How can resources be found for healthcare, the social reintegration of prisoners and welfare? Social impact bonds are one possible answer. Here's how they work.
"There is a gap between the availability of public funds and the social needs that must be addressed. It is a constant problem, one that affects the whole of Europe and that can no longer be ignored." Aldo Cavadini, adviser at Fondazione Sodalitas, pulls no punches at the SRI Week event dedicated to impact investing. The examples, after all, are ones we all know first-hand: healthcare, the social reintegration of prisoners, urban waste disposal. Complex, costly activities in which the public sector is supposed to guarantee a universal service, yet finds it increasingly difficult to source the necessary resources. It comes as no surprise, then, that new models of public-private collaboration are being sought. Social impact bonds are one example.
A "normal" bond is an instrument through which governments and companies raise finance. If I buy a bond worth 100, at maturity I will get my 100 back, plus an interest payment that will be settled at regular intervals. In this way, the government or company has the liquidity for its activities, and the investor, who has placed their trust in it, earns a small return.
A social impact bond, also known as a "pay for success bond", is a bond through which the public sector raises private investment to pay providers of welfare services. The return on the capital invested, however, is calculated in a very particular way: it is tied to the achievement of a specific social outcome. The underlying rationale is innovative: if a social problem is solved, a cost to society is avoided. Thanks to those savings, the public administration can afford to remunerate investors.
The first social impact bond was launched in 2010, in the county of Cambridgeshire. Its aim was to support the reintegration of 3,000 prisoners at Peterborough Prison, who had been sentenced to terms of less than 12 months. Seventeen investors, almost all foundations and philanthropic organisations, purchased social impact bonds worth £5 million. In doing so, they accepted a wager: if by 2016 the reoffending rate had fallen by 7.5 per cent, they would receive a payment that — depending on the result — could reach a maximum of £8 million. Otherwise, no return. Payment was guaranteed 37.5 per cent by the Ministry of Justice and 62.5 per cent by the Big Lottery Fund, a public body that redistributes a portion of national lottery proceeds for charitable purposes. This pioneering experiment concluded successfully: reoffending fell by as much as 9 per cent, and investors received, in addition to the capital committed at the outset, a further 3 per cent per annum.
The Peterborough Prison experiment immediately attracted the spotlight, planting the first seed for the development of a wider system. To date, however, cases of social impact bonds remain sporadic. Only a few dozen exist, scattered across the United Kingdom, the United States, Australia and — more recently — Canada. Moreover, alongside the enthusiasm there has been no shortage of criticism. Consider Italy, for example: public procurement law is very rigid, leaves little freedom to choose private suppliers and imposes precise obligations on expenditure reporting.
"Social impact bonds are a powerful stimulus for social innovation, but it must also be said that almost all the risk falls on the shoulders of the funders: if the objective is not met, they will not receive their returns and in some cases will not even get back the capital they invested," Cavadini continues. All of this, moreover, makes it essential to find a precise and unambiguous way of measuring social impact. The road ahead is still long, then, and there are many knots to untangle. But what matters is that the will to invest in activities that have a positive impact on society and local communities is growing ever stronger.