But payment by results provides a big challenge for charities of all sizes – particularly smaller ones that don’t have the necessary funds to wait for payment.
Social impact bonds, however, can offer help to smaller charities because the financial risk is taken by social investors that provide up-front funding. Fourteen bonds are already in operation, of which the best known is the one at HM Prison Peterborough, where a number of charities, including the St Giles Trust, have been working to reduce reconvictions. Interim results released by the Ministry of Justice in June showed the project had had initial success.
Another charity involved in running a social impact bond is Teens and Toddlers, which tackles disadvantage and social exclusion through a youth development programme. It runs 18-week training programmes that work with young people at risk of not being in education, employment or training.
The programme helps year 10 students to develop life skills by pairing them with toddlers in nurseries. The students also take part in training sessions, covering subjects such as employability and social skills. The charity was commissioned by the Department for Work and Pensions as part of its Innovation Fund in 2012 to expand the programme in the north west of England using the social impact bond model.
The bond, which has a value of about £3m, has enabled the charity to increase its work significantly. The programme, which aims to work with more than 1,100 young people over three and a half years, accounts for about 40 per cent of the charity’s total beneficiaries.
The contract is being managed by the social investment intermediary Social Finance, and the bond is being funded by social investors including the Barrow Cadbury Trust, Big Society Capital, Bridges Ventures, CAF Venturesome, the Esmée Fairbairn Foundation and the Impetus Trust.
The charity’s work will be measured against six criteria, including behaviour and attendance at school and academic qualifications gained by students. For each outcome that a young person working with the charity achieves, social investors will receive a payment return from the DWP – meaning that all of the financial risk is with the investors rather than the charity or government. If the project achieves the expected results, investors could make a profit from their investment, with the charity also taking a cut of any surplus that is made.
The results will not be known until next year when the students involved have taken their exams. But so far the charity says it has seen success with softer outcomes, and overall it is positive about its experience.
Lady Diana Whitmore, chief executive of Teens and Toddlers, says a key factor in the charity’s success with the social impact bond so far is that it was already measuring its own impact before signing the contract.
She says this helped the experience to go smoothly, but adds that it has involved a lot of bureaucracy. Because the contract has such a heavy focus on the outcomes achieved by the charity, it has to maintain a thorough database and has had to hire a full-time member of staff just to carry out this task. "We’re putting data into it every day," she says.
But Whitmore says she understands why it matters. "Evidence is increasingly important to funders because money is so scarce," she says. "I think that social impact bonds, or social finance of some kind, are the future."
Jonathan Flory, director of Social Finance, says the fact that the charity has rolled out an established programme in a new geographical area has made it easier. And he says that one lesson that has been learnt from this particular contract is the benefit of basing the payment mechanism on a target achieved by each person, rather than having to wait for a group of people to achieve it, as with some other similar contracts.
Looking towards the future, what is the likelihood that social impact bonds will be used to fund more charities’ work, and will returns be high enough for a wider variety of investors to start funding them?
Flory says he hopes the success of these early social impact bonds will encourage other investors to become involved in future projects. "I think that investors who are interested solely in maximising their return might not be attracted, but these projects also have a social impact," he says.
"That is an important reason why social investors get involved, and it could help encourage others to do so in the future."