Social impact bonds will be worth "tens of billions of pounds" worldwide within the next two decades, the venture capitalist behind the Big Society Bank told MPs yesterday.Speaking at a Public Administration Select Committee inquiry into the big society, Sir Ronald Cohen said there had already been interest in social impact bonds from Canada, Australia and Israel, and that the Obama administration in the US had already committed about £60m to pilot schemes.
Social impact bonds allow investors to fund charities to carry out early interventions in fields such as crime reduction and children's services. If charities successfully reduce the number of people needing government support, the government repays the investors at a profit.
Cohen is director of Social Finance, the organisation that created the bond and is administering the first pilot – a £5m project to reduce reoffending at HM Prison Peterborough.
Cohen said that funding for the pilot had come entirely from philanthropic organisations, but the bond would eventually attract investment from pension funds, insurance companies and private investors.
But he said the bond might need to be made more attractive to commercial investors.
Alun Cairns, the Conservative MP for the Vale of Glamorgan, asked whether public sector officials would be reluctant to use social impact bonds because of the additional complexity involved in their design.
Cohen said that although all government departments would contain some sceptics, the progress of the bonds would be driven by other enthusiasts who could see the savings it would make.
Cohen said he expected social investment would soon be worth billions of pounds in the UK alone. The market is currently worth about £200m a year.
Big Society Bank
Cohen also told the committee that he was not concerned about securing approval from the European Commission for the Big Society Bank under rules that prevent governments giving unfair advantages to domestic businesses.
He said he did not expect the bank to be up and running until next year, but that an interim arrangement had been reached with the Big Lottery Fund that would allow lending to start much earlier.
Cohen said he expected negotiations with four high-street banks, which have agreed to provide £200m to the bank "on commercial terms", to conclude in the next few weeks.
Charlie Elphicke, the Conservative MP for Dover and Deal, told the hearing he thought senior bankers did not share Cohen's views, and said he felt the £200m capital injection might fail because bankers wanted a full market rate, which the bank could not afford.
But Cohen said he expected banks to provide funds at a rate that would be useful for the Big Society Bank. "Commercial terms doesn't mean the normal profit margin," he said.