Social impact bonds have not always lived up to expectations since the government launched its first pilot project at Peterborough prison five years ago. That scheme attracted more than £5m from investors to help six charities provide support to prisoners on their release, but it failed to reduce reoffending rates sufficiently to trigger payments to the investors. The pilot scheme was cancelled last year by the government after the introduction of its countrywide Transforming Rehabilitation programme.
But the government has continued to use SIBs, which require investors to pay for the project at the start, then receive payments based on the results. In London, the youth employment charity ThinkForward has just completed an SIB commissioned by the Department for Work and Pensions' Innovation Fund in 2012. Under the scheme, the social investors Impetus-PEF and Big Society Capital each contributed £450,000 to provide education and employment support to teenagers from 14 schools in the boroughs of Tower Hamlets, Islington and Hackney.
In return for providing ThinkForward with the capital, Impetus-PEF and BSC will get a return on their investment from the DWP. A spokeswoman for Impetus-PEF says it is unable to say what that return will be because it has not yet been finalised with the DWP, but confirms that is likely to be a "low, single-figure percentage".
Under the scheme, about 1,000 young people have received support that includes one-to-one advice from coaches and assistance with finding work placements.
Kevin Munday, managing director of ThinkForward, says that without the initial payments from investors it would have been difficult to bid for the DWP payment-by-results contract because the charity was established only in 2010 and did not have sufficient financial reserves.
"The big challenge for us is that when you get paid by results you have to wait a long time before money comes in, but have to meet the delivery costs in the meantime," he says. "The SIB gave us the capital to get started, and most of the risk was carried by the investors, not by us. It was the best way to help us get started."
For the investors to get payments, the charity has had to achieve targets against eight agreed metrics, including improvements in behaviour and attendance at school by the young people, and helping them to find employment once they left.
Munday says delivering the SIB has led the charity to adopt a culture more geared to performance management because its investors have required regular updates to establish whether the programme is achieving its targets. Munday says this has required the coaches to be educated about the importance of keeping on top of their paperwork to ensure that data is accurate and up to date.
The SIB ended in September. Results show that 90 per cent of the young people aged over 18 who received support from the charity progressed into further education, employment or training. The figure is above the agreed level to trigger repayments to the investors.
But despite the success there are currently no plans for the government to extend the SIB or offer a similar scheme again.
The charity therefore intends to fund its work through more traditional methods, including charging schools and bidding for funding from grants and foundations.
Munday says the charity would be keen to take on more SIBs, but adds: "There are not enough commissioners of social investment bonds. We hope the government is going to do more."
Julia Grant, chief executive of Impetus-PEF, says ThinkForward's success proves the value of SIBs: "For investors, they are a valid vehicle that can deliver sound financial and social returns. For charities, they offer long-term funding, allowing them to focus on delivering consistent results to those that need help the most."