Social Impact Bond--an innovative FINANCIAL TOOL to support social outcome

Question from Prof Z in the email: “Are the actions of government to support entrepreneurship in general enough or is there more that can be done to encourage venture development aimed at financially sustainable social impact?”

My follow-up Question: “Is it possible for government to develop social entrepreneurship by encouraging venture development aimed at financially sustainable social impact?”

I come across the website of “The Young Foundation”, and find “Social Impact Bond” ---a financial tool being developed in the UK (by the Young Foundation and Social Finance) to provide a new way to invest money in social outcomes. In my opinion, it is an innovative idea that combines the strength of government and venture capital.

(What is Social Impact Bond?http://en.wikipedia.org/wiki/Social_impact_bond)

SOCIAL IMPACT DIAGRAM

  Their key innovation is to link three elements:

• investments (by commercial investors or foundations);

• a programme of actions to improve the prospects of a group (for example 14-16 year olds in a particular area at risk of crime or unemployment); and

• commitments by national government to make payments linked to outcomes achieved in improving the lives of the group (for example, lower numbers in prison, and lower benefits payments).

Various versions of social impact bonds have been developed in the past by a number of people associated with the Young Foundation. More recently work has been done as part of the Innovation, Justice and Youth programme, building on concepts associated with ‘justice reinvestment'. The long term goal for Young Foundation is the concept being developed in collaboration with national and local government as well as foundations.

A pilot project has been implemented early this year.

“On the 18th March 2010, Social Finance announced the launch of the first Social Impact Bond with the Ministry of Justice.

This first issue will fund social organisations working to reduce the re-offending rates of short sentence male prisoners leaving Peterborough Prison. The Ministry of Justice has agreed to make payments to investors in the event that re-offending is reduced below an agreed threshold.

Re-offending is an area where preventative work could lead to a better society and save the taxpayer money. Of the 40,200 adults on short term sentences, an estimated 60% will go on to reoffend within a year of release, at a significant cost to the taxpayer and society.

During the Peterborough Prison pilot, experienced social sector organizations, such as St Giles Trust, will provide intensive support to 3,000 short-term prisoners over a six year period, both inside prison and after release, to help them resettle into the community. If this initiative reduces re-offending by 7.5%, or more, investors will receive from Government a share of the long term savings. If the SiB delivers a drop in re-offending beyond the threshold, investors will receive an increasing return the greater the success at achieving the social outcome, up to a maximum of 13%.”

The innovative idea of social impact bond is using government guarantee to give an incentive for investor; investment investors receive greater financial return as the social return improves. My question for this model is: both the public sector (government) and the venture capital has value system respectively, (Government value more of the social outcome and venture capital focus on financial return and cost-benefit assessment), who deliver the final assessment of the project(that the financial return based on)? How to make sure the opinion is unbiased? Is it necessary to hire an objective party (like an audit) to perform project evaluation?