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A paper exploring why a new social economy is needed and the role that Social Impact Bonds could play in stimulating its creation.

We started developing Social Impact Bonds in 2007 when thinking through how to increase the availability of finance for improving social outcomes and how to reduce the uncertainty of funding for social services in the UK.

Social Impact Bonds have since made up a significant proportion of our work. This paper is an attempt to capture and share some of what we have learnt while developing the initial Social Impact Bond pilots.

Social Impact Bonds raise funds from non-government investors to pay for the provision of services. If the services make a difference and social outcomes improve, investors receive success payments from the public purse. The size of these payments depends on how successful the services are.

We believe that linking investors’ financial interests with better social outcomes is an effective way to improve society. As we explore in this paper, Social Impact Bonds could help to drive the creation of a more diverse, innovative and evidence-based social economy in the UK. This in turn could lead to a substantial increase in the availability of non-government investment for the development of effective social services.

Those interested in payment by results and outcomes-based commissioning should note that Social Impact Bonds overcome two of the main constraints of traditional outcomes-based contracts:

- By contracting with investors rather than service providers, Social Impact Bonds facilitate the use of a number of service providers to deliver better social outcomes rather than assuming that a single organisation can succeed across the board; and

- By using investment to fund the delivery of services up front, Social Impact Bonds enable social sector organisations to participate in outcomes-based contracts that would otherwise require them to fund their activities before outcomes payments are made.

For the public sector, Social Impact Bonds represent a relatively risk-free way to address costly health and social problems. It stands to benefit from the development of new and improved social services, but only has to pay if the services have a genuine impact. 

For investors, Social Impact Bonds offer an opportunity to improve society and to potentially make an attractive financial return.

Social Impact Bonds may be particularly useful for funding preventative services. There is a growing body of evidence that society could benefit from such services – if interventions are effective, the public sector can spend less money on expensive services such as prisons, acute medical care and drug rehabilitation.

Historically, the public sector has struggled to fund preventative services as they require it to take a risk – it could end up funding not only the costs of preventative services, but also the costs of further services to deal with social problems if the preventative services fail. As Social Impact Bonds transfer the risk that interventions fail to investors, they should make it easier to address social problems earlier, generating benefits for both public sector budgets and wider society.

The first section of this paper explores why a new social economy is needed and the role that Social Impact Bonds could play in stimulating its creation. The second section draws on Social Finance’s work developing Social Impact Bond pilots to explore practical considerations around their use and application. In both we temper our enthusiasm by being clear about what we still don’t know and what is under development.

Our vision is that, over time, Social Impact Bonds will become a significant source of finance for effective services addressing a range of social issues, delivering attractive returns to a wide range of investors and improving people’s lives.

We welcome thoughts on this paper and hope that you will share our enthusiasm for the opportunities that a new social economy could bring.

Last updated | 
3 March 2010