Innovators in Action: Pioneering Social Impact Bonds in the United Kingdom

The latest interview in Reason Foundation’s Innovators in Action 2013 series focuses on social impact bonds, a relatively new—and increasingly popular—type of performance-based public-private partnership in which the private and third sectors finance and implement new social service delivery models on behalf of government under a pay-for-success model. If the interventions improve outcomes and save public funds, investors receive success payments from government that generate a return on their investment. If outcomes do not improve, government pays nothing and investors lose money.

In the U.S., social impact bonds are already moving forward in Massachusetts, New York City and Fresno, California, and are on the horizon in several other states, counties and municipalities.

The nonprofit organization Social Finance UK pioneered the social impact bond concept in the United Kingdom and in 2010 it raised $7.8 million from 17 investors to fund the first social impact bond pilot project, which aimed to reduce recidivism amongst prisoners in one British prison: HMP Peterborough. In June 2013, Reason Foundation Managing Editor Tom Clougherty sat down with Jane Newman, International Director at Social Finance UK, to learn more. Here’s an excerpt:

Tom Clougherty, Reason Foundation: Can you describe for our readers what a social impact bond is? What is the role of private capital in financing social interventions? And why the private and third sectors, not just government?

Jane Newman, International Director, Social Finance UK: We think of social impact bonds as a partnership between (a) government, which is the principal purchaser of services to address social issues, (b) service providers, who are the normal contracting party, and (c) a new set of interests, which are investors and private sector individuals who are interested in driving change in the way government contracts and also addressing social issues. From our perspective, I would say a social impact bond is really a partnership between social providers, the government and investors—brought together by an intermediary that focuses very specifically on a social issue. Very often, the social issue is a disconnect or gap in an existing service provision, or it’s an opportunity to invest in prevention and show that can generate savings down the line.

Clougherty: So you’re doing things that government wouldn’t do, because these activities are more speculative or more innovative?

Newman: Government can find it difficult to invest in prevention. Let’s take criminal justice. Government has the responsibility to deal with offenders, put them in prison. And it has to bear the costs of that responsibility.

At the same time, there are programs where—if you tackle some of the issues associated with offenders—you might be able to improve the possibility of those offenders not re-offending in the future. But it’s quite difficult for government to both carry the cost of the consequences and at the same time invest in prevention.

So what we’re talking about is an opportunity to try untested interventions—exploring whether something is capable of working, or, where it does work well small scale, if it’s capable of being scaled up. It’s an opportunity for government to innovate and explore and share the risk inherent in doing so with the private sector.

Check out the full interview here. Newman goes on to discuss the early results of the Peterborough pilot program, the challenges inherent in scaling up successful interventions, the future development of the social impact bond investors and service providers, and the central importance of performance assessment to the social impact bond model. She also offers some important advice to policymakers and officials in the United States who are thinking of launching social impact bond programs.

Other articles featured in the Innovators in Action 2013 series are available here.