The recent Cabinet Office Social Impact Bond announcement has highlighted a significant ask that Government is making of foundations around Payment by Results[i]. The DWP Innovation Fund, sub-contractors to the Work Programme, the Ministry of Justice Innovation pilots, the Cabinet Office Social Impact Bonds on chaotic families will all need investment. Added up, they are potentially demanding significant capital. Should foundations get involved, or should they, as they have often done, focus on their own priorities, and potentially on areas where government does not provide support?
The case for engaging looks something like this. For as long as most people can remember, foundations have funded social projects in the hope that they would demonstrate their value so fully that government would take-over funding them, or at least mainstream their ideas. Save the Children, for example, are rightly proud of their success in getting the Government to take on the idea of providing free school meals to poorer children, in 1944.
The problem is that this doesn’t happen very often. With officials suspicious of the evidence base or concerned about the risk of poor implementation, most such projects remain funded on an ad-hoc basis, or never. This leaves foundations in an awkward position, potentially supporting organisations for much longer than they had intended. This can mean that they stop funding in an area or leads to a shift in focus from funding service provision to advocacy work.
The SIB was designed to provide an alternative route to scaling social innovation. While SIBs and PBR are distinct, they are aimed at the same problem[ii]. With social outcomes and payments for them agreed with Government upfront, foundations know what they are getting into, and how they can get out. They get a return on their money and the evidence base for long term change is built in through the outcome measure. This struck us as a real improvement over the previous route, and potentially a way of developing better co-operation between two key funders of the sector who have sometimes found it hard to dance without stepping on each other’s toes.
So, if the opportunities outlined above are similar, what is making foundations wary? One issue is that foundations find themselves supporting a government proposition, rather than supporting a proposition being put to government. But should that really matter? My first reaction is “no”, who puts forward a proposition shouldn’t impact on whether it gets funded. The only concern might be whether these opportunities are on the same basis. In
other words, are these PBR pilots a plea for help from a Government in need of new solutions to complex problems, or are they about funding projects that were previously funded by government, only now foundations are being asked to pick up the tab? The answer is that there is some of each. So, should foundations simply fund the innovation focused work and ignore the other programmes, such as the DWP Work Programme, that are about changing the contracting of present services but with a greater working capital strain on the providers? Again, I don’t think it is quite that simple. By focusing on longer term outcomes, the Government is encouraging better work and better outcomes for jobseekers. From those that we talk to who actually implement these projects, they are pleased at this change of focus. It incentivizes a better service and rewards them for
things they wanted to do under previous contracts, but couldn’t afford to, such as supporting people to stay in work, not just to get a job.
The problem is that, in the rush, many service providers simply don’t have the working capital or access to outcome finance to participate. Thus there is a great deal of understandable handwringing about the programme. The handwringing is being done primarily by the charities and social enterprises that would like to participate but don’t have the financial strength to do so. The situation is unlikely to change as the private sector seems able to sustain the contracts and the DWP has therefore achieved its high level objective.
Should foundations support social enterprises and charities to participate in this market, particularly to serve more specific or harder to reach groups? My sense would be yes. If we don’t act now then we are in danger of losing significant areas of charitable activity to the private sector, or worse ceasing to happen at all. I don’t have an issue with the private sector per se, but this feels like a market where a mixed economy between private and
charitable providers would have more chance of producing the best outcomes for
people out of work.
So does this mean that foundations should invest in any charity doing PBR? Clearly not. So, here is my first attempt at some criteria, in no particular order:
a) Do you believe in the intervention model and service providers who plan to deliver it?
b) Is the outcome based contract well structured, avoids perverse incentives and have real potential for creating social value?
c) Are the outcome payments high enough to make the investment case stack up?
My thought here is that assessing opportunities on these criteria would not only fund organisations to improve society, and potentially generate a financial return, it would also help shape and improve the PBR pilots as they emerge.
This is emerging thinking for us. We would welcome thoughts and feedback from others, in particular foundation staff and trustees wrestling with these concerns and those outside the UK where the issues may be different.
To recap, PBR contracts only pay providers part or all of their revenue on the basis of the results that they generate only once those results come about. This means that there can be significant periods of time where organisations are working without being paid. While the private sector has access to capital markets to cover this working capital requirement, social organisations generally do not, thus the request to foundations to help through loans, social impact bonds or other forms of outcome finance.
We’ll be doing a separate blog on the difference between PBR and SIBs.
By Toby Eccles, Development Director at Social Finance