Should Foundations engage with Payment by Results?

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

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2 Responses to Should Foundations engage with Payment by Results?

  1. Toby

    I think this is a really interesting and useful post – like you, I hope there are responses from Foundations on where they stand on this.

    I think one of the challenges for Foundations is that they will want all of their funding to be directed towards the programme itself – as it would be if they were taking the normal grant funding approach. The costs involved in developing the financial instruments for Social Impact Bonds, which are currently being highlighted by Polly Toynbee in a series of articles in the Guardian, may be a real deterrent.

    Let’s see what everyone else has to say

  2. Hi Russell,

    Glad you liked it. I agree the debate at the moment isn’t really getting into the issues, which is frustrating. Do send me a link to your blog when it goes up and feel free to link to mine or mention it when you put it up!

    Good luck and I look forward to reading your blog when it arrives.

    All best

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