Essex – no longer the only way

We are entering the fourth month of our support and engagement contract for Commissioning Better Outcomes[1] on behalf of the Big Lottery Fund. So far we’ve held 4 workshops, and spoken to over 100 commissioners and service providers who have shown an interest in developing a Social Impact Bond (SIB) in their community. Many of them were introduced to the concept by reading about the Essex SIB, which was the first Local Authority commissioned Social Impact Bond, launching in November 2012. This was a watershed moment for Social Impact Bonds as it hinted at the potential of this mechanism to transform local government service provision across the UK. Since then countless blogs, articles and publications have espoused the value of contracting on outcomes, and the rigour performance management can bring to a programme.

Over a year on from the Essex launch, SIBs are being developed in areas such as troubled families, long term health conditions and rough sleeping. But it is still children’s services where we are observing the most interest. A few weeks ago we hosted a webinar looking at the Manchester Social Impact Bond that is currently in development, which, unlike Essex (which looks to prevent entry to the care system) is looking to improve the outcomes for children already in care. This blog will take a look at the Manchester SIB, and some of the differences between the two projects.

Overview
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At the heart of a Social Impact Bond is the social issue it is designed to address. In Peterborough it is the lack of support for short sentenced offenders, in Essex it is children at risk of going into care, and in Manchester it is poor outcomes for children in residential care.

Social Issue

Manchester currently has 1,300 children and young people in its care with 177 of these children in residential placements, significantly higher than the national average and its statistical neighbours. The Department for Education estimated the weekly cost of care in a residential placement at £2,689 per child/young person per week, compared with an average cost of £676 for foster care. There is also consistent evidence of the social cost; overall those children and young people in residential care have poorer school attendance, a greater likelihood of a substance abuse problem, a greater chance of having entered the criminal justice system, and a greater chance of becoming NEET to name but a few.

Foster care has two kinds of benefits. First, it is seen as giving better outcomes for a young person in terms of their educational, social and emotional well-being. Second, it is more cost effective as compared to the use of an internal or external residential placement.

Manchester came to us with this issue in mind; they wanted to explore how social investment could support young people to transition from residential care to foster care and target those individuals who have experienced the breakdown of multiple foster placements. We designed a SIB model that would allow for the funding of Multi-dimensional Treatment Foster Care (MTFC). This is an intensive intervention where young people live with specially trained foster parents who are supported around the clock by a team of professionals from health, education and social care.  Each set of foster parents looks after just one child for 9-12 months, concentrating on behaviour management to promote emotional stability and the skills needed to live in a family setting. It is expected that 66% of young people will ‘Graduate’ from the programme, meaning they will complete their individual programmes and move on to family-based placements.

Outcome Payments

Unlike the Essex SIB where outcomes payments are based on a reduction on children entering the care system, Manchester operates a tariff model where outcomes payments will be made for a child achieving milestones such as staying on the MTFC programme for the duration, and after graduation remaining in a family setting and therefore away from residential care.

Although a year of MTFC costs £100,000 per total package of support, the residential costs per year are estimated at £125,000, for the remainder of a young person’s care journey. If successful, it will be both MCC’s Children’s Services and Central Government benefiting from the cost savings. This makes Manchester an obvious candidate for “top-up” payments from the Big Lottery and Cabinet Office’s Outcomes Funds.

Conclusions

In some cases the Essex Social Impact Bond can be directly replicated.  Other social issues may require detailed analysis of the local area in order to design a model to address these specific issues, but the more SIBs in development, the more pooled knowledge there is to share.  There is also a plethora of support on offer; the Cabinet Office SIB Knowledge Box is a comprehensive resource of technical guides and case studies, and we are co-hosting with the LGA a series of workshops focussing on different aspects of Social Impact Bonds. The Big Lottery Fund has also made available up to £3million of technical assistance for commissioners with an EOI accepted by the Funds. We are optimistic that Essex has carved a path for other Local Authorities to follow, and hope that our partnership with LGA and BLF will support commissioners on this journey.

Any further questions, please contact sioutcomesfunds@socialfinance.org.uk

By Sarah Henderson, Service Manager at Social Finance 


[1] Please note that Commissioning Better Outcomes is part of the “The outcomes Funds” which refers to both the Commissioning Better Outcomes (Big Lottery Fund) and the Social Outcomes Fund (Cabinet Office). For ease of access however there is only one application form and the Funds will decide during assessment which fund is most appropriate for your application and in some cases may decide to jointly fund projects.

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HM Treasury Has “Stopped, Looked and Listened”

HM Treasury released on 10 December key detail on the proposed Social Investment Tax Relief (SITR).  Our impression is that HM Treasury has spent time listening to social enterprises and charities and their needs, as well as to intermediaries as they attempt to construct investments that satisfy both providers of cash (investors) and users of cash (social enterprises).

We are pleased that the eligible investees can now include co-operatives (through registration with the FCA), unregulated CLGs (through registration with the CIC Regulator) and social impact bond share companies (accredited by the Government). 

Whilst the amount of tax-advantaged capital that a social enterprise can raise will remain limited during the first applicable tax year 2014-15, the inclusion of plain vanilla unsecured debt will mean that small enterprises can immediately offer its Friends & Family network a tax relief against providing much needed growth capital.  

Once the amount of tax-advantaged capital has been raised to the level of a commercial enterprise (£5 million per rolling 12 months) in 2015-16, there will be wider and further utilisation of SITR.  

Our firm belief is that a wide section of the investing public will want to invest for the benefit of UK society.  It is therefore important to see how the SITR eligibility rules (regarding both investees and instruments) could be transferred to the already existing Venture Capital Trust-style indirect investment scheme or some other similar indirect scheme.  HM Treasury’s roadmap for social investment, scheduled for January 2014, will be a further step in the right direction.  

Tax Relief on a Personal Level

What does this mean for the individual investor?  Below are three small ways in which the new tax relief can make an individual investor like myself more likely to dip her toe into the new and exciting impact investment arena: 

  1. Retail bonds – for the right investee and instrument: During the past year, Triodos Bank and Fidelitas Capital have arranged several exciting, fixed-coupon bond offerings by charities and environmentally minded companies.  Examples include £10 million for Golden Lane Housing (for the benefit of learning disability charity Mencap), £5 million for Greenwich Leisure Limited and up to £5 million for Avante Partnership (a dementia charity).  Many of us have already invested in these.  For the right charity or social enterprise, and when correctly structured, these retail bonds should with time (when the investee limit is increased) be able to make use of the new tax relief.
  2. Social Impact Bonds (SIBs): An increasing number of gritty social issues have now been tackled through the SIB: children on the edge of care, NEETs, adoption, homelessness, etc.  When the next generation of SIBs is created in 2014 and beyond, there is the possibility for individuals like myself to invest a proportion of my liquid assets in a SIB instrument and receive an up-front tax relief in the fiscal year I invest.   Additionally, any capital gains reliefs available to a commercial Enterprise Investment Scheme investor would now also be available to me, the SITR investor. For instance, the loss relief element of the relief could reduce my potential downside on a £10,000 investment to less than £4,000.
  3. Community Organisations – Pubs, Care Homes, Nurseries, Community Regeneration: Provided the investee fits the size and trading activity requirements, a local co-operative or Community Interest Company can raise capital from local residents and, in return, offer an upfront tax benefit.  The April 2011 IPSOS Mori survey Investing for the Good of Society indicated that a local investment combined with a tax relief constituted a highly attractive investment opportunity for a wealthy individual.

With the tax relief in place, and a roadmap for increasing its size and reach to a wider audience, it is now back to the drawing board for charities, social enterprises and intermediaries to see how we could make use of the new relief in 2014.

 By Annika Tverin, Director at Social Finance

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Commissioning Better Outcomes – the first few months

With the first quarter of our Commissioning Better Outcomes support contract drawing to a close, it seems like a good time to reflect on activities so far. To recap,  Big Lottery Fund appointed Social Finance in partnership with the Local Government Association (LGA) to support the development of Social Impact Bond (SIB) proposals in England that could then benefit from the £40million Big Lottery Fund’s Commissioning Better Outcomes Fund or the Cabinet Office’s £20 million Social Outcomes Fund. We plan to do this through a range of activities – workshops, webinars, podcasts, and technical guides.

So, what’s happened so far? It all kicked off with a launch in September, at which the Big Lottery Fund England Chair Nat Sloane gave some context as to why this support was contracted. He stated that we need 30+ SIBs launched for the SIB market to really take off. The market currently stands at 15, so we certainly feel excited about what this contract might help achieve.

The team has quite literally travelled the length of the country, with workshops in London and Newcastle. Both workshops have been oversubscribed, but we’re holding plenty more so check out the events page for one in your region. After all the work planning and developing materials, we were excited about starting to deliver. It wasn’t quite down to earth with a bump, but the first workshops certainly brought home the scale of the challenge ahead. The attendees came with a mixed range of previous knowledge so the workshops had to be sufficiently broad to engage all participants.

After every workshop we’ve reviewed our approach and made changes in light of feedback received. There seems a challenge of “what next” after the initial excitement of the workshop.  We are considering how we can best support commissioners through this stage, which requires a more personalised approach. For commissioners already working on an early stage SIB proposal, an expression of interest (EOI) to the Outcomes Funds is more straightforward. We can put them in touch with one of our team to discuss any queries they may have. For those with very early ideas, we hope they will review the materials publically available on the affiliated websites (a full list is at the bottom of this page.) We recognise that every commissioner will have their own barriers to overcome and can offer support in briefing their colleagues, or just talking through some early stage ideas.

The most popular section of the workshops has consistently been when we’ve reviewed the Essex SIB. This shows us the power of a case study to bring a complicated structure to life.

This video features Roger Bullen from ECC. He played an influential role in the Essex SIB and highlights the importance of an internal SIB “champion” in pushing forward with this complex, but ultimately rewarding new mechanism.

Our partner LGA has been instrumental in reaching out to their networks and introducing the local authority audience to the potential of social investment. You only have to look at where other countries are in terms of their SIB development to see what a vital role Big Lottery funding has played. They have recognised that there is untapped support need among local and central government.  We have also observed a really productive partnership in the way the CBO Fund has been able to complement the existing Cabinet Office Social Outcomes Fund. This has certainly removed the potential for duplication of work, and consequently public funds.

We’ve had to clear up a few more misconceptions around the Funds and our role. For the full scope of our work check out this page, but a key point to note is that no commissioner is required to speak to us in order to submit an EOI or full submission. If you are currently working with another intermediary, or feel confident that you have the internal capacity, then don’t feel you need to speak to us. All the resources we provide are of course at your disposal. There has also been some confusion about the two outcomes funds. For efficiency there is only one entry form, and the Funds will decide who should fund what. The key difference is that the Big Lottery Fund  is looking for projects that enable more people, particularly those most in need, to lead fulfilling lives, in enriching places and as part of successful communities. For the Cabinet Office, they are looking to catalyse and test innovative approaches to tackling complex issues using outcomes based commissioning.

So, looking forward to 2014, we are planning more workshops, more webinars, and hopefully more people getting in touch. It has been particularly inspiring to see that at a time of such upheaval for local government, the people we are speaking to still have the energy and motivation to embrace new ideas and consider a different way of reshaping and financing their public services.

Key Resources

Full guidance, Q&A and Expression of Interest application form – Big Lottery Fund and Cabinet Office. This is recommended as the first port of call for anyone considering submitting an EOI: www.biglotteryfund.org.uk/sioutcomesfunds

Social Finance website: www.socialfinance.org.uk/sioutcomesfunds

SIB Knowledge Box – Cabinet Office: http://data.gov.uk/sib_knowledge_box/

 By Sarah Henderson, Service Manager, Social Finance

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Development Impact Bonds Debut in NYC

New York City: Social impact investors, leaders of non-governmental organizations, and development specialists gathered at the Rockefeller Foundation in New York City this week to learn about Development Impact Bonds (DIBs), a new financial instrument that aims to tap private sector innovation to help improve the lives of poor people in the developing world.  

Zia Khan, Rockefeller Foundation vice president for strategy and evaluation, told the audience that DIBs hold promise as “the next evolution” of innovative finance for meeting global development goals.

“What excites me most about the report are the specific case studies ranging from HIV prevention in Swaziland to scaling up low-cost schools in Pakistan. There’s enormous appetite for this kind of innovation at a global level,” Khan said.

Although the first DIB deal has yet to be signed, the idea is more than wishful thinking. Presenters explained how DIB pilots in various stages of development would bring the private sector’s drive for success to such problems as reducing sleeping sickness in Uganda, improving education in Pakistan, avoiding teen pregnancy in Colombia, and fighting malaria in Mozambique. (See event page for full video and photos.)

“There’s growing interest in doing good while doing well but changing the world requires more than good intentions,” said Toby Eccles, the founder of Social Finance UK, an organization that works to inject market-principles into social sector funding. “DIBs provide an opportunity for the private sector to invest in the world’s most pressing development challenges in a meaningful way.”

Eccles, CGD senior fellow and director for Europe Owen Barder, and Elizabeth Littlefield, CEO of the US Overseas Private Investment Corp., a US government agency that turns a profit, served as co-chairs of the CGD-Social Finance Working Group that prepared the report.

Eccles explained how Social Finance UK pioneered a new instrument for involving private investors in financing socially desired outcomes starting with a project to reduce high rates of UK recidivism—when former prisoners commit fresh crimes after release and wind up behind bars again.

Barder told how he was living in Ethiopia when he first learned about the new approach, dubbed Social Impact Bonds, or SIBs, and contacted Social Finance to explore how the approach could be applied to development challenges. That led to a partnership between CGD and Social Finance, which jointly convened a working group to adapt the new approach as Development Impact Bonds, or DIBs. 

SIBs and DIBs work in a similar fashion: Private investors provide up-front capital to service providers who work to achieve a specific, measurable goal, such as fewer teenage pregnancies or reduced recidivism. If an independent third party verifies the goal has been met, funders (such as national governments for SIBs or donors for DIBs) repay the investors their initial investment plus a return linked to performance—the better the outcome, the greater the return.

Unlike traditional aid projects, which tend to focus on implementation of specific solutions identified before a project is funded, the DIBs approach links payments to outcomes and aligns the incentives for investors and the service providers to discover the quickest and most cost-effective means to achieve the desired result. Funders—aid donors, in the case of DIBS—pay only if the result is achieved.

Drawing on one of six case studies in the report that describe emerging pilot projects, Barder explained how a DIB could be used in Uganda to reduce sleeping sickness, a parasitic disease that takes a heavy toll on human health and is invariably fatal if left untreated. He encouraged investors and donors to learn about the new approach—and to consider taking the plunge.

“This is a time for leadership,” Barder said. “Traditional aid is giving way to innovative new forms of development finance that will create new opportunities for private firms and donors—and at the same time much better development outcomes. But these benefits can only be realized if some pioneering funders and investors are willing to bear the upfront costs of creating a new market. Heroes wanted!”

To help manage risk for individual investors and funders, the Working Group recommends the creation of a new DIB Outcomes Fund and DIB Investment Funds. These funds, which would pool capital and dilute risk, would facilitate launch and implementation of the first DIB projects and help catalyze market growth. 

Luther Ragin, president and chief executive officer of the Global Impact Investing Nework (GIIN) kicked off the discussion at the New York event with a ringing endorsement of DIBs, .

“There is innovation at play that is very exciting to a wide range of investors. At the GIIN, we are convinced that this is a space that has lots of opportunity. We are happy to be associated with the development of these instruments, and the organizations that have pushed the development of these instruments.”

But he also offered some potential concerns from investors. Success would depend crucially on the quality of the management of the NGO or other entity that serves as the intermediary, he said, and of “the quality and integrity of the data that determines whether or not investors get paid.”

The Development Impact Bond Working Group was convened by CGD and Social Finance with support from the Rockefeller Foundation and the Omidyar Network. Working Group members include thought leaders from the worlds of finance, government, civil society, foundations and official aid.

Six case studies of DIBs in various stages of feasibility, development and negotiation are included in the Working Group report. Pilot DIBs currently being explored and the groups in the lead include: Social Finance, for reducing sleeping sickness in Uganda; Lion’s Head Global Partners, a London-based merchant bank, for education in Pakistan; Instiglio, a non-profit that designs Social Impact Bonds, for avoiding teen pregnancy in Colombia; OPIC, for investment in clean energy; and Dalberg, a development advisory firm, for fighting malaria in Mozambique.  

Guest post by Lawrence MacDonald, Center for Global Development

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Social investment is not an asset class, it’s a mindset

If we want to truly change the world, we need to start thinking bigger; we need to start seeing social investment as something that is relevant to all of our financial activity; we need a new mindset.

“In today’s globalized world, too much emphasis is placed on economic success, measured in terms of material wealth…”

Social investment – investing private capital in organisations that create a direct, intended and measurable social impact while also generating a financial return – is a wonderful thing.  It appeals to both the commercially and philanthropically minded as in theory it can (and in practice often does) allow investors to have their cake and eat it, so to speak.  Whilst the concept seems at odds with the prevailing materialistic mentality of today’s society, there are few people who are not intrigued at the idea of “doing well whilst doing good”.

It’s hardly a new idea.  One can point to the great Quaker business leaders of the 1800s for their radical ideas on ‘good business’.  The US introduced Program-Related Investment in 1969 and the Community Reinvestment Act in 1977.  Professor Yunus began his work on microfinance in the mid-70s.  Even the recent market growth started over a decade ago, helped by a UK government initiative leading to innovations such as Social Impact Bonds and the world’s first Social Investment Bank.

 “.. What gets overlooked is that GDP and other economic activities are means to ultimate ends, not the ends themselves…”

And yet, despite all this work and the topic even making the agenda of this year’s G8 conference, the social investment market remains tiny in the grand scheme of things.  JPMorgan’s seminal 2010 report predicted social investment could be as large as $1 trillion over the next decade – barely 1% of global assets.  Even SRI/ESG investing is seen as a niche market by most institutional investors.  Up to 20% of global assets are said to be managed with “ESG considerations” although few would argue that this has led to a 20% improvement in global social or environmental impacts.

The simple reality is that financial return and short-term thinking continue to rule business and investment decisions.  Social investment and social entrepreneurship are nice ideas best left to individuals with money to spare and a conscience.  But if 80% (at least) of our money doesn’t care about how it generates its return, we can hardly be surprised when problems arise.

“.. We need to redefine success in terms of the wellbeing that is generated by our activities and how this wellbeing is distributed across populations and generations…”

There is a story of an old man walking on a beach where the tide has gone out, leaving many starfish stranded and dying on the sand.  Every few steps the old man stops, bends down and throws a single starfish back into the water.  A young man watches for a while and then wanders over.  “You’re wasting your time!” he says.  “You’re missing most of the starfish and the tide will simply come back in again and leave more stranded.  You’re not making any difference.”  The old man smiles gently, picks up a starfish and throwing it back says “It made a difference to that one”.

Viewed in isolation, I see social investment somewhat like the old man.  Yes it will make a very significant difference to a few and for that the market is to be encouraged, nurtured and grown.  We must find more people willing to pick up more starfish, so the few become many.  We must develop more ideas focused on intervention, like Social Impact Bonds, to reduce the numbers washed up on to the beach in the first place.

But whilst the tides of global economic growth continue to surge with no care for those caught in the wash, many victims will continue to be left stranded.  We must therefore address this issue at the same time and for that I believe we need a new mindset.

“.. Such a redefinition can lead to new approaches toward achieving fair and sustainable prosperity.

So how do we change the tide?  By firstly realising that we can no longer separate business activity into either “commercial” or “social”, but that they need to become one and the same thing.  Businesses must rediscover what it means to be socially valuable in all that they do.  They need to factor in the true cost of their activities – including elements like environmental impact.  They need to strive to be of benefit to as many people as possible.  That is certainly not to say they should not also be profitable, but it will mean a change in the way things are done.

And we can achieve this by using finance as the key lever of change.  Put simply, as investors and consumers, you and I together can choose where to put our money to bring about these changes.

I have come to see my whole financial portfolio as a spectrum – from investments made primarily for the financial return through to pure grants.  The financially focused part of my portfolio needs to reflect my values just as much as the grants I might make and all the elements in between.  I want to understand the local and global effects of the companies I invest in and, more importantly, I want to invest in those that are creating opportunities for sustainable human flourishing around the world.  This is not an oxymoron.  It’s an opportunity to re-engineer business and for investors to use their capital to create a future worth having.

 “.. It can also uncover new opportunities for human cooperation.”

This is what I mean when I say Social Investment is not an asset class, it’s a mindset. 

I really don’t care about the semantics – call it whatever you will.  What I care about is seeing the behaviour of individuals and corporations change for the better. 

Will you change your mindset?

By Martin Rich, Director at Social Finance. This post was originally written for the Global Economic Symposium 

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Social Finance and LGA launch support services for local commissioners

26 September 2013

Today we are launching the support services for local commissioners interested in Social Impact Bonds (SIB). This service is being funded by the Big Lottery Fund. This is great news for commissioners who want to move forward with their ideas but don’t where to start! So what are we actually doing?

Firstly, we are going around England and talking to as many commissioners as we can about how to put a Social Impact Bond together. We will offer workshops – general and more specific – and we will put out guides, podcasts, webinars and interactive tools to get the word out.

Secondly, for those with a more defined but still early stage SIB proposal, we will provide feedback and support so that you can fill in an Expression of Interest (EOI) form to the Big Lottery Fund and Cabinet Office’s Outcomes Funds. There is now a single point of entry for both funds.

And lastly, for those who receive a positive response at the EOI stage , we will help identify what the next steps are, including providing a list of  organisations, like but not just Social Finance, who can help you move forward. 

This is part of a package the Big Lottery Fund has put together to stimulate the Social Impact Bond market through their £40m Commissioning Better Outcomes fund, which also includes £3m of development funding. It also complements the Cabinet Office’s £20m Social Outcomes Fund.

If you are not commissioner, but part of the Voluntary, Community and Social Enterprise sector or an investor we’d still love to hear from you.  You are very welcome to come along to our workshops and engage with the service. And if you are a SIB intermediary, please get in touch so that we can add your name to the list of service organisations we are compiling.  

We at Social Finance and the Local Government Association are really excited about this project, so please get in touch if you would like to hear more: sioutcomesfunds@socialfinance.org.uk or visit our website http://www.socialfinance.org.uk/sioutcomesfunds

 

Sarah Henderson, Service Manager, Commissioning Better Outcomes Fund Support

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Public Accounts Committee Publish Early Action Landscape Review

This is a guest post from Will Horwitz, Researcher for the Early Action Taskforce. 

The social finance movement has always believed that in social policy as elsewhere, prevention is better than cure and social impact bonds, famously, provide a mechanism for the public sector to act earlier without having to spend up front. But despite their encouraging adoption in some areas, most of government has lumbered along as before – disjointed and head down, focusing on the short term and usually reacting too late.

A new report from the Public Accounts Committee could see that begin to change. Their Early Action Landscape Review succinctly and bluntly lays out the case and exposes the failings:

“The Government spends nearly £400 billion each year on, for example, health, education, employment, justice and welfare, but huge numbers of people still suffer preventable health problems that are expensive to treat, too many young people leave school with too few qualifications and unable to get a job, too many young offenders commit further crimes when they leave prison, often because of drugs or alcohol addiction, and too many families get locked into benefit dependency.”

More importantly, they suggest what needs to change. Government is short-sighted and disjointed in its planning, with no-one taking responsibility for early action so the Committee recommend the Treasury step up, leading a drive for early action across government. Beginning by agreeing a definition to be used across government and mapping how much is spent. Then by asking departments to include ten year impact assessments in their spending review submissions, forcing a focus on the longer term and ensuring cuts now won’t cost more later. And finally by leading a shift towards pooled budgeting and joint working between departments so the benefits of investment flow to those who spend upfront.

These recommendations and others would create an environment in which social finance could flourish, as departmental boundaries are hurdled and commissioners are encouraged to look beyond next April. Promising recent progress, such as the Cabinet Office’s Social Outcomes Fund, give us a flavour of what could emerge if the PAC’s recommendations were adopted vigorously across government. It would be better late than never, ensuring we’re never too late again.

This is a guest post from Will Horwitz, Researcher for the Early Action Taskforce. 

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Challenge Annika! 17 personal things you can do to put “GREAT” back into Great Britain

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Not native to this country, I have by now nonetheless lived in the UK for twenty years.  Early on, a few years into my stay, my friends and I used to amuse ourselves with describing the type of society we would ideally like to live in.  What would be the features that would make it the best possible society – features that would truly put GREAT back into Great Britain again?

If you want to talk the talk, you must walk the walk.  Below is a highly subjective view of what I would like to see in a GREAT Britain again, as well as a promise from my side to take 17 concrete steps to being part of delivering that greatness. 

Over my five years at Social Finance I have had the pleasure of coming across a vast array of inspirational social enterprises – companies whose raison d’être is more than simple profit maximisation.  Profits make you sustainable as a company, but just as human beings need more than supernormal earnings to be happy, surely a company must have other aspirations than profit maximisation? Being a reformed “evil banker” at Social Finance, I now have the opportunity to be both the customer and potentially adviser for these organisations.

I will return to this challenge in 12 months’ time to see how I have scored against my pledges.  My review is divided into broad areas of activity where I can exercise, as a consumer of products and services, much better civic duty, e.g. food, clothing, transport, entertainment and savings & investments.

Food

Three decades ago, few people recycled packaging, or even newspapers.  Two decades ago, few people consistently purchased Fairtrade products.  Today, both of these consumer choices are mainstream.  A decade from today, it is likely that most consumers will pay attention to whether their food has been sustainably farmed, and whether we should consume meat at all.  My pledge for the future would be:

  1. Fastidiously recycle food packaging – at home and in the office
  2. Whenever there is the opportunity, purchase fairtrade and other ethical products to enable producer co-operatives to earn fairer prices.  Going forward, I will shop coffee and tea through Cafédirect, chocolate and cocoa though Divine Chocolate, bananas and other fruit through the fairtrade mark, jams through Rubies in the Rubble and nuts through Liberation Foods.
  3. For sustainably farmed or even organic fruit and vegetables, there is an increasing array of suppliers (e.g. Abel & Cole, Riverford Farm).  With the harvest season just around the corner, my pledge will be to eat seasonal fruit and veg: out go strawberries, in come apples, prunes and plums grown locally.

Clothes

The fairtrade concept clearly extends to clothing.  And in addition, I need to start recycling rags as well: not doing so is simply poor household management! I pledge to the following over the next 12 months:

  1. Buy at least one present from PeopleTree and from Epona, who both support badly treated textile workers or cotton farmers in developing countries.
  2. Buy really stylish bags and accessories presents from Elvis & Kresse, who make their products out of recycled heavy-duty fire hose!
  3. Recycling my family’s clothes through Oxfam.

Transport

Over the past 24 months, I have occasionally cycled to work.  Now, I am hooked on biking.  Biking is quicker than public transport, allows you to both save money and raise your fitness level – what is there not to like? For the real “bike-head” please check out the good work of Bikeworks CIC based in Bethnal Green, Leytonstone and Shepherds Bush.

As a cyclist, I lament the poor air quality in London. The logical conclusion is to purchase an electric car which will suit my limited driving needs perfectly.  Citroen, Mitsubishi and Nissan are the leading brands as per Eco Cars. Again, what is there not to like: electric cars run perfectly adequately in city traffic, cost less to run and directly improve London’s at times poor air quality.  

  1. 50% of the time, travel to work by bike. 
  2. Upgrade your diesel car to an electric one.

Entertainment

I am really tired of switching on the telly in the evening.  In a better country, I would be participating actively in cultural pursuits.  So, this passivity will need to stop.  My pledge going forward will therefore be:

  1. Stop subscribing to SKY and sell the TV, and all other unwanted gadgets and toys.
  2. Buy a piano and start playing again.
  3. Learn to play chess better.

Savings & Investments

The fairtrade movement makes clear that by making enlightened consumer choices, I can influence the livelihood of disadvantaged individuals in the value chain.  The impact investment trend is making the same argument: by deploying my savings and investments differently, I can influence the way in which social problems are being addressed in the UK today.  Just as I am pleased that I have purchased a fairtrade product, I can be proud to know that my savings and investments have made a positive contribution to society. My pledges for the year ahead are therefore:

  1. Invest my ISA allowance in a cash ISA supplied by a social lender like Charity Bank or Triodos.
  2. Open up a second bank account in London Plus Credit Union (formerly Hammersmith & Fulham), my nearest community-based credit union.
  3. Become a true 10 percenter and invest 10% of my existing portfolio sustainably; potentially through ethical IFAs Helm Godfrey, Barchester Green or Holden & PartnersWorldwise Investor, managed by Holden & Partners, has an informative list of interesting ethical portfolios to consider.
  4. Invest in a Retail Bond whenever a social enterprise offers some great yielding bonds.  Recent past offerings have included Golden Lane Housing and Nuffield Health. Alternatively, consider putting some smaller amounts of money to work in Abundance Generation’s hydro power projects.
  5. Before the end of this tax year, invest in a Venture Capital Trust (VCT) focussed on environmental or social companies.  ClubFinance’s website gives a comprehensive review of available VCTs.
  6. Invest in a Social Impact Bond (SIB) with a tax wrapper (either Enterprise Investment Scheme or, when it is available, the Social Investment Tax Relief).  At Social Finance we are planning to launch a few new SIBs next year.

Will I be able to live up to Challenge Annika? Only time will tell…

By Annika Tverin, Director at Social Finance

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A Jewel from the Crown: Tax Relief for private investors in 2014

Tomorrow looms the final deadline for submitting responses to HM Treasury’s consultation on a social investment tax relief (“SIR”).  This is an important challenge to the social investment market and to the social investment and finance intermediaries (SIFIs) operating across our market.

HM Treasury’s consultation has modelled the structure and the resulting consultation questions on the existing tax reliefs to UK tax payers for investment into SMEs – the Enterprise Investment Scheme (EIS) and the Venture Capital Trust (VCT) frameworks.  Treasury has commendably followed the recommendations of NESTA’s Financial Planners as Catalysts for Social Investment report (June 2012) to use well-known tax reliefs in order to “contextualise” the relief to private investors and to Independent Financial Advisers (IFAs), financial planners and private wealth managers already familiar with the commercial wrappers.

Few in our sector appreciate how advantageous an EIS tax relief can be – and how catalytic an identical SIR scheme could be.

Our response to the consultation has been driven by the principle that in order to truly engage private individuals on a large scale in investment into social enterprises, both the end investors and the distribution channel (their IFAs) need to feel that SIR is offering a fair deal.  As such, SIR needs to offer the same tax benefits that EIS offers.

The Benefits

The tax benefits afforded to an EIS investor are considerable – and even more so in SEIS (Seed Enterprise Investment Scheme), where the upfront income tax relief is not 30% but 50%.

Important terms of the EIS tax wrapper are:

  • The size of the relief available to the individual investor is up to £1,000,000 in any one tax year.  This equates to a maximum hand-out by HMRC to the audacious investor of £300,000 per annum;
  • The tax reliefs available to the individual investor are:
  1. Income tax relief at 30% (including the ‘carry back’ facility into the previous tax year);
  2. Tax free capital gains on investments;
  3. Full inheritance tax relief provided the investments have been held for two years and are held at time of death;
  4. Full capital gains tax (CGT) deferral on tax due on any other capital gains if gains are invested in EIS share; and
  5. Loss relief which can be taken as a deduction against income or as a capital loss.

Let’s work through what this means in terms of financial returns and downside protection for the private investor into social enterprise.

Successful Investment

Assume our hypothetical investor Ms M. Pact would like to invest £100,000 into Children’s Support Services, a Social Impact Bond delivery company aiming to reduce the number of troubled adolescents going into residential care.  She would immediately upon investment be able to receive 30% income tax relief in the tax year of investment.  Her net cost of the investment is therefore £70,000.

Upon a successful sale of her investment in Children’s Support Services after the minimum three year holding period at, say, a modest 15% uplift, Ms M. Pact’s proceeds equal £115,000.  The gross gain is £45,000.  Ms M. Pact does not need to declare these gains on her tax return.  On a £70,000 net investment, Ms M. Pact has received a gain of £45,000, or realised an internal rate of return (IRR) of 18% on her investment.

Had Ms M. Pact not been able to use the EIS wrapper, her gross gain would have equalled £15,000 and her net gain (applying a Capital Gains Tax of 28%) £10,800 (£15,000 less 28%*£15,000).  This equates to an IRR of only 3%.

Catastrophic Investment

Equally, in terms of downside protection, the ability to achieve both income tax relief on the way in and loss relief on the way out of the investment makes an important difference to Ms M.  Pact’s willingness to commit.

Her net cost of the investment remains £70,000.  After the three year holding period, the value of the shares in Children’s Support Services has fallen to zero.  Ms M. Pact, a 45% higher rate tax payer, can claim loss relief at 45% on the net cost of the investment, either against income tax or capital gains tax.  The maximum downside on the investment equals £38,500 when subtracting the upfront income tax relief (£30,000 benefit) and the loss relief (45%*£70,000, or £31,500 benefit) from £100,000.

The need for a complete level playing field

The new relief is a great jewel handed to our market.

We believe we can make the most of the relief if it sets up social enterprise on a level playing field with purely commercial enterprises and both EIS investors and IFAs recognize the features of the tax relief.  SIR should be made available at as identical terms as possible to the existing commercial regimes of EIS and VCT.

By Annika Tverin, Director at Social Finance

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New Money? Cash Savings? A Response to Duncan Green about Development Impact Bonds

Duncan Green recently took on the subject of Development Impact Bonds and impact investing in this blog post, and raised a few reasons for skepticism. As he anticipated, we didn’t really agree with the concerns that came up and wanted to explain why.

DIBs are based on Social Impact Bonds first launched in the criminal justice sector in the UK, and now being implemented in other sectors in the UK and in the US, Australia, Ireland, and elsewhere. There are high hopes in the impact investing world that SIBs will bring new money to social sectors, and generate cash savings (used to pay back investors) for government by funding preventative measures – two very promising features of SIBs and reasons why they might appeal to governments in particular.  But these aren’t where the only or the biggest potential benefits of SIBs lie, or why CGD got interested in looking at how the SIB model could apply in development.

In his blog post, Duncan quotes a colleague who says that the Peterborough Social Impact Bond hasn’t really attracted new money. This may or may not be true but it wasn’t the main point. The interesting thing about DIBs is their potential to do what the Peterborough Social Impact Bond is doing: bringing together the public, private, and non-profit sectors and aligning incentives towards achieving a social outcome.

It is too early to offer an assessment of how well the Peterborough SIB is working but the early evidence is that services are being managed well under the SIB – recidivism has gone down among Peterborough prisoners (6%) while it’s gone up nationally (16% – the numbers are here), and the program seems to be better than traditional public sector programs at identifying and responding to individual ex-offenders’ needs and the things that might lead to them to reoffend.

There’s a lot more on this at Social Finance´s website and Owen Barder and Toby Eccles have written blog posts, here and here, about how DIBs are not just a financing tool but a new business model for development.

On the question of whether the Peterborough SIB is attracting new money, this evaluation reports that a lot of the Peterborough investors are foundations using their endowments to invest (so not grants), or are foundations or individuals investing in criminal justice for the first time.  And the SIB is attracting new money in the sense that preventative programs are getting funding under the SIB that they weren’t getting before. So SIBs/DIBs can change what gets funded in the first place (government pays only for proven results so doesn’t have to take the risk of paying for programs that don’t work) as well as how services get delivered (with more flexibility than traditional government contracts).

The second argument by Duncan’s colleague is about the challenge to identify sectors where reduction in future costs can be clearly demonstrated. It’s an advantage of SIBs/DIBs that they can help to shift more resources into prevention, reducing the costs of treatment later, but “future cost savings” is not actually the defining criterion for either SIBs or DIBs.

In the Peterborough SIB, the idea of saving money over time (preventing reconvictions rather than paying for prisons) makes it a good “value for money” case for the government, but the real focus is on whether the overall business model leads to a better social outcome (reduced recidivism).  Success in the SIB, and repayment to investors, is based on the rigorous measure of that outcome, and the government is committed to paying for success regardless of what future costs savings turn out to be.

It would be even harder in developing countries than in developed countries to identify sectors where future cost savings could be calculated. In some sectors, for example education (see the case studies in the DIB Working Group consultation draft report) savings would be harder than for others to quantify. What’s more, in developing countries donors are providing external financing. It’s not a question of how much future spending they will save in a country but a question of whether current spending is being used as efficiently as possible.

And one final note: we’re not arguing that DIBs will make sense for every development problem –but they could help to solve a lot of current problems in development and are an approach worth testing.

Guest post by Rita Perakis, Center for Global Development. It originally appeared here

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