Social impact bonds are unlikely to attract commercial investors unless they offer lower risks or higher returns, according to a report published today by the think tank the Social Market Foundation.
The report, Risky Business, says there is a "huge gulf" between what commissioners are prepared to pay and the return investors will accept.
It says commissioners are keen to pay for results only when they can be sure that those are down to an intervention, and this requires a high level of risk to be taken by investors, who will lose their money if the SIB does not hit commissioners’ targets.
To make an investment worth the risk, this means that investors must be extremely well rewarded if the SIB succeeds. But commissioners are reluctant to pay this level of return, it says.
"SIBs could be used as a mainstream commissioning structure," the report says. "But for this to happen, a great deal of action needs to be taken to close the risk gap between the returns that would-be investors demand and the price that commissioners are prepared to pay."
At present, says the report, SIBs tend to be small-scale. This means commissioners demand high levels of improvement to ensure that change is down to the intervention rather than statistical fluke or another reason.
It also says the nature of SIBs means high transaction costs are involved in setting one up. It says that SIBs will become more attractive to investors if they operate in larger numbers and at a larger scale, and if they become more standardised.
Speaking after the launch of the report, Nigel Keohane, deputy director of the SMF, said: "There is a yawning gulf between what commercial investors and public sector commissioners want to get out of social impact bonds. Into this uncertainty, one party has to be willing to take a leap of faith.
"Unless the government or philanthropists are ready to make this leap of faith, the market is unlikely to be attractive to investors seeking market rates of return."