The Ministry of Justice has announced it will run a pilot project using the new model of the social impact bond in a scheme aimed at reducing prisoner reoffending.
The bond allows third sector organisations to attract finance for projects backed by the promise of a Government payout to bond holders based on the success of the scheme.
Investors in the pilot bond, administered by enterprise consultancy Social Finance, which proposed the idea, will receive a return only if the project hits Government targets to reduce reoffending. Depending on results, investors will be able to make a profit of up to 13 per cent.
Money invested in the pilot will be paid up front to the third sector organisations involved in the project. They will use it to fund their work with beneficiaries.
The pilot will take place in Peterborough and is expected to be run by a small consortium of third sector organisations, including the St Giles Trust. It will work with about 3,000 prisoners over a six-year period to reduce offending.
The Government is hoping to raise £5m in the first bond issue, and to start work in Peterborough later this year.
David Hutchison, chief executive of Social Finance, said: "We see this pilot as an important first step in rolling out the social impact bond more widely in the future. There is scarcely an area of social or healthcare policy where prevention or early intervention isn't both cost-effective and socially desirable."
If the pilot worked, he said, the Government might offer more generous terms in future projects, and would look at applying it in other departments.