Slide 1 New ways of financing social outcomes Geoff Mulgan

Slide 2 The Young Foundation 2011 Why? A need for new investment (philanthropic and commercial) for public goals at a time of scarce resources An interest in better interventions that prevent future costs and problems for government Appeal of markets for outcomes, with parallels in carbon

Slide 3 The Young Foundation 2011 Building on a long history: Commissioning for outcomes Payment by results PPPs Shared savings models Publicly created markets

Slide 4 The Young Foundation 2011 Every politician would love a way to bring in new money that only rewards results achieved The investment world would love a new market – and to be able to claim that they are doing good and making money at the same time Charities would love a new source of investment

Slide 5 The Young Foundation Design options

Slide 6 The Young Foundation 2011 Finance from Foundations, or Commercial investors Raising a sum for investment Implemented by a range of providers, coordinated by a lead organisation, intermediary or an SPV A programme of actions Commitment to pay on achieving outcomes Benchmarked against control group, and separated from "environmental" risk factors A commitment to repay Social Impact Bonds

Slide 7 The Young Foundation 2011 First SIB contract signed with the Ministry of Justice in March Social Finance raised £5m to fund work with 3,000 male, short-sentence prisoners leaving Peterborough prison. Nationally, 60% of such prisoners re-offend within 1 year. They receive little statutory support to address causes of offending. Social sector organisations, such as St Giles Trust provide intensive support to prisoners and their families, both inside prison and after release. Peterborough SIB

Slide 8 The Young Foundation 2011 Investors will receive a return if re-offending among the prison leavers falls by 7.5% or more compared to a control group of short-sentence prisoners in the UK. Funding for payments is partly subsidised by the Big Lottery Fund.

Slide 9 The Young Foundation 2011 Commissioned by state government likely to be focused on juvenile justice, parenting support for vulnerable families, disability, homelessness and mental health. Budget committed $100m to support Pay for Success Bonds, homelessness, education, criminal justice. Massachussets announced aim to be one of the first. New South Wales and USA

Slide 10 The Young Foundation Suitable fields

Slide 11 The Young Foundation 2011 Stakeholders are open to SIB approach Savings for the government stakeholder(s) are greater than the costs of the intervention Possible to identify specific government stakeholders that will financially benefit Enough people will benefit from the intervention to enable robust measurement of impact The specific impacts of the intervention can be quantified The intervention improves social wellbeing and prevents or ameliorates an undesirable outcome The intervention is preventative in nature & sufficient funding is currently unavailable 7 tests to meet …

Slide 12 The Young Foundation Delivery vehicles

Slide 13 The Young Foundation 2011 Model 1

Model 2

2 key questions: What skills are most vital for intermediaries: access to investment markets; relationships with philanthropy; ability to design intervention programmes; ability to performance management What transaction costs are achievable and acceptable – likely range from 10-40%

Slide 16 The Young Foundation 2011

Slide 17 The Young Foundation Outcomes and metrics

Slide 18 The Young Foundation 2011 Need for unambiguous, independently determined metrics: eg prison re-entry; hospital re-admission; welfare entry from defined population group. Need to design out selection, cream-skimming etc and agree control groups from comparable areas without comparable interventions (or historic data) to screen out other causes (eg economic downturn, new laws).

Slide 19 What counts as success? Individual NGOs, projects, programmes – sometimes claiming 30-40% efficacy

Slide 20 The Young Foundation % rates count as very good in replicable research

Slide 21 The Young Foundation 2011 The “iron law” of evaluation (“the expected value of any net impact assessment of any large scale social program is zero”) and “stainless steel law” of evaluation (“the better designed the impact assessment of a social program, the more likely is the resulting estimate of net impact to be zero”). Internal rates of return on social programs with positive net benefits are rarely above the discount rates of 3 to 5 percent typically used in social impact evaluations. Since 1990, 10 federal social programs have been evaluated using randomized experiments. According to evaluation experts Isabel Sawhill and Jon Baron, nine “found weak or no positive effects.” Experts often fatalistic about any impact

Slide 22 The Young Foundation 2011

Slide 23 The Young Foundation Risk and rewards

Slide 24 How to align appetite and incentives of investors, intermediaries, and payers?

Slide 25 The Young Foundation 2011 Investors seeking commercial returns or mixed and minimising risk. Government/payer seeking minimum risk (ideally complete transfer) and maximum new money Intermediary with typically little capacity to carry risk Providers/delivers – typically comparable risks to other programmes, options of incentive based

Slide 26 The Young Foundation 2011 % success rate of portfolio 95%90%75%50% Return per intervention for funder with overall 0% desired return 3%5%15%41% Return per intervention for funder with overall 10% desired return 13%16%27%56% Return per intervention for funder with overall 20% desired return 23%26%39%70% At an expected 75% success rate for a portfolio, these results suggest that for an average project: Charitable trusts and foundations would seek a 15% return; Public sector bodies would look for nearly 30% rate of return; and Commercial entities would aim for a rate of return of the order of 40%.

Slide 27 The Young Foundation 2011 NSW example as way of sharing risk – consequences of failure to reach milestones

Slide 28 The Young Foundation 2011 Rewards

Slide 29 The Young Foundation Scale

Slide 30 The Young Foundation 2011 What counts as optimum scale? Financial perspective – possibly $20-30m minimum given transaction costs, plus advantages in spreading risk Risk management perspective – keep scale more modest, $5- 15m Statistical perspective – funders confidence in avoiding ‘Type 2’ errors, government confidence in avoiding ‘Type 1’ errors

Cost efficiencies Size of organisation/unit Very efficient Less efficient Small Large What counts as optimum scale for programmes?

Cost efficiencies Size of organisation/unit Very efficient Less efficient Small Large The pattern for public services, and national governments: so best impact of SIBs is replication not necessarily scaling, creating both stronger push and stronger incentives for adoption

Slide 33 The Young Foundation Longer term evolution

Slide 34 The Young Foundation 2011 The long-term: Possible evolution of asset classes – eg generic funds investing in a range of Pay for Success bonds, SIBs etc, becoming mainstream for PRI funds and options for improving tax treatment And/or... Preventive investment, direct commissioning, incentivising outcomes + market for social capital with pooled budgets across federal, state, local Or transitional device to broader use of payment by results, using existing capital markets

Slide 35 The Young Foundation 2010 Transforming Justice in Greater Manchester as alternative model for evolution – larger scale financial incentive deals

Slide 36 The Young Foundation 2011 Young People at risk of conviction 1 Young People at risk of reoffending 2 Young Adults at risk of reoffending 3 Adults at risk of short custodial sentences 4 Adults at risk of reoffending 5 Police-led Restorative Disposals diversionary approach for first time entrants where the young person admits the offence & apologises to the victim Multisystemic Therapy –intensive therapeutic offender and family-based treatment Restorative Youth Conferencing – restorative and community based approach involving all those involved in the crime Choose Change –support and resettlement service for short term prisoners Intensive Alternative to Custody –sentencing option for those aged combining intensive supervision with punitive and rehabilitative requirements Work is underway on: systematic evidence-based programmes to de-escalate engagement in the criminal justice system; a pooled budget across the 12 municipalities and national agencies; and a financial incentive model with payments for success in reducing demand for prison &c, with savings shared between the various partners.

Slide 37 The Young Foundation 2011 Potential hybrid ‘preventive investment’ model: Investment fund raised from mix of philanthropy, public, local commercial funds plus public local savings product Invested in package of interventions (eg focused on youth) Repayment commitment from state government linked to outcomes achieved

Slide 38 The Young Foundation 2011 We should welcome enthusiasm! The challenge: how to strike the right balance with intelligent scepticism PFI as a warning: no serious evaluation, measurement; no serious experimentation; and a vast and unnecessary waste of public money on the way to some quite useful tools