Towards a new Social Corporate Finance theory?

As exits are more or less non-existent in the social investment world, debt and equity merge. Do we need a new Corporate Finance theory for our sector?  In the social investment market, what is the difference between the return expectations of debt and equity instruments?

In my Applied Corporate Finance course at INSEAD, the differential between the return expectations on debt and equity instruments was comparatively easy to calculate.  The required return on a debt instrument would be a function of the investee company’s credit rating and the seniority of the specific instrument among other debt instruments (if any) on the balance sheet.

The required return on equity, on the other hand, would be the function of the Capital Asset Pricing Model (CAPM) and the Weighted Average Cost of Capital (WACC).  Without going into technical detail on these concepts, equity returns generally (in the form of dividends and capital gains) are unknown up-front and therefore riskier than returns on debt instruments.  Equity holders risk losing their capital if the business does not perform.  Debt instruments can also be risky, but holders of debt instruments have a prior charge on the company’s assets in case of bankruptcy.  Given that equity holders take on board more risk, the required return on equity is higher.  This differential between required returns on equity and debt contracts and expands as the business and its market evolves, but it remains positive.

Social investments are different from commercial investments in (at least) two fundamental aspects:  Firstly, the majority of socially-driven companies and social enterprises have no equity.  I believe that I would capture 95% of all socially-driven companies and social enterprises if I included (a) charities and their operating subsidiaries; (b) Industrial and Provident Societies who exist for the benefit of their community (IPS ben comms); (c) Community Interest Companies (CICs) and (d) For-Profit Social Sector Organisations (SSOs).  It is only in groups (c) and (d) where equity capital is at all present.

Secondly, even if CICs with share capital and SSOs have the ability to take on board equity investments, most of these organisations can generate only dividends for the equity holder. We are operating in an exciting and nascent market so we have limited precedent transactions to go by, but I would wager (fill in your choice of bubbly!)  that that there are less than a dozen cases in the past decade where equity in a CIC or a SSO has been sold and a capital gain has been recorded for the vendor of the equity.  There is a variety of perfectly reasonable explanations for this lack of precedents. Firstly, if the social enterprise is a CIC with share capital, equity can be sold from one equity holder to another third party owner – at whatever price is negotiated between the vendor and the buyer.  However, the ultimate exit out of the equity position would only be through a sale at par to the CIC itself.  CICs by definition are supposed to keep value creation with the company and not allow shareholders to benefit from it. A rationale buyer would therefore be prepared to only pay for the expected dividend stream and not for the ability to sell the equity at a premium.   Otherwise, ultimately, the Last Mohican would be left with a capital loss.

Some practitioners in the social investment market pay less attention to the legal form and more to the substance of the business.  As such, one could envisage a For-Profit Social Sector Organisation (SSOs) with articulated social objects.  In this case, again, capital gains could be achieved on a theoretical level; however, practical circumstances will prohibit the realisation of gains.  Why would social entrepreneurs, profoundly wedded to their social causes, risk a proportion of their equity to be sold off? In my experience, social entrepreneurs are incredibly protective of their social mission and will heavily scrutinize (rightly so) the motivations of an external provider of equity investment.  Equally, on the other side, where are the purchasers of equity?  There are no three-letter-acronym exits in the social investment market: no IPOs (Initial Public Offerings), no MBOs (Management Buy-outs) or LBOs (Leverage Buy-outs). Depending on the industry, there also appears to be a very limited number of trade buyers – buyers whose social objects are the same as the SSO’s.  Given this dearth of purchasers, how could capital gains be realised?

Given the absence of capital gains in the vast majority of cases in the social investment market, the difference between debt and equity blurs. An equity investment generates only a dividend stream to the equity holder: this dividend stream is then akin to an interest payment variable with performance of the underlying business (e.g. a type of Social Loan).  As such, the return differential between equity and debt should also shrink – possibly even disappear. In fact, as already pointed out earlier, in IPS ben comms, charities and CICs without share capital, junior debt already plays the role of risky equity.

To me, applying Corporate Finance theory to the social investment market is a must: we are analysing investments where there is an articulated intention, subject to the normal vagaries of running a venture, to repay capital and create a return for the investor. However, some aspects of our market are so fundamentally different that new thinking is needed.  As cherished as it is by conventional Corporate Finance theory, in our nascent market it is time to desert the return differential between debt and equity in favour of a more appropriate, situation-specific theory of required return.

By Annika Tverin, Director at Social Finance

A STEP IN THE RIGHT DIRECTION BUT NOT ENOUGH

Slowly we are getting to know more about the plans for probation and prisoner rehabilitation reform. We can see that some effort is being made to make the model work better following the consultation but is it enough to allow for a level playfield for all providers to take part? Will it achieve the ultimate goal reducing crime?

The key positive changes are as follows:

• The whole idea that rehabilitation of prisoners and short sentence prisoners in particular has moved to centre stage and has become a key government policy is terrific and long overdue. Many should feel embarrassed that this has taken so long.
• The idea of resettlement prisons, which will have a requirement to work with those providing rehabilitation services, and to which prisoners will be transferred at least three months before release. This resolves a key issue that effective rehabilitation needs to start in prison, rather than after.
• The acceptance that a mix of binary and frequency measurement is required to make this system work. This may sound an esoteric point but is vital. A binary measure only pays in the event that a prisoner stops committing crime for twelve months. A frequency measure pays for reductions in offending across a cohort. Some people go through the prison system 10 or more times a year. If you have only a binary measure as was originally suggested the only correct financial decision when faced with such an individual (and required to give them a service) would be to give them a leaflet and tell them to go away. Further investment would invariably be loss-making as intense effort over a period of time and money is needed both to gain trust and thereafter help to move their lives in the right direction. Being paid on frequency and therefore acknowledging “distance travelled” will make it worthwhile financially.
• The shift in number of contract areas from 16 to 21, and the different area sizes, are positive changes. This should mean that social organisations acting as primes, or a probation trust mutual, can bid.
• But the positive impact of other elements in the response is less clear. The idea of standard contracts is interesting, but will they have to be finalised before the last round of bidding? In other words is there wriggle room?
• The transparency piece sounds like a step in the right direction, but only a step. Input cost data and outcome payments should be transparently available across the market. In the public sector we see how much is spent on what and hopefully also get an idea (not always!) of the outcomes generated from that money. In the circumstances where you are building a new market, this data is even more important, not less. There will be enough benefit to incumbency without letting providers keep hold of this data. This will also make it clearer if a provider is not finding it economic to work with a particular cohort and is parking them.
• The comments about women in prison were good to see, but they didn’t seem to imply that anything would be done to make the model work for women.

And there are areas where we simply don’t know anything:

• What are the potential pricing expectations?
• Will there be significant segmentation of the cohort and the pricing that goes with it?
• Will men and women be priced the same? Needs and complexity are very different.
• Is there room for alterations of pricing for specific groups as we learn over time? It seems deeply unlikely that it will be right first time.

So, at the end of this, what are concerns?

1. This is an incredibly complex, risky and ambitious programme of change. Tom Gash at the Institute for Government has written on this issue in his blog, with sensible recommendations for reducing the risk.
2. Bidding process and pace will favour incumbents

I was told by a private sector provider considering bidding for prisons that they had understood they should expect to bid in one round to learn how to possibly win in a later round. In other words, spend £1 million plus on a learning process before you stand a chance. Social organisations or probation trust mutuals don’t have that luxury. Those who know what the MoJ expects in large contracts will score better than those who are learning on the process. So the answer that it’s a level playing field simply doesn’t wash.

If charities are going to invest upwards of £250,000 of charitable funds and a considerable proportion of senior management time on a bidding process, they need more substance from the MoJ that they stand a realistic chance.

In addition, while there are some limited resources available to help test the mutual option, developing such a strategy and capacity takes time. So would developing a social prime and investment for it. The focus on the timetable above all else is in danger of defining the answer.

It should be a strategic imperative for the MoJ to end up with a mixed economy of private and social provision (and not just in the supply chain, at the prime level). There will be more learning, more constructive competitive tension, and probably greater investment in rehabilitation. European law should allow the MoJ to actively manage the market and they should do so, explicitly.

3. There is still room for gaming in the bidding

Gaming bidding is where an entity bids on the basis of having little intention of doing much rehabilitation, and makes money from input revenues without generating very many outcomes. Some seems to have occurred in the work programme, particularly around harder to reach groups. There are a number of ways that the MoJ can avoid this, examples include:

• Requiring a certain level of investment in rehabilitation and monitoring it.
• Scoring bidders on how much they say they will invest in rehabilitation and monitoring it.
• Requiring transparency on input and outcome data and stating that bidders authenticity to what they said they would do will be assessed and those below a certain threshold won’t be allowed to bid again.
• Without such measures, a sense that a low cost, gaming bid is likely to do better than a higher cost, rehabilitative bid will prevail

4. I’m not convinced the numbers add up

I can’t see into probation numbers, so I don’t know if it works to take out 20% of cost and provide an effective rehabilitation service for a wider community on top. But my instinct is that real rehabilitation will require real money. This money  is presently tied up in prisons. There should be a sense that these contracts can, if very successful, eat into the prison budget. What is fundamentally up for grabs here is what is the right allocation of resources between processing and punishing people, and trying to stop them doing it again. I wrote about this more substantially on another occasion. Read it here. My view is that the allocation that gets the number of future victims of crime to be as low as possible. In other words this is not about being nice to prisoners, or not nice to prisoners. It is about stopping crime and helping avoid further victims.

In conclusion, the MoJ is making some effort to allow this to work for a wider community than simply their incumbent private sector providers but not enough. The perceived need for speed and the inaccurate perception that they are building a level playing field are likely to undermine social sector interest in bidding at the top tier. The rehabilitation revolution should be about creating social value, reducing crime and reducing the costs of justice overall, and not simply about providing a lower cost privatised probation service. It would be a shame if at the end of the process this was how it was perceived.

By Toby Eccles, Development Director at Social Finance

Treasuring the Immeasurable

Yesterday I came across an article that really struck a chord. I’ve been at Social Finance just over two years and am proud of the work we do, and have nothing but respect for my colleagues’ dedication. We’ve been doing some fascinating work with data analysis and learning how to use the data we collect to improve social outcomes for vulnerable members of society. We focus on defined target groups, clear outcomes metrics, and evidence based interventions which are relatively low cost compared to potential public sector savings. It occupies my 9-5 but at the end of the day I know that what we do is adding just a fraction of value to society. I could tell you what fraction because the structures we devise require precise measurement. But, pardon the pun; we should never discount the immense contribution from charities whose impact cannot clearly be defined.

It was something David Robinson wrote in Charity Times that led me thinking down this route.

“The development of the hospice movement over the last 50 years would be high on my list of the third sectors greatest achievements but it hasn’t reduced the benefits bill, got the unemployed into work, or equipped the next generation to be economically active. It is, however, civilising, humane and, for those whose lives have been touched by it, of immeasurable value.”

This sensitive, humbling example made me think back to a phrase from Sir Gus O’Donnell I loved when I first heard. “If you treasure it, measure it.” (I work in communications so a snappy line always goes down well). But slowly I’ve been questioning the word of G.O.D. For civil servants undertaking a spending review it’s important to know how many people your cuts will affect. Using the hospice example however, where on earth do you start? But I’m sorry G.O.D; the work of Macmillan nurses is something I hold desperately dear.

A clear social mission has always been at the heart of every piece of work we’ve undertaken; be it children on the edge of the care system, rough sleepers in London, ex-offenders in Peterborough. We measure because it goes hand in hand with the financial mechanisms funding the work.  Savings may accrue but this is only from commissioning the best possible service for the client in the most efficient way, and has never been the main driver.

Again going back to David Robinson who speaks from experience and more eloquently than I ever could;

“Charity is not first and foremost about saving public money and, though many of us will argue that we do, it is not why we are here”.

If you are bidding for a contract the ability to demonstrate the impact of your service is crucial; this can be your competitive advantage. But it is heavy work that requires a certain type of employee. In Peterborough we call him Data Dan and he works tirelessly on measuring the impact of every single intervention in order to improve the service, and justify the expenditure to investors. This growing focus on impact measurement is important for my industry but for the social sector as a whole it’s not the be all and end all and I can understand why some people will be finding it frustrating.

David Cameron’s Big Society perhaps has been unhelpful branding towards a movement that has been flourishing for years and years. The Neighbourhood Watch teams making streets feel safer, the casserole left on an elderly neighbour’s doorstep – there is no point measuring the cost of these, because the value is something you will never be able to calculate. Call it Big all you like, but this type of grass root charity simply is our Society. I hope it can continue in this way and not have to divert resources into measuring the immeasurable.

It is important to be transparent in evaluating the work we do, and also to recognise that there is value that we have not yet learnt to measure.  So, to conclude with words from David Robinson, “Let us not become the generation of third sector leaders that knew the price of everything but the value of nothing.”

By Sarah Henderson, Communications Analyst at Social Finance

Two new budgets, one new bond – social investment news from around the world!

The UK’s recent budget proposal for tax incentives in social investment was greeted with cautious optimism from the sector. Yesterday it was our US sister organisation’s turn to probe through the latest Obama budget. It also made for exciting reading, with two key points to draw out:

“In 2014, the Administration will broaden its support for Pay for Success, reserving up to $195 million in the areas of job training, education, criminal justice, housing, and disability services.”

This allocation marks a $95m increase from the previous budget.  For the uninitiated, “Pay for Success” is the American terminology for Social Impact Bonds (SIBs), and the first project has recently launched in New York State aimed at reducing reoffending from Rikers Island jail. Many more SIBs are in the pipeline, including a project to reduce homelessness in Massachusetts and support for low-income children with asthma in California.

However the news which has particularly captured our interest is the endorsement of the UK Cabinet Office Social Outcomes Fund:

The President’s Budget is also proposing a new $300 million incentive fund at the Department of the Treasury to help State and local governments implement Pay for Success programs with philanthropies.  The fund will provide credit enhancements for philanthropic investments and outcome payments for money-saving services.  This approach borrows from the Outcomes Finance Fund, a similar fund established in the United Kingdom. 

The £20m Social Outcomes Fund was announced in November to facilitate the launch of further SIBs. It does this by providing a “top-up” contribution when no one commissioner can fund the outcomes payment because savings accrue across multiple departments.

Continuing on the international theme, Australia’s first “Social Benefit Bond” was recently announced by the New South Wales Government. This project will raise investment to support children in or on the edge of care system, with the aim to return them safely to their families.

It is great to see that several landmarks have already been set in the social investment space in 2013. It is exciting to note that the UK is at the forefront of this market, but also to recognise that we can learn by collaborating with our global partners.  

By Sarah Henderson, Communications Analyst at Social Finance

Chancellor announces social enterprise tax break – our response

Social Finance welcomes the Chancellor’s renewed commitment to the social investment market and the consultation announcement on a new tax break for social enterprises. Evidence shows that tax incentives are key to motivating and unlocking investment. A recent report by the City of London estimated that £480m could flow into the social sector over five years from more than 225,000 households. David Hutchison, CEO of Social Finance, says that tax breaks “would level the playing field to allow social enterprises to offer the same tax advantages as for profit enterprises. Enhanced access to capital will enable them to deliver impact at greater scale and play a larger part in delivering public services”.

Social Finance believes that the simplest route would be to adjust current tax advantaged schemes to allow all regulated social sector organisations (e.g. charities, community benefit Industrial and Provident Societies and Community Interest Companies) with a range of activities and trades to benefit. We look forward to working on this initiative.

For more information please contact alisa.helbitz@socialfinance.org.uk

Mark II: Finally! The potential market size of retail social investment quantified as 225,000 households

The recent report on tax incentives in social investment has provided many interesting insights. Social Finance is clearly interested in this debate, having launched the Social Impact VCT as a way of using an existing tax incentive to raise finance for successful social businesses and to enable UK tax payers to invest for impact through the VCT. We have pulled out the following from the report as of particular importance. Unless italicised, all text has been taken from the report.

Forecasted projections: What is the potential market size if tax incentives are offered on social investments?

• Tax reliefs have been a highly effective policy lever in attracting mainstream venture capital and have raised close to £800m in 2010/11 alone.
• If even a proportion of the estimated likely impact of creating such a relief for social investment materialises – around £500m of social investment over five years – this would provide a solid underpinning for the continued growth of the sector
• This report presents a forecast of the amount of high risk social investment that could be generated from high net worth individuals if such a tax relief was provided. The forecast is for £165m over a three year period and £480m over a five year period.

£480m is arrived at assuming that there are 225,000 households which are likely to be interested in social investment and primarily motivated by a tax incentive. Assuming an overall conversion rate of 21% (based on Ipsos MORI 2011 research), this should result in 48,000 UK tax payers making one social investment over a 5 year period.

Research shows how many enterprises are investible propositions

• The 2012 RBS SE 100 Index, which tracked the activity of 365 social enterprises, found that in 2012 the combined turnover of the 100 fastest growing enterprises (the SE100), was £319.4m – an 85% higher turnover than the 2011 SE100 enterprises (£172.7m).  Furthermore, these SE100 organisations grew on average by 60% – greater than the 48% growth experienced by the 100 fastest growing FTSE companies that year.

Next steps: looking beyond trusts and foundations to the retail market. Clear demand from mass affluent for investment opportunities that have a social impact as well as financial return

• The challenge now is to find new financiers to take over the role of government, foundations and trusts, who have provided around £500m of social investment over the previous eight years. Research from Ipsos MORI  into wealthy investors (those with £50,000+ of investable wealth) has shown [that] there is an unmet appetite amongst different types of wealthy investor[s]. High net worth individuals (HNWIs) – those with greater than £100,000 of investable wealth – were found to hold social and ethical values. They want their money to ‘do good’ as well as to produce a return, to use their wealth to reflect their values, and are likely to be engaged in community activities.

Tax advice

• Tax advice is a key aspect of the services that financial planners and accountants offer. An appropriate tax incentive would therefore become integrated into the decision-making process for wealthy individuals’ tax planning. A tax incentive based on adapting existing regimes would overcome a major barrier for financial planners, as they are familiar with these schemes. The financial planner/advisor will be a key route to market for social investment.

Existing schemes

• The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) are difficult for charities and social enterprises to use. This is due to both being share relief schemes, whilst the majority of social sector organisations [do not have share capital]. Subsequently, would-be social investors wanting to use EIS and VCT to provide some relief on risk-bearing investments have almost no opportunity to do so. In comparison, over £500m and £300m of investments into SMEs were placed via EIS and VCT respectively in 2010/11.

In the Social Impact VCT we can through structuring enable risk capital to be deployed in supporting the activities of a charity which does not have share capital.  However, should the recommendations of the tax relief report be implemented, investments in charities and social enterprises would become more straight-forward, requiring less structuring and the universe of potential investments would be greatly expanded.  As such, VCT funds could most likely be deployed faster and at a lower cost to the investee ventures.

Role financial advisors have to play in growth of market

• Financial advisers have a significant bearing on the success of the social investment sector. If tax incentives drive client demand, this will influence advisors’ level of engagement. The growth of socially-motivated investment is leading the industry to establish technical and advisory procedures which the new regulatory body is committed to taking into consideration. Adapting existing tax regimes such as EIS and VCT, will help ensure that the IFAs become engaged in helping distribute these opportunities to appropriately screened clients.
• Research published by JP Morgan in August 2012 projected that 81% of £50,000+ household income earners will seek professional advice to varying degrees. Financial planners are also under considerable regulatory pressure to ensure that the investments of their clients are appropriate. Investment opportunities are often only provided to sophisticated investors (such as HNWIs) through their IFAs. For this reason, a tax relief for social investment will, by default, be largely taken up by such HNWIs (at least in the beginning). However, research from NESTA and Worthstone suggests that IFAs are most driven by client demand for impact investment products. This puts the onus back on HNWI clients to show sufficient awareness of social investment products for an advisor to discuss such opportunities with them.

Conclusion

The intention of a tax relief would be to see greater social investment from wealthy individuals into distinctive schemes for public benefit. The relief would need to provide sufficient incentive, but not be so complex or different that financial advisors and investors do not engage.

Next steps:  This is the first time that research has unveiled the potential size of the market (225,000 households). We hope that this and the conclusions of this report are acknowledged by the relevant authorities and that they consider how tax incentives could be used to scale up investments in UK companies which make a distinct positive contribution to improving society.

By Sarah Henderson and Annika Tverin, Social Finance 

Finally! A call for level playing field for Social Entrepreneurs

Social Finance welcomes the report “The Role of Tax Incentives in Encouraging Social Investment” published today by Worthstone with the assistance of Wragge & Co for the benefit of the City of London and Big Society Capital.  

One of the main recommendations of the report relates to an expansion of existing tax reliefs (e.g. Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT)) to apply to registered social sector organisations such as charities, Industrial and Provident Societies and community interest companies.  Such expansion would involve accepting debt and quasi-equity instruments as qualifying investments for EIS/VCT purposes.

Expansion of tax reliefs would be a welcome measure as it would create a level playing field between social and commercial entrepreneurs.  At the moment, commercial entrepreneurs with attractive investment propositions can offer individuals investing in their businesses a 30% tax income relief up-front – either by way of a direct EIS investment or by way of a diversified pool of money (VCT).  In addition, and depending on the tax incentive, the individual investor will receive other benefits such as tax free dividends and loss relief.

The Worthstone report highlights the importance of making these types of tax reliefs also available to social ventures that have a dual purpose: ventures that create both a financial and social return.  After all – what is more natural than, if private individuals invest for the benefit of society and thereby create a social good, they also receive a tax relief as a quid pro quo? Additionally, the tax reliefs afforded to the investors are augmenting the financial return of the underlying investment, and providing an additional “financial” fillip to making the social investment.  In 2010-11 tax year, tax reliefs were a highly effective policy lever for the Treasury as these helped mainstream venture capital raise close to £800 million.  A similar incentive would be very helpful for social sector organisations going forward.

The EIS and VCT regimes were originally created to enable economic impact by creating another pool of risk capital available to SMEs.  By expanding the EIS and VCT regimes to social sector organisations, these tax incentives will create both economic and social impact.

Social Finance, together with the FSE Group, launched Social Impact VCT in November 2012, a new type of VCT aiming to create, on the one, a pool of capital available to social enterprises and socially-motivated companies, and on the other, an investment vehicle available to individual investors.  The minimum subscription amount for the Social Impact VCT is only £2,000 – considerably less than the five- or six-figure numbers required for an investment in other social impact funds. Social Impact VCT is part of the democratisation of impact investment: individuals whose financial needs have been taken care of (but who are not plutocrats!) can invest for impact through a portfolio and a tried and tested tax wrapper.

In the Social Impact VCT we can through structuring enable risk capital to be deployed in supporting the activities of a charity which does not have share capital.  However, should the recommendations of the Worthstone report be implemented, investments in social ventures would become more straight-forward, requiring less structuring and the universe of potential investments would be greatly expanded.  As such, VCT funds could most likely be deployed faster and at a lower cost to the investee ventures.  

If society expects more from social ventures and social entrepreneurs in addressing the ills of society, then surely access to capital to scale up and expand should be done on a level playing field with commercial ventures.  It should be a priority to enable social enterprises that receive investment from social investors to play a larger part in supplying services under government contracts.  A low cost of risk-adjusted capital for social enterprises should enable them to deliver cost effective services to government and that this saving to government will over time more than compensate for the cost of extending tax reliefs to individual social investors.

By Annika Tverin, Director at Social Finance

From Tanzania to Tower Hamlets…social investment opportunities get global

Social Finance and Ingenious Media recently co-hosted a fascinating seminar on impacting investment, whilst showcasing two very different offers that highlighted the growing range of products for prospective social investors.

After a welcome from Ingenious Director Sebastian Speight, the Social Impact VCT was introduced by Kate Liebson of Social Finance and presented by Jeff Dober of FSE Group, who are acting as fund managers. The VCT is a £6m fund looking to invest across four pillars of social impact; building futures, community cohesion, socially-motivated brands, and health and education. Social Finance are responsible for deal origination and impact measurement, and are looking for established social enterprises whose revenue streams are expected to be underpinned wholly or partially by delivery contracts. A worked example was of Bromley Healthcare, an NHS “spin-out” providing community health services. For more about Bromley Healthcare watch this interview with the CEO Jonathan Lewis.

We also heard from Phil Conway, founder and CEO of Cool2Care, a company providing carers for children with disabilities. What Phil brought to the session was the real life experience of growing up with a disabled child, and his passion for running a business putting the needs of the user as a priority. It is this personal motivation combined with his previous financial experience that makes a company like Cool2Care an exciting investment proposition.

Then we heard from Ingenious about a very different offering, their African Solar Fund. This is an opportunity for social investment to transform the cost of energy supply in some of the most deprived households in Africa. The social issue at hand here is the high cost of kerosene as an energy supply, meaning that after sunset children are unable to study, small businesses are unable to operate, as well as other issues such as fire risks and the negative health effects associated with kerosene usage.

There is a strong body of evidence for using solar energy as an alternative to kerosene, but the high upfront costs of the units often prove prohibitive. The African Solar Fund will invest in companies providing off-grid solar technology, and revenue will be generated from the sale of scratch cards at local vendors. These cards allow the user to activate the solar panels and provide lighting for a set period of time.

Both projects present great opportunities to become lead investors in this new, growing and exciting market. The amount of people in the room was testament to how much interest there is in the retail investor community for such products. All of us at Social Finance appreciated the opportunity to share a stage with Ingenious Media, and found the session a great example of how mainstream investors are exploring how finance can provide solutions to entrenched social issues, and deliver a blend of financial and social returns.

By Sarah Henderson, Communications Analyst at Social Finance

Response to the MOJ’s Transforming Rehabilitation Consultation

Social Finance has responded to the Ministry of Justice transforming rehabilitation consultation. You can read our full response here but the following is a brief summary.

We welcome MOJ’s commitment to transforming rehabilitation and offender management services to deliver better rehabilitation outcomes.

We believe that the VCS sector has a vital role to play in the delivery of effective rehabilitation programmes at local level. The value that the VCS sector brings is based on local knowledge and expertise, mission–driven staff, ability to motivate a network of volunteers and mentors to deliver a cost-effective programme and contribute to a diverse market.

We believe the value-for-money (vfm) arguments for the commissioner should go beyond achieving reductions in short-term spend to encouraging preventative spend in reducing reoffending that will provide material future benefits and savings to the tax payer. If incentivised and motivated under fair terms, the VCS sector brings mission-driven organisations and volunteers on a cost-effective basis.

We are concerned that the procurement process could favour bidders who will deliver short term savings to the cost of probation services but will not commit significant investment or support innovation in working to reduce the rate of reoffending.

Principal recommendations: We believe that the best overall balance would be achieved with a procurement process that has the following elements:

• A scoring system for contract awards that recognises quality of delivery and longer term benefits as well as short term financial savings.
• A requirement that prime contractors(a) specify the operating model and range of services and(b)  allocate a minimum committed annual ring-fenced external spend (£M) on rehabilitation services supplied by third parties linked to outcomes revenues and (c)a scoring system that rewards more spend.
• A requirement that prime contractors agree the terms of their principal sub-contracts prior to definitive offer stage (BAFO) to protect against onerous VCS contracts being imposed post contract award.

We believe effective engagement is about providing the right balance between mandatory engagement and programmes that encourage participation   Discussions with offenders and ex-offenders at our Peterborough Social Impact Bond pilot disclose a strong sense that a mandatory programme post release for short sentence prisoners could result in less effective engagement.   Volunteers and mentors may be less attracted to mandatory programmes than a voluntary programme where the offender is choosing to engage.

We would urge that the scoring system used to rank and select bidders should include both quality as well as cost/financial assessments. There is a big difference between a streamlined “sign-posting” case management programme   and a more intensive programme that commits to put substantial resources into rehabilitation with low case management ratios and a lot of specialist support.

Whilst predictable fee-for-services functions can be refined and continuously improved to reduce costs, it is not currently the case that compelling evidence exists on how best to reduce reoffending and encourage reintegration. Innovation and substantial resources are needed to make an impact. The quality of programmes offered and their potential to provide future benefit, should be a factor in determination of contract award.

Will there ever be a common social reporting standard?

Before the SIAA conference in Berlin back in November 2012 I would have shrugged, shaken my head and answered that I just couldn’t see it happening. How can impact be judged? And why would you want to do so?

My initial scepticism reflects the 19^th century’s reaction to the proposal of common accounting standards and yet those learned men who spoke so eloquently against the idea of comparing a ship building company against a textiles manufacturer sound amusingly off the mark.

Following the keynote address from Kate Ruff (Charity Intelligence Canada) I am convinced that a common social reporting standard may be possible and I may even have a part to play in making that happen.

As an Analyst at Social Finance I’ve interviewed recovering drug addicts at a methadone clinic, helped pitch social investment opportunities to banks and worked with charities to think through how they might use social investment to scale their impact. Doing these varied activities has required a combination of financial analysis, social research and an attempt to understand the nature of the underlying social problem. (Note: I don’t pretend to have all of these skills and I’m thankful to an understanding and talented team of colleagues).

Over time I have started to appreciate the demands of investors who want to maximise the impact of their investment and the constraints placed on charities who want to scale their impact and demonstrate their effectiveness. There can be a tension between helping as many people as possible and the requirement to measure effectively. Some charities, rightly, prioritise getting the job done over making sure everyone knows about it. Of course attracting donors and investors requires standing behind a good record but there is a balance to be struck. I think the debate about a report standard needs to be set in this context – one in which we recognise the costs of imposing burdensome reporting requirements as we don’t want to snuff out good work.

Kate’s talk identified slightly more practical barriers to a common reporting standard and how they can be overcome with the help of social impact analysts:

• Achieving both flexibility and comparability. A common standard needs to allow for comparisons but cannot be overly restrictive to adopt.
• Uncertainty about which disclosures matter – about what needs to be reported and what doesn’t. Analysts can help identify what those with the money want to see evidenced and draw together these strands whilst understanding the nature of the problem and those metrics that represent genuine improvement.
• Avoiding isolated, private information reports. Social impact analysts can collaborate and share reports so that a data-rich environment is created in which the most useful ways of presenting information gain primacy.

The idea that a standard can balance flexibility and comparability shows that the doubters might need to think again. I am sure that promoting adoption of – and maintaining adherence to – an emerging shared understanding of impact reporting is a job for which social impact analysts are well placed.

You can watch Kate Ruff’s key note presentation from the 2012 conference here.

By Harry Hoare, Analyst at Social Finance

This post originally appeared here.