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The name is Bond: Social Impact Bond

Mark Easton | 11:40 UK time, Wednesday, 19 January 2011

Fancy paying more tax? No? Think it's a good idea to prevent people becoming a huge burden on the state? Yes? Maybe it is time for some sort of special agent. The name is Bond - Social Impact Bond.

Mother and child

One of the big challenges for any government is how to find the money to invest in preventive schemes which won't save money for years. The problem is even more acute in times of austerity.

Today the Labour MP Graham Allen will hand the prime minister a review of Early Intervention Projects citing good scientific evidence which shows how, for instance, supporting teenage mums now can save billions in anti-social behaviour costs later.

Mr Allen is something of an evangelist for early intervention and three years ago wrote a book with former Tory leader Iain Duncan Smith - Early Intervention: Good Parents, Great Kids, Better Citizens [884KB PDF] - to try and convince policy makers that investing in "tried and tested" schemes was pretty much guaranteed to cut crime, improve educational attainment and reduce welfare dependency.

His latest report, commissioned by David Cameron, suggests that over a generation or two the savings from preventive action would run into the hundreds of billions of pounds. All those noughts are bound to attract ministers' attention, but where to find the cash?

For the answer to that we have to wait. The second part of Mr Allen's review, due in the summer, "will detail the new funding options needed to resource Early Intervention".

"There is massive saving to be made by helping babies, children and young people to make the best of themselves rather than cost society and the taxpayer billions of pounds for want of a modest investment. The next task is to discover the best way to use that massive potential saving to drive up-front investment in Early Intervention policies."

We know, however, that "the best way" won't be higher taxes. The money must come largely from non-state sources - namely the private and charitable sectors. The conundrum preoccupying large parts of Whitehall at the moment is how to unlock that cash.

This is where "Bond" enters the action. Or rather a whole array of bonds and finance schemes that civil servants are looking at. The central idea is that investors buy bonds and the money funds preventive social schemes now. The bond issuer (usually a government department) will repay the bond with a return on top at a later date - after the benefits of the scheme have started to feed through.

A small scheme on these lines is already operating in Peterborough prison aimed at cutting reoffending. The Ministry of Justice has sold £5m worth of Social Impact Bonds (SIBs) to charitable trusts and rich philanthropists. If reoffending is reduced significantly, the investors could get up to £8m back after six years - a very healthy annual return of 7.5%. If recidivism doesn't fall, they stand to lose their money.

I know of a number of charities actively working with government officials on other schemes where SIBs might be used: cutting school truancy and exclusion; increasing youth employment; reducing acute hospital care by improving community support; improving provision of fostering to cut the cost of residential placements for children in care.

There are, however, real challenges with issuing bonds of this kind. The Treasury is still to be convinced on how they might underwrite the bonds and there are departmental questions about who issues and pays out on them. After all, a health or education initiative might well save money in the courts and police stations years later. How are they going to calculate where any benefit has gone?

In some respects, the ideas listed above are the easy ones. It is relatively straightforward to measure reoffending, truancy or bed occupancy in a hospital. When it comes to the kind of early intervention projects that Graham Allen is proposing, measuring outcomes is much harder.

Let us imagine that an investor funds a Family Nurse Partnership to support at-risk teenage mothers bring up their babies.

According to a US evaluation, by the age of two, nurse-visited children are seen in hospital emergency departments 32% less often than similar kids without the help. By age 15 there are noticeable differences in reports of child abuse, teen-pregnancies, welfare requirements and arrests.

So there are expected savings across 15 years, but how can you be sure that any improvements are caused directly by the intervention? It might be the impact of a brilliant GP or teacher, a parent with high aspirations for their child, an astute police officer or, most likely, a complex mixture of a multitude of factors.

In 2009 the Cabinet Office published the results of work by the Measuring Social Value consortium [629KB PDF] which had been trying to find ways to monetize the success of social projects.

They produced a tool called Social Return on Investment (or SROI in the uninspiring jargon) and there is some hope that it could be used to unpick the cash saving of a particular scheme. If cautious Treasury officials can be convinced that SROI is measuring something real, they might be more enthusiastic about underwriting bond issues.

The charity Action for Children, for instance, is suggesting that with early intervention schemes "there is a strong case for raising the funds needed through a series of annual bond issues with 10-year maturities".

"Even after factoring in the transition costs from the system we have now to a more preventative approach returns to the UK economy would total £486 billion over 20 years. These savings are calculated on the basis of an investment of £620 billion to fund the transition and £394 billion to implement the bond scheme."

To back their argument, the charity has conducted SROI measures of some of its preventive schemes and says that for every £1 invested annually, "society benefits by between £7.60 and £9.20".

The Deputy Prime Minister Nick Clegg is today urging banks to "put something back into society by supporting social impact bonds and other forms of social investment". But success won't come from shaming financiers to invest. They must be convinced that there is a reasonable prospect of getting a return and, as yet, the case has not been made. Graham Allen has got four months to do so.

Comments

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  • 1. At 12:25pm on 19 Jan 2011, watriler wrote:

    Is this any more than an expensive way of funding the deficit. Why not offer it as an option to the general public - I am only getting 2.8% on my investments?

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  • 2. At 12:37pm on 19 Jan 2011, jon112dk wrote:

    So the government can't afford to carry out a policy. It then borrows money from someone, carries out the policy and promises to pay the money back at a later date.

    Isn't that 'borrowing'? ... and before they pay it back isn't it a 'debt'?

    Sounds like a convoluted scheme to conceal government borrowing/debt.

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  • 3. At 12:47pm on 19 Jan 2011, watriler wrote:

    "It's PFI - but not as we know it PM" The question is what are the risks to bond holders if the pay back of both capital and interest is not guaranteed and may take 10 years or more to realise and quantify the savings. There could be an industry of advisers/consultants on the way and outcomes of measurements. Is it conceivable that disputes may arise about returns even litigation? Whilst it is no bad thing for proposals to be supported by professional business cases these may become de facto or quasi contracts in the commercial environment with all the admin and overheads that may imply.

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  • 4. At 1:00pm on 19 Jan 2011, Whistling Neil wrote:

    1. At 12:25pm on 19 Jan 2011, watriler wrote:
    Is this any more than an expensive way of funding the deficit. Why not offer it as an option to the general public - I am only getting 2.8% on my investments?

    ===================

    However you have to balance risk - this sounds potentially very risky. It is implied that if for your investment no improvement results you get nothing back not even the principle. That level of risk is not typically suited to most members of the general public unless viewed as basically charitable giving.
    If you start getting to banding and measures it sounds like it rapidly could get bureaucractic and costly incredibly fast.

    It has some interesting aspects which could be beneficial, though obviously can be open to abuse and like any system some would abuse it no matter what.
    The most obvious potential would seem to be as risk reward for covering new ideas or unproven solutions which now the public purse funds the trials - some work, some don't but the costs are spent irrespective.

    So if a social entrepreneur or philanthropist or charity have a belief that a different way of doing things could work and are prepared to back the pilots in this way then it spreads the risk - if they work great, if they don't we know and it has cost nothing bar the effects on the people enrolled onto it.

    Once different ways of doing things are established that are proven better then the decision is a conventional government one - do it and pay up front for the benefit or don't and accept he consequences. Continuing to use the mechanism would just be PFI though could be supported on a performance related pay similarity.

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  • 5. At 1:16pm on 19 Jan 2011, John Ellis wrote:

    only through capital growth of the banks can we see a return to higher interest rates, until such time as the banks reach a level of real capital then society will not be able to move forward at all levels.
    more borrowing will just hold us further back. this however will have some good knock on effects depending on how you view life. House markets will crash, the value on homes will diminish. fantastic for 1st time buyers and in some ways for the banks as it will increase the values of the capital they have, unfortunate if you used your home as investment or bought in the later years of the boom when housing was at its highest. Making the housing market an investment market was one of the biggest financial mistakes of the last few decades. Only supported eventual by the highest earners in society.
    Which them brings us to families and the breakdown, high home costs low wages lack of jobs all make for a broken base to society. Panorama showed this the other night in the feckless fathers program which was filmed local to myself and showed the end results of industrialisation and joblessness, it makes the male redundant both in the area of work and social ability as well as the home and family.
    So the State steps n and causes the final breakdown by penalising families in high unemployment areas with less money than a single parent and absent parent would get. So to the family unit the male is made redundant through social policy as he is worth less to the family by £30 a week, £120 a payment cycle That's a family's fuel bills a year!!!


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  • 6. At 1:23pm on 19 Jan 2011, John Ellis wrote:

    the other way to look at it for the saving of £30 a week on a family the state must pay to the none participating parent regardless of involvement, the extra £30 pw plus a rent allowance plus a full council tax subsidy. which is on average £700 per payment cycle.

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  • 7. At 1:25pm on 19 Jan 2011, cynicalyorkie2 wrote:

    Easy money, get a contract to (say) reduce re-offending rates which will pay you [£100] 'profit'.

    Slip the offender under review £20 to behave...or at least not get caught!!

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  • 8. At 1:29pm on 19 Jan 2011, BluesBerry wrote:

    “Social finance” is an idea that's been gaining ground in the UK and North America. In Canada, the task force includes former PM Paul Martin.
    The contention: the creation of a social-finance sector in Canada would make philanthropists out of investors and ease the burden on government-funded social services. The Canadian Group is known as the "Task Force on Social Finance". Our Finance Minister Jim Flaherty is giving it a look.
    Last year, the British Ministry of Justice in conjunction with Social Finance (org affiliated with venture capitalist, Sir Ronald Cohen) announced the launch of what was billed as the world’s first "social-impact bond".
    A social-impact bond = is in effect a contract between private investors and government. Money raised by the bond issue pays for programs undertaken by not-for-profit organizations. IF, AND THIS IS A MIGHTY-BIG if, these projects achieve some targeted outcome, investors are paid out of the ensuing governmental savings - though God knows how the savings will be calculated.
    In Canada, tax laws and guidance from the Canada Revenue Agency on what charities are allowed to do are narrower than those in many other jurisdictions, like Australia. Innovative ways of raising money are often smothered. The supporters add that now is an ideal time to remove the barriers.
    Former PM Paul Martin: “When governments are strapped financially, they should reach out to as many innovative things as they can find.”
    Part of the reason for the traditional separation between charities and business is that charities are advantaged by their tax-exempt status.
    A Spokeswoman for Finance Minister Flaherty: “We consult and receive input from numerous Canadians during our pre-budget consultations and examine them in the context of the current fiscal realities and the best interest of taxpayers.”
    There is some social finance at work in Canada - the Regent Park Revitalization Project, a community housing project in Toronto, was partly financed by $450-million worth of market-rate bonds that were sold to provincial governments, pension funds and institutional investors.
    In 2009, Mr. Martin launched the $50-million Capital for Aboriginal Prosperity and Entrepreneurship fund, which is backed by many of the country’s largest corporations and foundations including our largest banks: Barrick Gold Corp., Manulife Financial Corp., Sun Life Financial Inc. and SNC-Lavalin Group. Capital for Aboriginal Prosperity and Entrepreneurship fund aims to boost economic independence among native people through the creation of successful businesses.
    Bonds could be designed to support and expand the promotion of lung health and disease prevention, potentially saving the government billions in health-care spending. Lung disease currently costs the Canadian economy $154B a year (acc. to the Lung Association).
    Former PM Paul Martin: "I think Ottawa should provide social entrepreneurs with the same opportunities, both in terms of regulation and in terms of tax incentives, that they provide business entrepreneurs.”
    To tell you the truth, I don't know enough about these ventures to make pithy, intelligent comments, but there is something about them (upon with I cannot put my finger) that whispers "hedge", as in hedge-fund.
    I see problems in assessing overall savings and therefore pay-back.
    In Canada, coward that I am, I am awaiting the expertise of our Finance Minister Jim Flaherty, waiting for his nod of approval.

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  • 9. At 1:47pm on 19 Jan 2011, watriler wrote:

    Quantifying or monetising social benefits will always be problem which in some forms could become a serious liability for future public sector budgets (we are yet to see the true consequences of PFI's). Commercial purchasers of bonds will want minimum risk what could be done is that bonds are offered to the public in specific social ventures at near market savings returns to provide a source of funding in addition to that funded by taxation and sovereign debt may be attractive because investors could identify the specific purpose of their investment and watch it develop.

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  • 10. At 2:04pm on 19 Jan 2011, HardWorkingHobbes wrote:

    7. At 1:25pm on 19 Jan 2011, cynicalyorkie2 wrote:
    Easy money, get a contract to (say) reduce re-offending rates which will pay you [£100] 'profit'.

    Slip the offender under review £20 to behave...or at least not get caught!!
    ---
    Or pay the local 'hard-man' £10 to go round and beat the c**p out of him and let him know it will be even worse if he re-offends.

    Or pay the local 'hard-man' £10 to go round and beat the c**p out of anyone who would report his offending to the police.

    Next year you could take out another bond on the 'hard-man' (because he would now have a police record for eating people up) and don't pay him to beat up any more people, as he's not getting paid he'll stop beating people up and thus you'll get another pay-out.


    Reminds me of a practice in the Victorian era where you could take out life-insurance on other people, so people would take it out on (often homeless) strangers, get someone else to kill them and claim the insurance.

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  • 11. At 7:51pm on 19 Jan 2011, KeithRodgers wrote:

    While ever the divorce laws ream the husband you will have single women claiming life is hard for them. When the reality is they have a direct tap into a mans pocket even when they find another partner!
    Some women know that once they have a child they have a meal ticket for life and they have no intention of working.
    The sad fact is kids do need a mum to care for them and not be passed around like a pass the parcel in endless child care establishments.
    England is well and truly messed up, children are treated like an inconvenience by employers.Employers use women because they are cheap to hire compared to men thats a fact. The human cost of womens liberation is there to see, latch key kids that run wild and cause criminal damage and become thieves just to get attention.
    Women that want to work should not have children period, as many studies have shown broken families create criminals due to poverty.

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  • 12. At 08:06am on 20 Jan 2011, Aneeta Trikk wrote:

    Mmmm, Mark, now let me see, didn't Henry Ford think and do much the same in industry?

    Investment in people? Hasn't it be done before? Oh wait a moment, but of course, it was just to get a plaque on a wall somewhere. No, no one has remembered the success Mr Ford had with paying good wages, giving good holidays, having best equipment, looking after health and accommodation for employees etc. They are all saying "pay them the absolute minimum or move somewhere else; treat them bad; if they don't like it sack 'em and get someone else.

    Yeah, from cradle to grave, there'll be a 'net' to catch you if you fall run by your trusty representatives not some private racketeer. Oops, but now we have several private racketeers involved and a lot more queuing up. Someone wasn't paying attention Mr Ford and the problems it is causing is costing us trillions. But hell Mr Ford our cars are so, so, so cheap (they don't work well either but that is besides...) you can have five of 'em on one weeks wages....

    Blessed are the poor; they are such a tolerant lot for all the effluent we pour on 'em.

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  • 13. At 1:21pm on 21 Jan 2011, The Magic Tramp wrote:

    The flaw in the Social Bond proposal is that the evidence is created a priori to justify the issuance of the bond.

    If there is evidence for the proposals efficacy why would the Government wish to do it via a bond, which is more expensive. They should just but the outcomes directly with a downside penalty.

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  • 14. At 11:28pm on 26 Jan 2011, John Ellis wrote:

    Have to giggle about finance and the lenght's people go to I got this mail a few mins ago I know its not of dave himself but its funny and its about money.

    OFFICE OF THE PRIME MINISTER
    TREASURY AND MINISTER FOR
    THE CIVIL SERVICE,LONDON,
    UNITED KINGDOM.

    Our ref: BRT/1370/IDR
    Your ref:26/01/2011

    I Rt Hon David Cameron MP,Prime Minister, First Lord of the Treasury and
    Minister for the Civil Service British Government wish to inform you of your
    Inheritance Payment from British Government.The British Government,order the
    Release of this Funds to you with immediate effect.

    So, this letter is to officially inform you that ATM Card worth of
    £2,000,000.00 GBP been accredited in your favor, with ATM Card Number:{4080
    2010 1765 5503};Your Personal Identification Number[112].

    As this office will mail you a Visa/ATM CARD which you will use to withdraw
    your funds in any ATM MACHINE CENTRE or Visa card outlet in the world with a
    maximum of £5000 GBP daily.Further more,You will be required to re-confirm
    your Bio Data as stated below to enable;Rt Hon William Hague MP Secretary of
    State for Foreign and Commonwealth Affairs,begin in processing of your
    Inherited funds.

    (1)Full names:(2)Address:(3)Country:(4)Nationality:(5)Phone#:
    (6)Age:(7)Occupation:(8)Post Code:(9)Sex:
    A scan copy of your passport or any mode of Identification

    Rt Hon William Hague MP.
    Secretary of State for Foreign and Commonwealth Affairs
    Email: sfc_affair@2g.cc : fcaffair@london.com
    Tel:(+44) 701 116 4174

    TAKE NOTICE: That you are warned to stop further communications with any other
    person(s) or office(s) different from the staff of the State for Foreign and
    Commonwealth Affairs to avoid hitches in receiving your payment.


    Regards,
    Rt Hon David Cameron MP
    Prime Minister

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  • 15. At 01:15am on 26 Aug 2011, Crash_Black wrote:

    Victorian Britain .... the work houses were funded by philanthropists, where did that really get the poor, besides off the streets and out of sight.

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  • 16. At 3:09pm on 26 Aug 2011, Boudicca12 wrote:

    The nitty gritty is this: no matter how much money you throw at a problem, nothing will change until the attitudes of the criminal classes change. In a world where it has become 'cool' to be bad, to skip school, to be rude to those in authority, to steal and rob without any punishment being likely, where having a social conscience is redundant, and where some parents see children simply as a means of getting government benefits and never having to make the effort to look for work (though many are simply unemployable anyway) it is not surprising there is so much crime and decent people are living lives of fear and misery. Once, the 'lower classes' saw aping the manners and aspirations of their 'betters' as the way to get on in life, and many of them achieved it and should be applauded for it. The attitude now seems to be that the government, of whatever hue, is a soft touch and being an anti-social, criminal waste of skin is the way to go and get the 'respect' of your peers. I'm sick to death of the feckless and the uncaring being pussy footed around and pandered to, while poor folk who work hard to get out of the poverty and sink estate on which they live are apparently ignored and not rewarded. The criminal classes are laughing at the rest of us.

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  • 17. At 11:29am on 27 Aug 2011, Piggyback wrote:

    Why is the government (and previous ones before it) making the same mistake of REWARDING those who cause the rest of society trouble? I was in EXACTLY the same situation as these troublemakers, background, lack of opportunities, terrible living conditions.... instead of watching TV and descend into crime, I studied hard whilst doing part time work when I could. I'm not going to lie, this path - the only path - is a long and tough one.

    But nowadays I am classed as "middle class", despite the rough upbringing, and are thus amongst those who are considered guilty for not helping the poor and disaffected. I was one of them!!!

    The belief amongst those now, much like rewarding single mothers benefits and houses without too much issue, is that they have no reason to change their ways, since the government (or charities, businesses - any "authority" figure - that is how the disaffected see it) are providing them with more funding.

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