At Social Finance we’ve been looking at the track record of preventative services in many spheres. In the second part of a series of blogs Harry Hoare looks at the risks involved when preventative programmes are implemented.
In my previous blog, I suggested that some preventative programmes might fail to get funded due to their inherent risky nature. Here, I put forward some strategies to deal with that risk.
When funding preventative programmes, Government has at least three options: keep the risk and seek to manage it; transfer the risk using Payment by Results (PbR); and, transfer the risk using a Social Impact Bond (SIB).
Option 1: Keep the risk and manage it better
There are times when Government is best placed to manage risk. For example, Government doesn’t buy insurance policies, instead choosing to self-insure since it can cover losses from within its own resources. For those things that Government couldn’t cover (e.g. total financial meltdown), there would be no point having an insurance policy since the insurance company would also have melted (or the payout would be too large to be tenable for the insurer). Needless to say, Government does seek to reduce these kinds of risks.
Option 2: Transfer risk using Payment by Results (PbR)
PbR can be used to transfer risk to service providers by making payment for service provision contingent on jointly agreed results such as a reduction in reoffending. If service providers are financially responsible for results, good performance has a profit motive attached. Under PbR, Government is insulated against the risk of achieving substandard outcomes, since the Government does not pay in this circumstance. This is appropriate when delivery organisations are large enough to bear the financial risk of service delivery.
Option 3: Transfer risk using Social Impact Bonds (SIB)
SIBs can be seen as an option within PbR – the principle of transferring risk outside of Government is the same but instead investors hold the risk and use their capital to fund the operations of the service providers. Since investors hold the risk, smaller locally-embedded VCS organisations can take part since they do not have to use their own smaller resources to fund service delivery. In addition, these investors might have relevant skills and experience that help guide the programme during its implementation, rigorously focusing on the outcomes stated in the SIB contract and marshalling resources to achieve results.
We’re not wedded to one approach to managing these risks. In the recent feasibility studies we have completed, such as for Manchester City Council, we have concluded that an external investor might be better placed to manage the risks of introducing some new services whereas the local authority is better placed to manage risks around others. What is important is that commissioners and providers recognise the riskiness of implementing preventative programmes and have a strategy for addressing this risk. Otherwise, despite the political rhetoric, the results of investment in prevention will disappoint.
By Harry Hoare, Analyst at Social Finance
NB: Such themes are of continuing importance in David Robinson’s Early Action Taskforce which is working to address these issues and promote early intervention.
Social Finance will be exploring the issues surrounding funding prevention, management of implementation risk and the value for money of social impact bonds at a conference in Bristol on 20 June 2012. To register, please click here.