Social impact bonds

What are social impact bonds and how are law firms involved in their creation?


Social impact bonds (SIBs) are a form of financing for public services. They allow investors to pour funds into public projects aimed at achieving goals for the greater social good. If a project fails, investors walk away with nothing. If it goes well, the government repays the value of the initial investment plus interest (the level of which depends on the results achieved). 

SIBs are commissioned by central government departments (eg the Ministry of Justice or Department for Work and Pensions), local authorities (e.g. Essex and Manchester councils), and other public service organisations. To date, investors have tended to be foundations and trusts like Esmée Fairbairn and Barrow Cadbury, or social investors like Big Society Capital and Bridges Ventures.

For a SIB to be created, the project it's financing must satisfy three criteria. First, it must address a significant social problem – addiction, homelessness, reoffending – which places a strain on the public purse. Second, the project must have tangible goals which can be measured and assessed: a decline in addicts relapsing after treatment or a reduction in reoffending rates. The financial benefit of achieving these goals must also be identified, so that the government can clearly see what future savings will be made by nipping the problem in the bud. A reasonable timescale for measuring performance must be agreed as well. Finally, a suitable service provider must be found. These are typically large charities or groups of affiliated charities.

The environment has been ripe for the development of SIBs in recent years. Public sector cuts have put pressure on public service providers to deliver greater results with fewer resources. This has also created a pressing urge to act to address problems that will – if left unchecked – place an unsustainable strain on public services in the not-so-distant future. As a result, SIBs have become an attractive tool: they defer payment for projects (nothing is dished out to investors until outcomes are achieved) and transfer the risk of failure from the public purse to private investors.

Bates Wells Braithwaite has played a big part in the development of SIBs and the social investment market. Back in 2007, BWB lawyers advised on the establishment of Social Finance, a non-profit organisation which acts as an intermediary when SIBs are being set up and seeks to encourage social investment more generally.

The firm can also boast of helping to develop the very first SIB in 2010. Its focus: prisoners at Peterborough Prison serving short sentences. A group of investors – including Barrow Cadbury and one of the Sainsbury Family Charitable Trusts – put forward £5 million to get the project up and running. The Ormiston Trust, the YMCA and the St Giles Trust acted as service providers, conducting rehabilitation work to prevent prisoners from reoffending. The project focused on 3,000 individuals, all of whom were due for release within a six-month period. If the first 1,000 prisoners to pass through the system yielded a 10% reduction in reoffending rates, then investors would receive a payout. Once all prisoners had completed the process, a 7.5% reduction would prompt further payouts. Investors would be paid from a £6.25 million nest egg, formed of cash from the Ministry of Justice and the Big Lottery Fund.

However, after the government introduced a new rehabilitation policy in 2014 (which brought in private contractors to deliver services), the Peterborough SIB scheme was brought to a premature end. This turn of events revealed one disadvantage of SIBs: they're vulnerable to policy shifts. The difficulty of predicting precisely what the outcome of a project will be is another; many social problems are inherently complex and involve a huge web of public services. Third, those looking to set up a SIB have to gather data showing what the results of a particular service will be – and often that data simply doesn't exist or isn't compatible with the case at hand.

This may all sound rather gloomy, but there are big pluses to SIBs as well. First, they allow public projects that might otherwise not see the light of day to be financed. Second, they enable third-sector organisations to channel their creativity into developing new methods to tackle social problems. Third, investors are likely to be very meticulous in their due diligence when putting money into a bond; this means that SIB-backed projects will be built on more rigorous foundations than regular government activities. Fourth, SIBs allow funds and trusts to have a greater say over what happens to their money. Before they may have simply donated a grant; now they can package that grant into a SIB and get a return on a precisely controlled investment.

Child services is one area where the use of SIBs is expected to expand. In August 2013, BWB advised on a SIB for the CVAA, a national charity which acts as an umbrella body for a series of voluntary adoption agencies (VAAs) throughout the UK. The SIB will fund a project to help local authorities and VAAs place children who may have been overlooked due to their age or ethnicity. Bridges Ventures and Big Society Capital provided the £2 million required to fund the scheme, which includes a provision for 24-hour support for new parents in order to cut the likelihood of placements failing. Investors will be paid by local authorities out of the hefty savings made from not having children kept in care or with foster parents.

After adopting an ABS (alternative business structure) status in 2014, BWB launched an impact and advisory group headed up by ex-Baker Tilly accountant Jim Clifford. The group predominantly works with charities, social enterprises and public bodies – although the number of private sector clients it advises is increasing – to highlight the most efficient ways to use resources to achieve both a greater financial and social impact (by using methods like social investment and social impact bonds). Continuing in this vein, September 2015 saw BWB became the UK's first major 'B Corp' law firm. B Corps are for-profit businesses that have been certified as meeting high standards in environment and social performance, transparency and accountability. Basically, it's like the Fairtrade stamp for ethically sourced coffee, but for companies.

Whether SIBs really take off as a means of public financing remains to be seen. The government would certainly like to see them succeed: in the same week that the Peterborough scheme (mentioned above) came to an end, the Cabinet Office announced it would be freeing up £30 million to promote SIBs to help disadvantaged young people into work.