John Maddocks: Payment by results and social impact bonds

There is an increasing emphasis on outcomes rather than outputs, says the third sector technical manager at the Chartered Institute of Public Finance and Accountancy

John Maddocks
John Maddocks

One of the innovations in service delivery that we are likely to see more of in coming years is payment by results. This has implications for service providers, such as charities and social enterprises, as well as for those commissioning services. 

Payment by results allows public sector organisations to pay for services on the basis of the outcomes delivered rather than outputs. One example of this is social impact bonds (SIBs), which also incorporate an innovative approach to financing. With SIBs it is investors who pay for services to be delivered, with a view to achieving certain agreed outcomes. The commissioners contract with the investors and only pay the investors if certain outcomes are achieved.

For charities and social enterprises that get involved in delivering services through such initiatives this can mean big changes in the way they work. In the case of SIBs, for example, the funding relationship for a service provider will be with the SIB investors rather than the commissioning body. In addition the emphasis will be less on how many units of a particular service are delivered and more on what the resulting outcomes are in terms of achieving positive change.

The Peterborough Social Impact Bond is the first of these SIBs. It seeks a reduction in reconvictions of short sentence prisoners. Investors provide the money to deliver intervention services through a number of organisations including: St Giles Trust, Ormiston Trust and YMCA. The Ministry of Justice and the Big Lottery Fund will pay the social investors - but only if there is a measured reduction in reconvictions of 7.5 per cent relative to a control group of prisoners.

There are, of course, significant challenges in putting together such a scheme including: defining outcomes, assessing the potential impact and measuring the likely long term savings for those public bodies commissioning with the investors. But payment by results approaches may prove increasingly attractive as a way of delivering genuine improvements in outcomes which also produce savings elsewhere in public service provision.

From the commissioning side, there are the accounting implications to consider. The complicating factor in any payment by results scheme is that the payments due under the scheme are neither known nor predictable at the outset. It depends on the service providers’ performance in achieving the desired outcomes. This can make it difficult to assess exactly when a liability has arisen as well as the amount of that liability.

CIPFA is in the process of compiling information including descriptions of possible scenarios, with a view to clarifying accounting by commissioning bodies and publishing information on this in the autumn. If you are interested in more detailed insight on a broad range of charity and social enterprise accounting issues then you might want to take a look at our CIPFA Certificate in Charity Finance and Accountancy at London Southbank University.

For charities, social enterprises and other service providers, SIBs are a new financing initiative which offers opportunities for greater engagement in the development and production of services as well as the delivery.

The challenges for service providers include ensuring they have the capacity and capability to deliver against outcomes. Their planning and processes need to be up to the task of managing the very different drivers and characteristics of outcomes based service delivery.

CIPFA has recently published Financing Social Enterprise, which includes a section on social impact bonds and it is also releasing a publication on accounting for social impact bonds and payment by results later in the year.

John Maddocks, third sector technical manager, Chartered Institute of Public Finance & Accountancy

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