The journey into a home, employment and good health is frequently long and tortuous for the growing number of people living on Britain’s streets. An innovative financing mechanism, which rewards positive outcomes for individuals, could make a difference.
The London-based homelessness charity St Mungo’s is among the first UK organisations to raise external social investment to deliver positive outcomes commissioned by a public body. Its Street Impact programme, which aims to help over 400 homeless people rebuild their lives, has been granted a three-year ‘payment-by-results’ contract. It was commissioned by the Greater London Authority (GLA), with its upfront costs financed through £650,000 of external investment arranged by Triodos Bank.
The arrangement is possible thanks to a new type of contract called a social impact bond (SIB). These are novel because they require the use of private finance to tackle social issues on the government’s behalf. The borrower, who provides the service, is paid according to the success of its interventions. As such, payment by results contracts change the focus from what is done to what is achieved. Government bodies hope they will bring new impetus to solve intractable problems. The first social impact bond was launched in the UK in 2010, and the form is still evolving. Triodos Bank and CAF Venturesome, a social investment fund which invested in the St Mungo’s SIB, are both helping the UK Government to draft template contracts; similar work is underway in the US and Australia.
St Mungo’s will track the progress of 415 named individuals
Instead of working to blanket targets, St Mungo’s will track the progress of 415 named individuals. The objectives are exacting. One is to help them find work: a tough task given that nearly half of its service users are ex-offenders or have been in prison, and two-thirds or more have substance abuse and mental health problems. The data produced could also help to shed light on the causes of homelessness and the difficulties of reintegration into social structures.
“We are getting new insights. No one was pulling them together before”, says Adam Rees, the project manager at St Mungo’s. If the charity hits all its targets it will receive £2.4 million from the GLA. From this, it would recoup its delivery costs and repay the £650,000 of external social investment plus interest, and hopefully retain a small profit for the charity, an added attraction when social protection funding is shrinking, says David Evans, its Finance Director. Annual returns for social investors who supported the St Mungo’s SIB are 6.5%. Given the risks, commissioners “have to be prepared to pay for the upside. SIB projects can’t just be about cost-savings”, says Holly Piper, Investment Manager at CAF Venturesome.
For investors, prospective yields need to be appropriately risk-adjusted. We can’t simply rely on financiers to have philanthropic motives, says Dan Hird, Head of Corporate Finance at Triodos Bank. SIBs have no track record: the first, to help ex-offenders, has yet to run its course.
The St Mungo’s deal is structured to ensure that outcome risks are shared between the charity and external social investors; St Mungo’s has also invested £250,000 of first loss equity in the Street Impact project, which can be drawn on if things go wrong. For external investors, this was an essential sign of St Mungo’s commitment and confidence in its delivery of the programme.
Early results are promising. Six months in, all but 60 of the 415 rough sleepers could be accounted for: usually about a third would have drifted away by this stage, says Rees. Previously, the charity focused on helping homeless people into housing; now it has the means and mandate to motivate them to stay there longer, fight addictions, find work, and keep out of A&E.
As to what lies ahead, Hird at Triodos Bank says SIBs would take off more quickly if risks were shared more equally between commissioners, delivery providers and investors. One way of doing this is to ensure projects combine a ‘fee for service’ element with a ‘payment by results’ element, so that service providers can be sure of covering some of their costs.
The UK Government wants to scale up payment by results schemes, which will inevitably involve larger private sector service providers. But there are also dangers to this approach, including potential for cherry-picking to achieve outcomes and crowding out non-profit organisations, Hird warns. Driven by returns, private companies are likely to negotiate hard and may steer clear of the most challenging projects or individuals. If this happens, those with the longest journeys could get left on the road.