This guest blog from Laura Seebohm, Director of Operations at Changing Lives, discusses the value of social impact bonds.

The attraction of social impact bonds (SIBs) for the voluntary community sector during a time of funding cuts is compelling. As director of a medium-sized charity supporting people with experience of homelessness, addiction, employment and women centred services, the opportunity to bring investment into the sector is enticing. Any funding mechanism which pays for services up-front, is apparently low risk to providers, and pays us for doing what we already know we do well is an exciting prospect.

The government continue to regard SIBs as the answer to meet growing need, and there is no indication that this will change any time soon. To match this, there is significant support from investors, including some of the large charitable foundations who, it seems, hope SIBs may go some way to address the challenge of increasing demand from the charity sector as the role of local authorities is pulled back. The prospect that there are a group of investors ‘waiting in the wings’ to be approached with SIB models is always going to spark interest.  SIBs have some mystique, but when the veil is lifted there are some truths which are not always explicitly acknowledged.   

Over the past three years I have engaged with SIBs with cautious enthusiasm. Our organisation has been heavily involved in the development of one SIB which never came to fruition; another which has run for three years, and another just starting. I am emerging from these experiences with considerable reservation and some key learning. 

The business model:

SIBs do not bring new money into the system. The outcomes payments still have to come from an ever decreasing public purse. Investors are making profit from relatively high rates of return; and it is not only the investors who are benefitting from SIBs. 

The ‘brokers’ or ‘intermediaries’ working behind the scenes to develop the financial information based on our prediction of achievable outcomes, have a strong vested interest in SIBs being commissioned. They put time and resource into developing complex models and this is their core business. Many are well connected with central government and investors, all keen to prove it will work. 

Individually, the people and organisations involved in the financial modelling are well-meaning and ethical. We have found them to be supportive to the sector and brilliant at what they do. But their systems are not designed to be easily understood by external parties and they are in a position of significant power. As a provider, it can be an uncomfortable experience to put such trust in a financial model ‘stacking up’ without having access to the mechanism used to calculate outcomes payments.

It needs to be acknowledged that the specialist intermediaries are highly resourced to make SIBs work and many have thrived, despite the fact that relatively few have come to fruition or, if they have, actually demonstrate real value. 

The reality for commissioners:

In our sector we work every day with the understanding that the issues faced by the people who use our services are interconnected and interdependent; people are complex and life is not one set of definable measurable cause/effect processes.  The debate around outcomes-based commissioning is much wider than SIBs, but it is particularly problematic when organisations are financially dependent on a set of principles which in reality we all know are a simplification. 

Outcomes for SIBs need to be simple and binary in order to say we have achieved or not achieved the outcome; any model designed to meet a range of inter-related needs is too complex. Most areas do not enjoy the joint commissioning processes required to agree on outcomes across a range of themes (addiction, housing, domestic abuse etc).  The negotiation required to agree outcomes payments split across silos to meet the needs of each individual is unrealistic.  Furthermore, at a time when local budget cycles are short term and cuts are persistent, commissioners struggle to commit to these payments which may not be achieved for years to come.  Ironically, it is often easier for a commissioner to commit to paying for services with a grant for one year – because they at least know what their budget is – than to commit to outcome payments in future years when their level of financing is unknown.

The reality for the voluntary sector:

One of the positives we hear about SIBs is the flexibility it gives providers.  Commissioners and investors are interested in outcomes but not how they are achieved, giving us the freedom to evolve and innovate. 

In reality, all parties involved in SIBs have a strong interest in outcomes being achieved and this influences behaviours. We have experienced considerable pressure from management companies, boards and investors in how we operate as they have such a strong driver to ensure we achieve outcomes. At times we have seen that it is the providers who give the minimum input with the highest volumes whilst managing to scrape the outcomes are rewarded; those who spend more time with individuals and achieve more meaningful outcomes are penalised. As providers, we are asked to ‘do minimum’ - the lowest common denominator.

Another reality for the sector is that the ongoing dialogue with stakeholders takes an extraordinary amount of time. In my experience the management time required is never factored into the financial model. The number of meetings, ongoing issues with data collection, re-profiling, re-modelling, reviewing, re-budgeting can be extreme.  Everyone except the voluntary organisation gets paid for this work. It is clear to me that this is not an efficient way to do business. But because everyone’s finances are dependent on the SIB working, everyone has to accept it and do everything possible to make it work. This is the case even when the reality emerges that the model is intrinsically flawed.

The commitment given to the development of SIBs is a perfect example of designing models to suit the needs of systems, rather than meeting the needs of people who use our services. We need to ask whether the investment spent on brokers in the development SIBs would be better spent just funding organisations to do what we already know they do well. Is it time to stop now?

Clinks will be talking to social investment bodies about the issues raised in Laura’s blog to see how we might address these and make social investment bonds work better for the sector. We would love to hear from you about your experiences of social investment, good or bad. Please email kate.aldous@clinks.org