Social Investment Tax Relief – a missed opportunity for housing

For many 17 July passed just like any day.  It however marked a missed opportunity to make a significant contribution to helping open a new avenue for the funding of much needed social and affordable housing.

For those who missed it, the latest Finance Bill became law on 17th July.  Included were provisions for the introduction of Social Investment Tax Relief, a scheme which offers generous tax breaks for individuals looking to lend or invest money in organisations delivering positive social impact.  Modelled on the existing Enterprise Investment Scheme tax incentive, SITR has the potential to make a significant impact in supporting the growth of the social investment market, helping increase the supply of money to organisations that often struggle to attract investors.

As with any tax relief, carefully defined scheme rules determine what can or cannot be invested in. Despite calls from Social Finance and others, one activity which is excluded is the provision of finance for affordable or social housing. While there are good arguments to exclude property from mainstream tax reliefs such as the EIS scheme, the arguments for its exclusion under SITR remain less convincing.

By its very nature, affordable or social housing is a sub-market activity. Against an alternative of developing market rental or for sale units, there is a need for some form of subsidy to make the figures stack up.  Historically this has come in the form of grant, explicit planning restrictions depressing land values, and to a lesser extent by the implicit government guarantee larger housing associations have enjoyed when accessing debt markets.  However with these all under pressure, it is no surprise that many housing associations are rethinking the scale of their development ambitions.  A SITR which covered social housing, if properly constructed, had the potential to offer organisations funding at effective costs far below available currently, and in particular help them identify new sources of equity funding.  This in turn would have allowed more schemes to stack up financially, helping support the development of new much needed housing.

Don’t get me wrong, SITR would not have been the panacea for the shortage of good quality homes that this country needs, but if appropriately structured it could have helped.  As such I can’t help feeling that SITR as it stands feels like a missed opportunity for housing.

By Tim Rothery, Associate Director at Social Finance 

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Building a Business Case for Prevention

The duty to help those in greatest need today rightly trumps tomorrow’s problems. But this means that high spending on today’s problems leaves little money to spend on tomorrow’s problems. So how we find the resources to prevent tomorrow’s problems from occurring? How do we convince those who control the public purse, to invest in prevention?

Today we are publishing a technical guide “Building a business case for prevention”. This is part of a package of support we are delivering on behalf of the Big Lottery Fund, to help commissioners develop Social Impact Bonds and apply to the Outcomes Funds.  The aim of this guide is to clarify what is needed to make a decision to invest in prevention, and sets out the key questions that should be answered to develop a robust business case for prevention.

To use Community Links founder, and Social Finance Board Member David Robinson’s persuasive phrasing, a fence at the top of the cliff is preferable to an ambulance at the bottom. For example, we are currently exploring how promoting community connections and reducing social isolation amongst older people could be a critical element in preventing ill-health and meeting other needs. Social isolation not only reduces older people’s immediate quality of life, but it is linked to poor physical and mental health over the following years.

This type of analysis is at the heart of our work; how can we invest in prevention in social areas where current interventions are undermined by finance and delivery? The Social Impact Bond is designed to tackle a number of issues identified as hindering social progress. Firstly, governments across the board find it difficult to take on innovation, particularly prevention and early intervention. This is in part due to risk aversion but also because of the fear of paying twice, once for the interventions and then again for the acute services if the interventions fail.  Secondly, voluntary organisations are dependent on prescriptive contracts that focus on activity rather than successful outcomes. This limits innovation and flexibility in the delivery of support services. And lastly, because of funding issues, organisations rarely work together to deliver a set of interventions tailored to individual need.

The technical guide published today draws on the excellent work of the Early Action Taskforce (EAF) in championing (and gaining) national recognition for prevention. For those working in areas with a consistent lack of investment in prevention, a SIB may allow for innovation to be tested, with the risk transferred from the commissioner. There is £60 million in outcomes funding available in Outcomes Funds administered by the Big Lottery Fund and Cabinet Office, as well as up to £3 million in development grants to refine a SIB proposal. More information about the support available can be found here.

We hope this guide will empower public service commissioners to explore how investment in prevention could reduce the burden on acute services, and ultimately deliver a more effective range of services for those in  need.

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£30 million for new Social Impact Bonds Announced

Toby Eccles, founder and development director at Social Finance, comments on today’s announcement that the government will launch £30m of new Social Impact Bonds to help young homeless people into accommodation and support vulnerable 14-17 year olds:

“The Government’s announcement of £30 million of new Social Impact Bonds (SIBs) today is a significant step to transform the funding and effectiveness of services to vulnerable young people in the UK. SIBs bring financial innovation to the social sector to deliver better social programmes. SIBs help voluntary and charitable organisations to deliver flexible, well resourced and responsive interventions.

“We believe creating positive social change on a large scale needs a new approach to funding and delivery of services. It requires a commitment to securing better outcomes to individuals and communities. Social Finance developed the Social Impact Bond to bring new investment to social change. The financial structure of the Social Impact Bond and the focus on results enables interventions to be individually tailored and flexible in a way that has never been done before. The launch of these new SIBs is a sign of the government’s commitment to embed this new way of working into the UK’s social landscape.

“Social Finance continues to work closely with the public sector, social organisations and investors to consider the application of Social Impact Bonds across a range of social issues.”

 

 

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Peterborough SIB – a success or a failure?

Musings on Finance and Social Change

If you are a Social Impact Bond (SIB) aficionado, you will already know by now that the Peterborough SIB will no longer be a SIB for its third and final cohort. It will most likely be turned into a fee for service model due to the arrival of Transforming Rehabilitation (TR).

For more information on this change, have a look at: https://socialfinanceuk.wordpress.com/2014/04/24/social-finance-statement-peterborough-social-impact-bond/. In that Blog you can also find links to the RAND report on the inner workings of the Peterborough SIB to date, and the latest reoffending data from the project, which shows a decline of 11% vs an increase nationally of 10%.

Should this be a moment of great hand wringing? The death of SIBs? The proof they’re not needed? Certainly a few tweets today might suggest so. I beg to differ.

To understand this a little better, it is worth going back to why we developed…

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Social Finance Statement – Peterborough Social Impact Bond

As announced today, the Ministry of Justice has proposed an alternative funding arrangement for Peterborough Social Impact Bond (SIB) in light of the expected introduction of a new approach to UK probation and rehabilitation services at the end of 2014.

The proposal will enable the Peterborough intervention (the “One Service”) to continue but will change the way the service is funded and remove the outcomes payments for the third and last cohort of prisoners to be released from June 2014. Details of the alternative funding arrangement are still being discussed but the Ministry of Justice is keen to ensure that the same level of rehabilitation support continues to be provided to this group through until the new regime is established and a new provider is in a position to establish supply chain arrangements for rehabilitation.

The support to prisoners in the second cohort will continue to be funded by social investors as anticipated until June 2015 and the investors will qualify for outcomes payments on the same basis as the first cohort.

We are very proud of what we have achieved so far. The social value of the Peterborough Social Impact Bond lies in its flexibility to offer a well-resourced and responsive service to prisoners in custody, through the gates and in the community. Offenders have found that the offer of support that is voluntary, pro-active, non-judgemental and flexible to be invaluable. The figures released today suggest that there is a continued drop in reoffending by the first cohort of prisoners that we were charged with working with. Our focus, together with our delivery partners, is to ensure that the One Service under the new arrangement will continue to be delivered in the same manner to support prisoners on release and we will endeavour to share our learnings from the programme widely.
ENDS

For more information, please contact Alisa Helbitz on 020 7667 6388 or 07500 433 044 or alisa.helbitz@socialfinance.org.uk

Notes for Editors:
1) The Peterborough SIB was set up in 2010 and is an outcomes based model. Social investors provided £5m to fund interventions to reduce reoffending among three cohorts of 1000 short-sentenced male prisoners leaving Peterborough prison. Investors will receive a return if we reduce reoffending by 10% per cohort compared to a national control group. The service was due to last until 2017. The Big Lottery Fund and the Ministry of Justice are providing the outcomes payments.

2) The Peterborough Social Impact Bond will continue in its current form until June 2015 when the delivery of support for the second cohort is due to end. Results and related outcomes payments are expected in the summer of 2014 (first cohort) and in 2016 (second cohort).

3) The Peterborough interventions are managed by Social Finance and are collectively known as the One Service. It offers tailored support to prisoners for one year after release through the St Giles Trust, Ormiston Families, Sova, MIND, YMCA and John Laing Training. We are also an integral part of the Safer Peterborough Partnership and work closely with the Police, Probation, Integrated Offender Management Teams, the Prison, the local authority, local statutory providers and the voluntary sector.

4) The Peterborough Social Impact Bond was the first financial investment that aligned successful social outcomes with financial returns. Following its launch in 2010, there are now 14 Social Impact Bonds in the UK, 5 in the US, 2 in Australia, 1 in the Netherlands, 1 in Belgium and more than 100 proposals world-wide. Over $100m has been raised in social investment to fund Social Impact Bonds.

5) Interim figures for the Peterborough cohort were released today by the Ministry of Justice. For more details, please link to: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/305776/annex-a-payment-by-results-apr14.pdf

6) An independent evaluation by RAND Europe was published today. For the report, please link to: http://www.gov.uk/government/publications/phase-2-report-from-the-payment-by-results-social-impact-bond-pilot-at-hmp-peterborough

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Of Ants and Aphids: How can our market make the most of Social Investment Tax Relief?

We are delighted to see that the government has created a level playing field between commercial and social enterprises by setting a rate of 30% income tax relief for the Social Investment Tax Relief (SITR). This is the same level as the rate for the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).

How can the social investment market utilise this relief?

By working with established commercial players! The social investment and finance intermediaries (SIFIs) are comparatively strong at origination of SITR investment opportunities.  We are comparatively less strong in distribution, however.

The commercial market participants already highly active in EIS, Seed EIS and VCTs are not particularly familiar with SITR.  They tend to call it Social EIS (a better name actually!).

We need to find partners in the commercial world to enable effective utilisation of the SITR.  We have three important constituencies to engage with:

  1. Seed EIS firms: Given that currently the amount on which SITR is available for an eligible investee (c. £290,000) is on the same level as for Seed EIS (£150,000), investment firms in the Seed EIS space have a wealth of experience of how to sell and manage small investments with a tax wrapper.  Notable companies in the Seed EIS space are Jenson Funding Partners, Mercia Fund Management, and Oxford Technology, to name only a few.  We need to team up to combine origination with distribution.
  2. EIS firms: Whilst Seed EIS is only a couple of years old, EIS has been running for almost 20 years by now, and the market is estimated to be just short of £1 billion in size.  Highly regarded players in this space would include big firms like Octopus Investments, but also smaller managers like MMC Ventures and Ingenious Media. With the amount eligible for relief increasing through the EU application and approval process, these houses will take note of SITR. We need to team up to combine origination with distribution.
  3. Crowdfunding:  Equity crowd funding sites are the newest category of intermediaries making use of the Seed EIS and EIS tax wrappers.  At the moment there are three authorised platforms with an emerging track record of aggregating funds over the net for enterprises: Crowdcube, Seedrs and SyndicateRoom.  Given that SITR will be applicable to unsecured debt products as well, peer-to-business loan platforms should also take note of SITR.  The tax relief should enable loan platforms to provide an important stimulus (30% upfront discount!) on loans to eligible social enterprises.  Leading names in the loan crowdfunding space are:  FundingKnight, Assetz Capital and reinvestingsociety.com.

In nature, there are many examples of symbiotic relationships, i.e. situations where different species live in mutually beneficial relationships with each other.  For instance, ants milk aphids for honeydew and in return ants protect and enhance aphids’ living environment.

We SIFIs, the ants of the investment world, need to milk the aphids (i.e. EIS, Seed EIS and crowd funding types) for their distribution capacity.  In return, we ants can enhance the aphids’ world by providing more origination deal flow.   Long live mutually beneficial relationships!

By Annika Tverin, Director (and insect enthusiast) at Social Finance

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Our Response to Social Investment Tax Relief Announcement in Budget 2014

As of 6 April 2014, individual investors in small social enterprises can benefit from the new Social Investment Tax Relief (SITR) set at a rate of 30% income tax relief.  This is the same level as the rate for the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).  The first box has been ticked.

Unlike EIS, however, this new tax relief applies to debt instruments (in addition to equity) as the majority of social sector organisations (SSOs) do not have equity capital.  Additionally, the government has recognised that social enterprises tend to have more employees than commercial SMEs and has doubled the size ceiling on number of staff for eligible investee organisations.  The gross assets test remains the same for social and commercial enterprises.

Whilst eligible investee organisations will from April 2014 onward be able to receive tax advantaged investment up to approx. £290,000 (€344,827) over three years, we look forward to the results of the application to the EU for a larger scheme.  We hope that this larger scheme will also reflect the EIS and VCT rules and enable eligible investees to raise up to £5 million over any rolling 12 months. This is the second box to be ticked to create a level playing field.

Lastly—our third tick—relates to indirect investments.  As it is (for the most part) currently used, EIS is a tax wrapper for high net worth individuals.  Individuals with medium levels of liquid wealth may find single EIS-style investments too risky.  An indirect investment opportunity may prove attractive to the broader investing public as diversification reduces risk.  The Treasury is in the process of working out what this indirect investment vehicle might look like.  This is the last and final tick to create a workable ecosystem of tax benefits to expand the growing impact investor universe and create new pools of funding for social enterprises.

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EATING ONE’S CAKE

I have been of the opinion for quite some time that it is possible to achieve substantial social and/or environmental impact alongside market rates of return.  To have one’s fairtrade cake and eat it, so to speak.  Not in all situations for sure, but certainly in some areas.  And why not?  As a society we are quite happy for companies – and indeed ourselves (take a look at your pension) – to make profit from things that kill people, tie them to a life of addiction or simply exploit them.  But make a profit from doing something good and helpful?  Tut tut…  Well, we’ve just done our first truly, 100% gen-u-ine, bone fide market rate transaction to add to the growing weight of evidence that will hopefully lay the impact-return argument to rest very soon.  (And it looks almost as good as our Sarah’s now-infamous Victoria-sponge-plus-chocolate-cake-with-white-chocolate-and-raspberry icing concoction, which is really saying something).

Our client, Empower Community, has just bought a portfolio of solar panels on the roofs of over 2,300 social houses in Sunderland owned by the Gentoo housing association.  These panels were installed for free by Gentoo to give their tenants free power and substantial help with the fuel poverty that many of them were and are facing.  Our estimates suggest total annual benefits of £0.5-1m in energy bill reductions alongside a saving of 3,000 tonnes of CO2 emissions.  The tenants we spoke to were certainly delighted with them.  Gentoo will use the money from the refinancing to install panels on another 3,000 or so homes, enabling yet more families to benefit from free energy.

The £10m raised for this transaction came from a large, institutional UK pension fund that demanded market standard terms and conditions.  Given their mandate and fiduciary duties this is perfectly reasonable.  (OK, yes, I do long for and am working towards the day when all investors want or are required to truly consider the impact of their investments and actively seek transactions like this; but we’re not there yet so the pragmatist in me prefers to roll up the sleeves and work from where we are rather than just wait for nirvana to be delivered by someone else).  This deal therefore pays a market rate of inflation-linked return, with strong cash flow covenants, cash buffers, insurance and full security.  No subsidies or cut-corners there.  We’ve also created a financial and legal template for future deals of which, hopefully, there will be many.  The investor likes the social impact of the project and hopefully will feel this is an asset that they can be proud of, but ultimately they bought it because it matches their liability profile and generates the right level of return for the risk.  Just imagine if, one day, we could finance the trillions of pounds of pension liabilities with assets that produced similar impacts to this one?  It’s one of my happy places…

Did the transaction rely on pro bono support?  Nope.  Lawyers, advisors and technical specialists were all paid reasonable fees for their work.

Ah yes, the Loxodonta africana in the room.  The debt is being repaid through the feed-in-tariffs which are themselves a form of subsidy.  So the deal is subsidised, right?  Again, no.  The oil & gas, automotive and steel industries (to name a few) all receive huge government subsidies in different ways around the globe, but no one considers the returns of BP or ArcelorMittal to be anything other than ‘market’.  Feed-in-tariffs were introduced to encourage the necessary switch to cleaner forms of energy.  Whether one likes this or not is a moot point – they are the cash flows which currently define this particular market so they are what the pragmatist has to work with.  You and I are contributing to them through our energy bills and, personally, I would rather see them going towards a transaction like this than lining the pocket of a private developer.

Which brings me to the final point – the sharing of the profits.  During the life of the transaction, over 80% of the profits flow back to the local community – on current estimates that’s over £5.5m – either directly through a local community foundation or indirectly via Gentoo (itself a not for profit organisation).  This is on top of the free energy and will target further reductions in fuel poverty as well as issues such as education, training and employment in the community.

And that’s the cherry on top of the white-chocolate-and-raspberry icing.

By Martin Rich, Sales Director at Social Finance

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Lisbon Calling!

We are delighted to be supporting the Social Investment Laboratory (SI Lab) which launches in Lisbon this afternoon and can be followed on a live stream from 5.30pm (GMT). The SI Lab is a social venture created by the Social Entrepreneurship Institute and funded by the Calouste Gulbenkian Foundation on a 3 year grant. It aims to be a knowledge centre for social investment in Portugal and Lusophone countries, enabling the creation of a nascent social investment market. Speaking at the event will be the Social Finance Chairman Bernard Horn and International Director Jane Newman.

The 3-year strategy of the SI Lab comprises of the following; to create knowledge and market intelligence, catalyse the market creation by identifying suitable infrastructure and identify pilot-projects to test innovative social finance instruments. They plan to publish monthly research notes on specific social investment topics. These will include a glossary of social investment terms in Portuguese and international case studies on market creation, social impact bonds and other on issue areas such as homelessness, children in care and recidivism. The first three editions of these will be published at today’s launch event.

Initial work has suggested the two issue areas of most interest to commissioners are children in care and youth/adult recidivism. The SI Lab is carrying out research and putting together a pre-feasibility study to inform future discussion with these commissioners, with the aim of launching pilot projects in these areas. They are also in the early days of convening a Portuguese Social Investment Taskforce, for which Social Finance has been supporting the development of a strategy and work plan. There is in-principle agreement from key stakeholders to participate in this Taskforce.

The SI Lab team is comprised of Filipe Santos (Academic Director and Professor at INSEAD), Antonio Miguel (formally of Social Finance UK) and Joana Ferreira. The SI Lab benefits from shared services from the Social Entrepreneurship Institute and from close support by the Human Development Programme at Calouste Gulbenkian Foundation.

The SI Lab has convened a prestigious Advisory Board with both national and international experts in the social investment sector: Jane Newman (International Director, Social Finance UK), Marc Ventresca (Professor, Said Business School University of Oxford), Carla Antunes da Silva (Managing Director and Head of UK Banking at Credit Suisse) and Joao Trigo da Roza (CEO of the Portuguese Association of Business Angels).

Social Finance extends its sincere congratulations to the team in Lisbon for all their hard work in launching this ambitious project and we look forward to working together to support the development of a global social investment market.  

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Energise and Teens and Toddlers Social Impact Bonds – The First Year

In October 2012 Social Finance was awarded two Social Impact Bond (SIB) contracts from the Department of Work and Pensions Innovation Fund. Today we are publishing a report looking at the first year of operations for the Energise and Teens and Toddlers SIBs. 

One of our most popular reports to date has been the Peterborough One Year On document, published in November 2011 and sharing our learnings from the first year of the Peterborough SIB. At a time where there is an enormous amount of interest in SIBs, but relatively few live examples, the opportunity to learn from them becomes all the more important and we hope this new report will be a valuable contribution to the existing literature.

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For a more detailed look at where SIBs are active in the UK and internationally, check out this blog from Emma Tomkinson

The SIBs outlined in this report came from a DWP initiative to intervene with young people at the age of 14 with the objective of preventing them from becoming NEET (not in education, employment or training) at 18. The DWP have traditionally intervened with young people who are NEET once they reach the age of 18, but the Innovation Fund contracts see a shift in this focus. 

The DWP has identified a number of outcomes against which the contracts will be measured including improved behaviour, school attendance, educational qualifications and employment opportunities. Outcomes payments from the Innovation Fund will be paid over three and half years. Unlike typical social service delivery, the funding is provided at risk by social investors, including Bridges Ventures, Big Society Capital, Barrow Cadbury Trust and the Impetus Trust, whose financial return is aligned to the positive social impact of meeting preagreed educational, training and employment outcomes. 

Energise Social Impact Bond: The Energise programme offers mentoring combined with structured activity days and residential courses designed to foster re-engagement with school, to build self-esteem and to improve interpersonal skills. Energise is delivered by the Adviza Partnership and the programme is managed by Social Finance. The programme combines bespoke and generic activities to address individual needs. It is aimed at supporting more than 1,500 young people aged 14 to 16 who are at risk of becoming NEET over a three and a half year period. 

Teens & Toddlers Social Impact Bond: The Teens and Toddlers programme combines an 18-week intensive intervention with regular support through to GCSEs. The programme is unique because it targets two sets of vulnerable children simultaneously, raising the aspirations of young people from disadvantaged areas by pairing them as a mentor and role model to a child in a nursery who is in need of extra support. It aims to support more than 1,150 young people aged 14 to 16 who are at risk of becoming NEET over a three and a half year period. 

What have we learnt? 

Both projects required a bespoke case management system to track each individual at every stage of their personal journey, and to ensure that they are accessing the appropriate level of support. A common theme across both projects has been the time this has taken to set up, as well as the time required for staff to adapt to a new, perhaps more extensive data capturing system than they were used to.   

Within the first few months we had data that led us to adapt the Energise programme. We saw that the residential course wasn’t having the desired impact and would have further value if it ran for longer, and was more intensive.  

We have also used data to inform adaptations to the Teens and Toddlers delivery model. A decision was made to provide support through to GCSE’s, whereas previously the programme had ended before this milestone. When attendance on this part of the programme began to decline, the intervention was changed to reflect better the needs and interests of young people. The programme now includes activity days and tutoring support in addition to the core service provision. 

The Innovation Fund is testing the following hypothesis – if you identify a vulnerable cohort, and invest in prevention, can you reap the social and financial rewards of diverting this group from requiring acute services? The principles behind this span social issues; diverting ex-offenders from returning to crime, diverting children from entering care, diverting emergency hospital admissions – at a time of budget constraints, the case for investing in prevention is stronger than ever. 

Social Finance is working to develop Social Impact Bonds across a range of social issues. For those working in areas with a consistent lack of investment in prevention, SIB funding may allow for innovation to be tested, with the risk transferred to social investors. There is £60 million in outcomes funding available in Outcomes Funds administered by the Big Lottery Fund and Cabinet Office, as well as up to £3 million in development grants to refine a SIB proposal. We are working in partnership with the LGA to deliver a support contract on behalf of the Big Lottery Fund, to encourage applications to the Funds. More information about the support available can be found here

We hope projects like the two listed above will encourage more commissioners to look into the SIB mechanism and the potential it has to transform services in areas affecting the most vulnerable in our communities. 

By Sarah Henderson, Service Manager at Social Finance 

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