Unlocking Future Savings

What should you expect if you’re a young Englishman on the wrong side of the law? Chances are, you’ll get a short jail sentence—but not much else. Prisoners serving less than a year typically receive little in the way of job training or other social services. When their term’s up, they tend to commit crimes at a high rate, with 60 percent back in the pen within a year. Once they become career criminals, “then taxpayers make a huge investment in them,” says Emily Bolton, associate director of the Londonbased organization Social Finance. “If only some of that money could have been used earlier, society could expect significant cost savings.”

Turning those imagined future savings into a financial asset is the goal of a new type of bond that Social Finance has spent three years developing. Social Impact Bonds raise investment capital for promising social programs, such as an anti-recidivism initiative for young offenders. If the intervention actually cuts reoffending rates, investors will be paid a share of that savings by the U.K. Ministry of Justice.

The idea of paying investors for future savings may sound simple, but working out the details has been a complex process, says Toby Eccles, founder and development director of Social Finance. “For government and investors, this is such a new way of thinking,” he says. “We had to convince government to sign up for a contract where they were paying purely on the achievement of social outcome.”

Under the terms of the contract, Social Finance raises the cocapital from foundations and high-net-worth people to fund a specific social program. That money is in effect the bond’s principal. If the program does not meet its goals, investors receive nothing. If the program meets its goals, the government pays the investors their principal plus a share of the savings.

The first bond, issued in March, raises £5 million for a six-year anti-recidivism initiative at Peterborough Prison in the east of England. Earnings kick in if the intervention reduces recidivism by at least 7.5 percent. Investors earn more with greater program success, with earnings capped at 13 percent.

For social sector organizations, the new financing model promises to deliver more reliable funding. Bolton describes current nonprofit funding mechanisms as “irrational.” Grants tend to be short term, with metrics focused on “how many people go through a program rather than the real change they made in the world,” she says. “And just as you get a program up and running and you’re ready to improve on it, the funding cuts off.” Social Impact Bonds build in a longer timeline, “so you have the ability to learn and improve on what works.”

Tight government budgets usually mean program cuts, especially for novel ideas. This model “creates room for innovation,” Bolton says, by opening a new funding stream.

Social Impact Bonds may be “the start of a funding revolution for organizations that specialize in preventative work,” says Rob Owen, chief executive of St. Giles Trust. His organization will be delivering services at Peterborough Prison, where he predicts a “win-win-win situation. Society wins as there are fewer victims of crime, the taxpayer wins as less money is spent on prisons, and clients win because they are given the chance to turn their lives around.”

Investors could win as well. Once Social Impact Bonds establish a track record, “we could see a pool of capital up to hundreds of millions [of pounds],” predicts Eccles. Future bonds could focus on improving preventive care to children in state care, elderly populations, or the mental health community.

Already, Social Impact Bonds are attracting attention. Social Finance welcomes imitation and plans to share what it learns. But Bolton offers a word of caution. Social Impact Bonds require an objective measurement of outcomes, “and that doesn’t work in every situation,” she says. “We think this is going to be one answer—not the answer.”

Read more stories by Suzie Boss.