The world's first social impact bond: early verdict

There were two goals to the Peterborough Social Impact Bond, launched in 2010 by Social Finance: 

1.    To address the failure of the system to intervene with short sentence male offenders other than by imprisoning them - by seeking to rehabilitate them. 

2.    To test a pioneering new way to divert taxpayers money to civil society organisations able to solve social problems that would otherwise go unsolved, and in the process deliver savings.

Since then, the idea has captured the imaginations of policy makers across the world and stimulated a global arms race to explore its potential. This is not surprising when one thinks it through. If successful, it promises not only to create value for taxpayers, but also for citizens who would otherwise have been victims of the unaddressed social problem; for charities and social enterprises by lowering their cost of capital and enabling them to scale their activities as businesses can; for investors who can make money by solving social problems. The applications of the idea are not restricted to criminal justice, but extend to all areas of social need. The implications could be huge.

Today, the initial results are announced. So, how did it go?

The headline outcome is that the One Service, the implementation vehicle for the Peterborough Social Impact Bond investors, has successfully delivered an 8.4% reduction in re-offending versus the control group. This is in line to beat the minimum hurdle of 7.5% to trigger the repayment of investor capital, along with a modest return.

A more detailed look at the numbers reveals an even more positive story – that outcomes achieved are getting progressively better, as the One Service gets better at co-ordinating the local interventions and services to greater effect. Should current momentum be maintained, investors can expect to make a significant return.

So the charities, government agencies and social enterprises that have combined to solve a social problem under the co-ordination of the One Service have proved they can deliver. Tangibly deliver, for all of those stakeholders. A favourable verdict, then.

There are a number of key design points underpinning this success. The discipline of a well-structured outcomes-focussed contract with government;  the social purpose of the legal structure that investors invested in; the social purpose of the intermediary that structured it; the combined social and financial track record of both the investors and the intermediary. For both the investors and the intermediary, the verdict is also favourable.

But returning to the strategic goals for the project, can it be judged a success?

Versus strategic goal (1), the jury is out but it looks like unless something changes then a fail verdict will be returned. The Ministry of Justice’s Transforming Rehabilitation (TR) reforms have led to the Peterborough SIB being prematurely discontinued, unavoidable given that it’s a national reform program. But in their current form, the TR contracts for do not provide for the investment in short sentence male offenders, in the aligned contract structure, that would result in meaningful outcomes such as those achieved in Peterborough. 

Versus strategic goal (2), the jury remains out. Something important has been proven. The global momentum for this idea will continue to be built. But the idea is only any good if governments can act as a rational counter-party. And this is where the wheels look like they might fall off.

Imagine if investors invested in a start-up business in Peterborough. Imagine that it demonstrated a brand new approach that delivers materially superior results to the traditional market. Imagine that by being rolled out nationally it could transform that market and create massive financial and social value in the process. Imagine that this business continues to deepen relationships and refine its new approach, and as a result can demonstrate ever better results from its already high base. Imagine then that the investors decided to shut it down. 

And then imagine no more, because this is precisely what the UK government have decided to do with the One Service – albeit that they are going to continue to fund it until the implementation of the Transforming Rehabilitation reforms, with their (currently) inadequate incentives for its value-creative activities.

So what we know today is that civil society organisations, charities & social enterprises have demonstrated that, under the right structures, they can deliver material value for society which may warrant the taxpayer making unlimited capital available to them, so that they can deliver that material value by solving social problems.

What remains to be seen is whether the representatives elected by the taxpayer are capable of claiming this potentially remarkable victory.