Social impact bonds – a new way to link finance to outcomes

Philanthropists have long been interested in finding better ways to finance social outcomes. Due to be piloted in the UK in 2010, probably in the early summer, Social Impact Bonds have been designed for this purpose. They will allow for investment by foundations or commercial investors in delivering measurable social outcomes, with repayments linked to whether they are achieved.

The idea was promoted by Gordon Brown’s Prime Minister’s Council for Social Action and has been developed in different forms by the Young Foundation and Social Finance, two London-based charities.

The Young Foundation’s recent working paper, Financing Social Value: implementing Social Impact Bonds, describes contracts in which national government or local authorities commit to making payments tied to outcomes achieved. This commitment then enables foundations or intermediaries to raise or provide finance to support programmes of action by social enterprises, private sector or other bodies. The greater the outcomes and savings, the greater the payments; conversely, if outcomes are not improved, nothing is paid out.

One set of pilots is likely to focus on criminal justice, with funding invested in NGOs providing support, jobs, housing and help to prison-leavers and teenagers at risk of crime, with subsequent payments from central government dependent on reduced numbers going into prison. Another pilot is likely to focus on reducing hospital readmissions for older people. Work is also under way on other fields where substantial savings could be achieved by smarter preventive action, including in the longer term investment in early years programmes.

A government White Paper in December 2009 backed the idea, and the opposition Conservative Party, which is on course to win power later this year, has also expressed strong support.

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