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: or visit our website


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


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.


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.


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.


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.


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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Setting the Scene for Generation Rent

“Crisis”, “challenge”, “disaster” – some of the words used to describe the current housing in England.   Whether informed participants agree with this description or not, in part, depends on which side of the fence, possibly quite literally, they sit.  What is clear is that supply has consistently failed to meet demand – even at the easy-credit fuelled peak of the market, just over 207,000 new homes and dwellings were built, still substantially short of the 220,000-250,000 new households being formed every year.  Since then the rate of building has fallen by over 30%.

The consequence of this is clear to see. Prices have risen, affordability has been stretched and the housing benefit bill has more than doubled over the last ten years. Home ownership, for many, has ceased to be a realistic dream. More and more families are no longer able to buy, but equally are not deemed in sufficient need to be eligible for social housing.  For many households, renting is now the long term solution to meeting their housing needs and no longer just a temporary stepping stone.  According to data published by DCLG, 1.6 million more households were living in the private rented sector in 2011, compared to ten years earlier.  Since then this figure has continued to grow, and by 2025 the proportion of households in the private rented sector is forecast to grow by a further 20% from 2011 levels.

Going forward, with development finance more limited, and grants for developing affordable homes around only a third of previous levels, it seems unlikely that traditional models of housing development will be up to the task of meeting demand.  What is required are new ways of working, and in particular partnership approaches which better share risks and returns among the many parties involved in the supply of housing.  Efforts need to be focused not just on new developments, but also on making better use of existing buildings – over 300,000 homes remain long term empty, there are more than 400,000 empty flats above shops and the decline of the high street has left countless numbers of commercial properties empty and ripe for converting back to residential use.

For the private rented sector in particular, concerns over unscrupulous landlords, poor living conditions and absence of security of tenure, while often overplayed, can still be justified.  The private rented sector remains dominated by small scale landlords; 95% of all landlords manage less than five homes, and represent over 70% of all property, leading to issues in terms of variable quality and service. Accepting that for some families the private rented sector is likely to remain the only long term tenure option, there is a pressing need to develop at scale purpose built, well managed, decent and affordable rented accommodation, with better security for tenants and more transparent rental increases.

The Montague review in 2012 looked at ways to address the barriers to attracting large scale institutional investment, such as pension and life assurance funds, into the development of new private rented sector accommodation. The report quite rightly highlighted the potentially important role of housing associations and other housing providers with clear social missions.  They can help increase the supply of private rented sector accommodation, both as developers but also as the natural asset managers of this stock, given their experience of offering a professional service to tenants.  To date, while some of these organisations have already entered the private rented sector market to a limited extent, either as an extension of their social mission or just as a means to cross-subsidise social housing, for the vast majority this remains a significant and untested new challenge.

So what are the key challenges in providing a fit for purpose private rented sector at scale, which can meet the needs of what by some has been dubbed “Generation Rent”? Over the last eight months Social Finance has been working in partnership with the Resolution Foundation, five registered providers and one housing charity – the Dolphin Square Foundation; Derwent Living; GreenSquare Group; Great Places; Home Group; and Plus Dane – to look at exactly this. The work identified five key challenges in developing the private rented sector as a new unique asset class, including: 1) identifying locations with long term rental demand; 2) designing a purpose build rental product; 3) accurately identifying costs of development for a bespoke product; 4) determining management costs and 5) estimating the impact to management and maintenance from offering longer term tenancies. A recently published report (available here) discusses each issue area in more detail, and we hope this will encourage further debate amongst those involved and interested in developing the private rented sector for the benefit of families and individuals who will rely on it to meet their housing needs over the coming years.  Later in the year Social Finance and Resolution will publish the next phase of this work, analysing the potential to develop a financing model for institutional investment for a national portfolio of build to rent units aimed at low to middle income households.

By Tim Rothery, Associate Director at Social Finance

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First indications from Peterborough – what do they tell us?

Last week was a big week for Social Finance as reoffending data on the Peterborough pilot was published by the Office of National Statistics. This gives the first early sense of how our first Social Impact Bond is doing. In this blog I want to explore the results a little and some of their implications.

So, first, the numbers, or to give it its full title:

Peterborough (and national equivalent) interim re-conviction figures using a partial (19 month) cohort and a 6 month re-conviction period



Discharge Period

Cohort size




































Binary: Reconviction rate over six months
Frequency: Frequency of reconviction events per 100 offenders within six months

Three topics to cover:

-          Is the Peterborough SIB working?

-          What do these numbers tell us about whether investors are likely to get paid?

-          Do they have any implications for developing the national recidivism PbR work?

1.  Is the Peterborough SIB working?

Put simply, it would appear so. The best way to show this is to index the results so that you can see them together and then to plot Peterborough relative to the national data:

Rebased reoffending data


So, the key measure for us is the one that we will be paid on, the percentage change in frequency of reoffending against a comparison group, in this instance the national cohort.

Peterborough relative to national


On that basis Peterborough has shown a 23% relative decline to the national data. On a sample size of 844 this is likely to be statistically significant, so on reoffending within six months, rather than a year, it appears we are making a difference.

Any caveats? A number. This is on the basis of six month reoffending, not 12 months, so one could argue that the impact of our programme may lessen over time. The comparison group, of wider national reoffending, is not as carefully defined as the comparison group that we have developed in the Peterborough model proper, where the reoffending rates of a matched cohort from the police national computer is used. Given this, the comparator group 16% increase over a two year period is something of an outlier, but it is all we have to go on.

So plenty of caveats. But however much these figures are indicative and however tentative and careful we are being; for a programme in its infancy and on its first cohort, this is a great start.

2. What do we know about whether investors will get paid?

So, two completely different numbers to note here:

a) the 23% relative decline discussed above; and

b) the fact that after this change the frequency and binary metric for Peterborough are now in line with the national average.

In other words what we have achieved so far is to move Peterborough from its historically higher rate of recidivism, to the national average. Through one lens we have done tremendously well. Through another lens Peterborough did (almost) exactly the same as the national average. Which lens will be reflected in the comparison group drawn from the police national computer?

If the prisoners in Peterborough are different and thus reoffend more, then this should be picked up in the comparison group as each individual is matched to one as similar as possible.

If the local environment is different, the prison for example, or the courts system, or the police… Then it is much less clear whether that will be picked up by the comparison group. It could be in part, if prisoners going through Peterborough are relatively local (and about 70% are) then those factors could be picked up to some extent in their criminal history and be matched to prisoners from similar environments. For those that are more transient, for example those coming through from London, such effects are unlikely to be picked up.

Locally there has been speculation for a number of years around why Peterborough’s recidivism rate is higher than the national average, and most of that speculation has focused on prisoner mix. But I don’t believe anybody has any evidence to back that up.

So, this all adds up to probably a greater uncertainty as to whether we will be paid for outcomes than we have that the programme is generating outcomes.

3. Any implications for the development of the national PbR programme?

These numbers probably complicate the development of the national PbR programme in one significant way, they give the impression of an increasing trend in reoffending, while the wider crime stats in terms of amount of reported crime and the British Crime Survey has generally been going down.

The key requirement this creates is that the Ministry of Justice needs to be completely transparent with the data and analysis that it is using to develop the counterfactual data. It simply cannot credibly develop it on its own and then tell people the answer. Regional variation needs to be understood, historical variance needs to be understood, a dialogue is needed to develop an acceptable answer.

Secondly, it increases the potential, in my view, for a proportion of outcomes payment to come from a fixed sized pot that is shared out according to relative performance amongst providers. This will resolve some of the uncertainties in bidders minds and show them that, while they may be taking a risk, there is a defined amount of outcomes payments that will be made if they perform better than some of their peers.

For such a pot to work, there should be a requirement to give a minimum spend on rehabilitation in the bidding process. Open book accounting thereafter can ensure that bidders keep to their promises, but the amount that bidders are willing to invest in reducing reoffending can then be used as part of their assessment. This can be used to counter the issue in the Work Programme – that for profit maximising providers the outcomes payments for harder to reach groups are insufficient to invest in trying to get them back into work.

So, the idea that bidders demonstrate a minimum commitment, is vital to maintaining the programmes credibility – that it is about rehabilitation, as opposed to only being about cost cutting and privatisation.

by Toby Eccles, Development Director at Social Finance

This blog can also be found on his personal blog page here.

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Development Impact Bond Launch Event

This afternoon marks the culmination of months of effort from the Development Impact Bond Working Group as we launch the consultation of their report. We have convened an exciting panel for the event, which includes Elizabeth Littlefield, President of the Overseas Private Investment Corporation, and Judith Rodin, President of the Rockefeller Foundation. From the UK we have the Rt. Hon Andrew Mitchell MP, former Secretary of State for International Development and Nick Rouse, Managing Director of Frontier Markets Fund Managers. It promises to be a lively session and I’m delighted to share the agenda with you.

2.45 Refreshments
3.00 Opening remarks from Ann Grant, Standard Chartered
3.05 Welcome from Elizabeth Littlefield, Overseas Private Investment Corporation
3.10 Introduction to Social Impact Bonds and Development Impact Bonds, Toby Eccles, Social Finance
3.25 The Development context and conclusions of the Working Group, Owen Barder, The Center for Global Development
3.40 Responses

Rt. Hon Andrew Mitchell, MP

Judith Rodin, Rockefeller Foundation

Nick Rouse, Frontier Markets Fund Managers

4.00 Discussion and Q&A moderated by Ann Grant, Standard Chartered
4.30 Drinks reception

The event itself can be followed on twitter under #devimpactbonds and the report can be downloaded here. The consultation period will run for 6 weeks until 17th July 2013. Please email with your feedback.

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Development Impact Bonds – consultation launched

On the eve of the Social Impact Investment summit in London this Thursday, 6th June, I am excited that CGD and Social Finance are releasing a consultation draft (PDF) of the report of the Working Group on Development Impact Bonds that we have convened over the past year.

Many of us working in development policy have attended dozens of meetings and conferences where participants applaud (even if some privately bemoan) the changing landscape of development finance. Traditional aid flows are now dwarfed by developing government revenues, private investment, remittances, and money from private foundations and new official donors. This is, of course, very good news, and these conferences invariably conclude with a call for “innovative” ways for these many diverse interests to work together. But as a senior donor agency official admitted to me the other day, “When we get back to the office we don’t know what to do.”

Development Impact Bonds are exciting because they help to answer that question. Done right, they are a platform for that collaboration, combining the distinct contributions of each stakeholder to improve the coverage and effectiveness of public services in developing countries and improving the efficiency with which precious aid resources are used.

In a Development Impact Bond, investors provide finance for social interventions in developing countries. The money is channelled to local public and private service providers. Once independently verified evidence shows that results have been achieved, the government and donors repay the investors their principal plus a financial return linked to performance.

Development Impact Bonds are an adaptation of Social Impact Bonds, a way of financing public services with promising experiments underway in AmericaAustraliaBritainCanada and Ireland.  (CGD’s partner Social Finance, a non-profit company in London, pioneered the first Social Impact Bond in the UK, at Peterborough prison.)

The distinctive characteristic of Development Impact Bonds, relative to the Social Impact Bonds already underway, is that in countries whose governments cannot yet afford the full cost of additional public services, donors provide some or all of the repayment to investors when the results are proven.

The Working Group concludes that Development Impact Bonds are a potentially powerful instrument for development cooperation for a variety of reasons, set out in the report. These include:

  1. They are a mechanism to engage a coalition of investors, governments, NGOs and service delivery specialists in a way which plays to the strengths of each partner;
  2. They focus attention on the results achieved by public and private contributions, rather than inputs, activities and processes;
  3. The challenge is often to “deliver science” to people (vaccines, bednets, fertilizers) but there is no “science of delivery”.  Every situation is complex and requires local knowledge, experimentation and adaptation, and often the integration of services from many different specialists. That flexibility is often impossible in aid programmes financed by government donors who are inevitably risk-averse;
  4. Governments and donors often find it hard to invest in interventions which cost money today, but bring about significant benefits (and perhaps savings) in the future;
  5. The private sector could make a bigger contribution to meeting social priorities in the developing world, but it is hard to engage business in a way which does not limit access for the very poorest people who have little capacity to pay;
  6. Some investors would like a “double bottom line” of a return on their investment and social impact; but there have been few investment opportunities of this kind in international development.

The Working Group’s report is now online for public consultation for the next six weeks. It sets out the circumstances in which Development Impact Bonds might work, including detailed case studies and a lot of practical advice about what is needed to get them off the ground.

Specific Development Impact Bond proposals which are in different stages of development and negotiation include reducing sleeping sickness in Uganda (Social Finance), providing education in Pakistan (Lion’s Head Global Partners), avoiding teen pregnancy in Colombia (Instiglio), investment in clean energy (the US Overseas Private Investment Corporation or OPIC), and fighting malaria in Mozambique (Dalberg). The consultation draft includes detailed recommendations for governments, foundations, investors, donors, service delivery organisations and ‘integrators’ who pull deals together, including a recommendation for a donor “outcomes fund” for the best Development Impact Bond proposals.

I and many other members of the Working Group are sceptical by instinct, preferring to see ideas tested and evidence gathered before reaching conclusions. None of us believe in magic bullets which will solve all development problems.  We are a tough crowd to please. But the more the Working Group considered the opportunities offered by Development Impact Bonds and the pilots being developed, the more enthusiastic we became about the possibilities that they offer.

We know that it will not be straightforward to get the first deals done, and it is important that they are done well. The approach is already demonstrating its worth in developed countries; we believe that if and when this approach becomes a normal part of the development toolkit, it will also unlock huge benefits for services for people in the developing world.

Intrigued by this idea? Hate it? Either way, the Working Group wants your views and will take them into consideration for its final report. We are especially interested in answers to these questions:

  • Which part of this idea seems weakest and most prone to failure?
  • What parts of the report are vague and confusing, or otherwise leave you scratching your head?
  • Are there potential applications of this idea that we failed to mention?

Please share your ideas in the comments field below or by email to

Guest post by Owen Barder, Senior Fellow and Director for Europe at The Center for Global Development 

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Towards a new Social Corporate Finance theory?

As exits are more or less non-existent in the social investment world, debt and equity merge. Do we need a new Corporate Finance theory for our sector?  In the social investment market, what is the difference between the return expectations of debt and equity instruments?

In my Applied Corporate Finance course at INSEAD, the differential between the return expectations on debt and equity instruments was comparatively easy to calculate.  The required return on a debt instrument would be a function of the investee company’s credit rating and the seniority of the specific instrument among other debt instruments (if any) on the balance sheet.

The required return on equity, on the other hand, would be the function of the Capital Asset Pricing Model (CAPM) and the Weighted Average Cost of Capital (WACC).  Without going into technical detail on these concepts, equity returns generally (in the form of dividends and capital gains) are unknown up-front and therefore riskier than returns on debt instruments.  Equity holders risk losing their capital if the business does not perform.  Debt instruments can also be risky, but holders of debt instruments have a prior charge on the company’s assets in case of bankruptcy.  Given that equity holders take on board more risk, the required return on equity is higher.  This differential between required returns on equity and debt contracts and expands as the business and its market evolves, but it remains positive.

Social investments are different from commercial investments in (at least) two fundamental aspects:  Firstly, the majority of socially-driven companies and social enterprises have no equity.  I believe that I would capture 95% of all socially-driven companies and social enterprises if I included (a) charities and their operating subsidiaries; (b) Industrial and Provident Societies who exist for the benefit of their community (IPS ben comms); (c) Community Interest Companies (CICs) and (d) For-Profit Social Sector Organisations (SSOs).  It is only in groups (c) and (d) where equity capital is at all present.

Secondly, even if CICs with share capital and SSOs have the ability to take on board equity investments, most of these organisations can generate only dividends for the equity holder. We are operating in an exciting and nascent market so we have limited precedent transactions to go by, but I would wager (fill in your choice of bubbly!)  that that there are less than a dozen cases in the past decade where equity in a CIC or a SSO has been sold and a capital gain has been recorded for the vendor of the equity.  There is a variety of perfectly reasonable explanations for this lack of precedents. Firstly, if the social enterprise is a CIC with share capital, equity can be sold from one equity holder to another third party owner – at whatever price is negotiated between the vendor and the buyer.  However, the ultimate exit out of the equity position would only be through a sale at par to the CIC itself.  CICs by definition are supposed to keep value creation with the company and not allow shareholders to benefit from it. A rationale buyer would therefore be prepared to only pay for the expected dividend stream and not for the ability to sell the equity at a premium.   Otherwise, ultimately, the Last Mohican would be left with a capital loss.

Some practitioners in the social investment market pay less attention to the legal form and more to the substance of the business.  As such, one could envisage a For-Profit Social Sector Organisation (SSOs) with articulated social objects.  In this case, again, capital gains could be achieved on a theoretical level; however, practical circumstances will prohibit the realisation of gains.  Why would social entrepreneurs, profoundly wedded to their social causes, risk a proportion of their equity to be sold off? In my experience, social entrepreneurs are incredibly protective of their social mission and will heavily scrutinize (rightly so) the motivations of an external provider of equity investment.  Equally, on the other side, where are the purchasers of equity?  There are no three-letter-acronym exits in the social investment market: no IPOs (Initial Public Offerings), no MBOs (Management Buy-outs) or LBOs (Leverage Buy-outs). Depending on the industry, there also appears to be a very limited number of trade buyers – buyers whose social objects are the same as the SSO’s.  Given this dearth of purchasers, how could capital gains be realised?

Given the absence of capital gains in the vast majority of cases in the social investment market, the difference between debt and equity blurs. An equity investment generates only a dividend stream to the equity holder: this dividend stream is then akin to an interest payment variable with performance of the underlying business (e.g. a type of Social Loan).  As such, the return differential between equity and debt should also shrink – possibly even disappear. In fact, as already pointed out earlier, in IPS ben comms, charities and CICs without share capital, junior debt already plays the role of risky equity.

To me, applying Corporate Finance theory to the social investment market is a must: we are analysing investments where there is an articulated intention, subject to the normal vagaries of running a venture, to repay capital and create a return for the investor. However, some aspects of our market are so fundamentally different that new thinking is needed.  As cherished as it is by conventional Corporate Finance theory, in our nascent market it is time to desert the return differential between debt and equity in favour of a more appropriate, situation-specific theory of required return.

By Annika Tverin, Director at Social Finance

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