The purpose of social impact bonds
SIBs provide a number of benefits for commissioners, service providers and investors:
they allow commissioners to attract private investors to fund early and preventative action on complex and expensive social problems
they enable new services to be tried without commissioners having to pay if they don’t work
they can help services to adapt so that they have a greater emphasis on prevention
they can allow greater flexibility for those providing the services to adapt and change the service according to their experience
they can help charities and social enterprises bid for and manage ‘payment by results’ (PbR) projects - projects where the government pays the provider of the service for the results achieved
Payment is based on what the project or service has achieved, not the processes or work that has been done. For example, payments for the social impact bond at Peterborough prison are based on whether or not the project has lowered the rate at which prisoners reoffend, rather than the cost of the project or the number of people working on the project.
Because payment is based on results rather than process, there is more room for innovation and greater freedom to demonstrate solutions that work. The result is better outcomes for the public and reduced costs to Her Majesty’s Government.
The diagram below shows how SIBs work: initial funding is paid for by investors to cover the costs of the project. The provider carries out the project, and the investor is paid by the government according to the results achieved, at specific points agreed in the contract.