry of Justice, 2014).

Opportunities & challenges

At the moment, there are several opportunities and challenges that investors, intermediaries, and commissioners are facing. These opportunities and challenges are both unique and shared in the Netherlands, Belgium, and the UK.

Speaking with regards to the Dutch SIB market, Ruben Koekoek points out that a lack of interest and investors is not a bottleneck at the moment. With an abundance of capital ready to be

(31)

30 placed into Social Impact Bonds, there is no current need to expand to traditional, return focused investors. Instead the major bottleneck for SIBs in the Netherlands is the lack of good business cases. Also, since the market is relatively new in the Netherlands, finding commissioners who understand the logic behind a Social Impact Bond is a major bottleneck. The major focus for the Netherlands should be to slowly increase the size of SIB projects, and bringing more parties into impact investing. In the current market there are more investors than investment opportunities, but the market should grow so that supply will match demand (Koekoek, 2015).

In Belgium, according to Pierre-Louis Christiane, the first bottleneck was the culture. Since the Belgian SIB was one of the first on continental Europe, there were challenges in order to get people interested in the SIB, as well as making them understand the aim of the project and the mechanism. Another struggle was determining the right social service provider. Just as in the Netherlands, finding interested investors was not a problem in Belgium. At the moment, the future of Social Impact Bonds in Belgium depends on the political willingness (Christiane, 2015).

The SIB market in the UK is much more developed than the Netherlands or Belgium. Therefore, the UK faces different opportunities and challenges. Mila Lukic mentions that she sees the market developing to view SIBs as smart commissioning. This enables commissioners to focus on paying for things that work, as well as possessing the structures that enable them to test different projects. SIBs are also providing a way to relieve overstressed budgets and providing the opportunity to commission things that would not necessarily be commissioned otherwise (Millest, 2015). Like in the Netherlands and Belgium, interest from investors is greater than the amount of projects available, meaning the bottleneck in the UK sits with the commissioners. According to Mila, the trends and interest surrounding development impact bonds is also positive and that specific market should grow. Alice Millest points out that it is important to not get too focused on Social Impact Bonds. In many cases it is a fitting investment vehicle, but they are not the only social investment tool available. Each project, commissioner, and issue should be looked at with a fresh pair of eyes, and investors have to be educated about the different ways social impact can be achieved with their money (Millest, 2015). For example, there are models around designing a product that is a blend of a renewable bond that also has a social focus. One such project involves installing solar panels on buildings within a housing association or a local

(32)

31 authority school. The energy that is generated from these solar panels is used to reduce the energy bill of the respective housing association or school. Excess energy is then sold back to the national grid, and the revenue generated from selling this energy is used to pay back the bond. In the UK renewable energy is supported by government subsidies which are inflation linked, meaning it can be an interesting investment for institutional investors. If there is enough cash left over, a small community fund is created that over the life of 20 years gives out grants to the local community to fund workshops around youth poverty, education, homelessness, etc. (Millest, 2015).

Conclusion

While the SIB market in Western Europe is still in its infancy, the opportunities for growth and a shift to becoming a mainstream investment vehicle exist. With the impact investing market showing rapid growth, especially around Europe, more money will continue to be made available for socially responsible investments.

Social Impact Bonds have already made a name for themselves and there is no lack of potential investors. One important step in the future of SIBs will be the potential to attract institutional investors. In order to achieve this Social Impact Bonds must first achieve a few things. The first step is creating a track record of success for SIBs. This has to be followed by a scaling up in size of Social Impact Bond contracts, as well as standardization and simplification of the SIB model. These steps are necessary in order to make institutional investors more comfortable with the risk they are taking on by investing in Social Impact Bonds.

Social Impact Bonds are still at a stage where the model is developing. This model can, for example, be applied to developmental issues (Development Impact Bonds) or health issues (Health Impact Bonds). While these forms of SIBs are not yet widely available on the market, strides are being made to launch both development impact bonds and health impact bonds in both the UK and the Netherlands.

It is important to consider that SIBs are only one possible investment vehicle when it comes to impact investing. Potential investors should not only look at SIBs, as there are several different models which can in some cases create larger impact. One such example in the UK are the sustainable community projects.

(33)

32 There is still a large amount of research that needs to be performed on the SIB model in order to gain full insight into its workings and its ideal structure. At the moment, data on returns is not widely available. If a party is able to get a hold of this data, a proper risk/return analysis needs to be performed on Social Impact Bonds.

(34)

33

Bibliography

Bridges Ventures. (n.d.). Mila Lukic. Retrieved July 2, 2015, from Bridges Ventures: http://www.bridgesventures.com/team/mila-lukic/

Center for Global Development, & Social Finance. (2013). Investing in Social Outcomes:

Development Impact Bonds. Washington D.C.: Center for Global Development, & Social

Finance.

Christiane, P.-L. (2015, July 3). Social Impact Bonds - Kois Invest. (W. Sarin, Interviewer) Department for International Development. (2015). Social Impact Bond Pilot -Sleeping sickness

in Uganda. Retrieved July 4, 2015, from Development Tracker:

http://devtracker.dfid.gov.uk/projects/GB-1-203604/

Department for International Development. (n.d.). Development Impact Bond for Sleeping

Sickness. London: DFID.

Disley, E., & Rubin, J. (2014). Phase 2 report from the payment by results Social Impact Bond

pilot at HMP Peterborough. London: Ministry of Justice.

Disley, E., Rubin, J., Scraggs, E., Burrowes, N., & Culley, D. (2011). Lessons learned from the

planning and early implementation of the Social Impact Bond at HMP Peterborough.

London: Ministry of Justice.

GIIN. (2014). About Impact Investing. Retrieved from Global Impact Investing Network: http://www.thegiin.org/cgi-bin/iowa/resources/about/index.html

Global Sustainable Investment Alliance. (2014). Global Sustainable Investment Review. GSIA. Koekoek, R. (2015, June 25). Social Impact Bonds - ABN Amro. (W. Sarin, Interviewer) Koekoek, R. (n.d.). Ruben Koekoek. Retrieved July 2, 2015, from Linked In:

https://www.linkedin.com/pub/ruben-koekoek/7/894/490

Liebman, J. B. (2011). Social Impact Bonds: A promising new financing model to accelerate

social innovation and improve government performance. Washington, D.C.: Center for

American Progress.

Lukic, M. (2015, June 30). Social Impact Bonds - Bridges Ventures. (W. Sarin, Interviewer) Millest, A. (2015, July 3). Social Impact Bonds - Social Finance UK. (W. Sarin, Interviewer) Ministry of Justice. (2013, April 19). Centre for Social Impact Bonds. Retrieved from Cabinet

Office: http://data.gov.uk/sib_knowledge_box/ministry-justice-offenders-released-peterborough-prison

Ministry of Justice. (2014, February 18). Centre for Social Impact Bonds. Retrieved from Cabinet Office: http://data.gov.uk/sib_knowledge_box/reoffending-rikers-island-0

(35)

34 Mulgan, G., Reeder, N., Aylott, M., & Bo'sher, L. (2011). Social Impact Investment: the

challenge and opportunity of Social Impact Bonds. London: The Young Foundation.

Rotheroe, A., Lomax, P., & Joy, I. (2013). The Future for Children Bond: Identifying the lessons

learned from Allia's bond offer to retail investors. London: New Philanthropy Capital.

Social Finance Limited. (2014a). The Global Social Impact Bond Market. London: Social Finance UK.

Social Finance Limited. (2014b). Peterborough Social Impact Bond Reduces Reoffending by

8.4%; Investors on Course for Payment in 2016 [Press Release]. London: Social Finance

UK. Retrieved from

http://www.socialfinance.org.uk/wp-content/uploads/2014/08/Peterborough-First-Cohort-Results.pdf Social Finance Limited. (n.d.a). About Us. Retrieved from Social Finance UK:

http://www.socialfinance.org.uk/about-us/

Social Finance Limited. (n.d.b). Introduction to Social Impact Bonds. London: Social Finance UK.

Social Finance, Inc. (2012). A New Tool for Scaling Impact: How Social Impact Bonds can

Mobilize Private Capital to Advance Social Good. Boston: Social Finance US.

Social Impact Investment Taskforce. (2014). Impact Investment: The Invisible Heart of Markets. Social Impact Investment Taskforce.

World Health Organization. (2015). Metrics: Disability-Adjusted Life Year (DALY). Retrieved from World Health Organization:

(36)

35

Appendix

Mila Lukic interview

Overview of the fund

So, basically Bridges Ventures started back from the Cabinet Office Task Force, which basically recommended that there should be a fund which would focus on investments in the underserved areas of the UK. Impact thesis being, focusing on regeneration and job creation. That’s how the very first growth funds, Bridges funds, were initiated. Since then, based on the track record there we’ve fundraised for the second and the third growth fund, and we started property funds as well. Within all those funds, there was the view that there are funds who deliver commercial returns, invest in profit maximizing businesses, but each business needs to have the investment thesis locked with impact. So basically it’s the delivery of impact in step with financial returns. Either through economical regeneration or by the nature of its model…

In 2010 the very first SIB in the UK was launched, the SIB in Peterborough. We didn’t invest in that because that model is effectively a pure LPGP? Model and so from that sense it is quite a hands off… and we are very hands on investors so we work in partnership with all of our investees, so it felt one step removed. That’s’ not what our investors want, they want to learn through the relationships with our investee companies. That’s not our preference either, so we didn’t invest in Peterborough. After Peterborough, the first innovation fund round started from the DWP and there the target cohort is basically the young people who are either NEET or at risk of becoming NEET and its basically

interventions that provide various types of sport to those young people to keep them in school and improve their attainment and their educational engagement, or bring them back into school. So, the whole bidding process went on basically all of 2011-12 and the projects went live in 2012. So we invested in 2 of them from our social entrepreneurship fund. The first local authority commissioned a social impact bond which was Essex, and that’s the SIB that targets troubled families who are at the edge of breaking up effectively, and the children in those families are at the edge of going into care. So the intervention is basically provide the wrap around support to those families to keep the young people out of care. That was the first locally commissioned SIB, because both Peterborough and the DWP were centrally commissioned. So we invested in that as well from our social entrepreneurship fund. Then we stood back and said, well OK, there is a lot of interest in SIBs, the Social Entrepreneurship fund was started to test different models. We tested investments in charities, and social enterprises that… there is such a large demand for SIBs that if we just continue doing that we will flood the social entrepreneurship fund. So then we realized that there is a need for a dedicated fund for SIBs, so we then went out to fundraise for it using the track record from the SIBs that we just supported, so they were quite young, but you could see the demand and what it looked like in the future for those projects. We took all of that and then Big Society Capital effectively seeded the first 10 million into that fund with a view that it was to be more than 1:1 matched, so we had the first close in March 2013 and the second close in last August which brought us up to 25 million, or 22.5 million to be exact but it all carries a co-investment from the social entrepreneurship fund so in total its 25 million that is available for investments. To date we have 14 social impact bonds that we’ve supported and out of those the first 3.5 effectively are from the social entrepreneurship fund, so the rest happened between end of 2013 and now.

Looking at it more broadly, where do we see the market going? We really see this as, the outcomes based commissioning, looking at it as smart commissioning, looking at it as enabling the commissioners and outcomes payers, whether its local governments or central governments, or different outcomes payers. Really enabling them to focus on paying for things that work. Only paying for things that work, and you know, being able to have structures that enable them to test different things. Not only to test different things, but also relieve the budgets, or commission things that they wouldn’t necessarily be able to do otherwise. But, effectively with the set-up, they’re able to not pay for things twice, because if they’re already paying for something if that’s converted to paying for outcomes, if nothing works, if they continue doing they’re fee for service, they may end up paying the fee for service level or if they’ve converted everything to the outcomes then they would have paid nothing of it because the outcomes would not have been achieved, and then the costs on the system would end up being the same as expected if the young people went into care or if they stayed in care homes, and so on. From our view, at the moment, the biggest bottleneck, is not necessarily focusing on the investment side, because there are… since we’ve started, there’s a lot of interest and a lot of social impact funds who are not necessarily social impact bond specific who are coming into the market and wanting to consider this as an investment… and are starting to consider it. Both the fair chance fund and the youth engagement fund were oversubscribed in terms of the investments coming in. At the moment, the bottleneck definitely sits with the commissioners, and we can bring all the capital we want.

Were they slightly oversubscribed?

They were heavily oversubscribed. The overall youth engagement fund was 15 million, so 15 million of projects, the working capital was 5 million, let’s say, so you probably would have had two times that in terms of interest from investors. So in absolute terms, it’s still quite small numbers, however, that is indicative of where the market is moving. It is quite a strong sign. What is interesting is that is happening more on that centrally commissioned projects, where it is local authority commissioned projects, and where there is a lot more development work that goes into it because you’re dealing with different commissioners. You know, central commissioners, one thing is in terms of capacity to really dedicate people to run this and terms of them approaching this as a really confident commissioner who takes a view that this is our rate card. We understand that some of these savings are immediate cashable savings, and some are longer terms views and what we see the benefit would be over the life time of young people. However, we’re confident the rate card. You know, this is our team dedicated to it, this is the rate card, all of your providers bid into it and lets go, right so that’s in terms of the timeline, the development is much more clearly managed and that’s where a lot of investors were keen to participate, and you had the likes of social impact funds, but for example Barclays wanted to support one of the

Analysis of the opportunities and challanges of social impact bonds in Western Europe