Payment by Results – The Social Impact

As representatives of the investment community we are familiar with the world of payment by results; if a fund doesn’t perform, sooner or later money will move out of it to one that does. The metrics of assessment, capital growth and income, are fairly easy to understand and even the inclusion of traditional ethical screening doesn’t cloud this decision that much.

It might seem a huge leap therefore to turn the view of investment around to looking at not just what you gain from an investment but what its social impact is and how you trade off the return of one versus the other for a blended social return.  This however is the investment approach of the nascent world of ‘impact’ investing. One of the higher profile impact investments of recent years was the Peterborough Social Investment Bond, which was launched in 2010 with the intention of funding a programme to work short term prisoners at Peterborough Prison to prevent re-offending.

This week, the government announced its intention to outsource all probation work with short term prisoners by 2015. Chris Grayling, the Justice Minister, cited the success of the Peterborough scheme when he moved to the job last October and has made further made reference to this programme this week as an example of the initiatives undertaken. One might argue that a seven year project, still in its infancy is a questionable basis for full public policy decisions but nonetheless, this has led the way in influencing government thinking.

Faced with a government with a double edged agenda of deficit reduction AND smaller government it’s not surprising that there is consternation by those in the public sector. One might hope that in this world of Big Society, that job losses could be replaced by a growing third sector but there are concerns about the ability of these charitable and third sector organisation to compete in a competitive market. Payment by Results initiatives require contractors to put money on the table themselves at the outset, so it seems inevitable the likes of G4S and Serco will once again step into the vacuum that smaller charities and voluntary sector organisations can’t fill because of the capital outlay.

Commenting in the New Statesman, Sebert Cox, Chairman of the Probation Association, says: “We’re lead to believe, by ministers, that they want voluntary organisations to be an integral part of delivery. I can tell you there’ll be few small voluntary organisations that could become involved. They don’t have the money – they’re squeezed because of the climate in which we live.”

Whilst the task is daunting, this surely represents an opportunity for the impact investment sector to build capacity and help ensure that specialist voluntary sector provision can help deliver these services with a focus on genuine social impact rather that one eye on profit. The Peterborough project was funded by a social impact bond administered by Social Finance. The return on the investment is as a result of achievement of certain benchmark in terms prevention of recidivism.  For the conventional investor it may be hard to understand the metrics and certainly the negotiation of the terms of the contract will be key – but one assumes that given that this is the general direction of travel that the government may not put the bar too high for fear of scaring off potential partners. On that basis, it’s surely a potentially attractive investment and one worth considering for investors with social inclinations.

Julian Parrott
EIA Steering Group

For further information on the matter discussed, see links below.

http://www.bbc.co.uk/news/uk-politics-19871283

http://www.guardian.co.uk/society/2013/jan/09/probation-service-private-firms-grayling

http://www.newstatesman.com/politics/2013/01/shadow-state-probation-chiefs-voice-doubts-about-outsourcing