First Official Results Demonstrate Positive Outcomes at Peterborough

Today, Social Finance UK released the first official results on the Peterborough Social Impact Bond (SIB)—the groundbreaking transaction that inspired numerous projects around the world.  An independent evaluator found that the SIB-financed program, One Service, reduced reoffending among the first cohort of 1,000 ex-prisoners by 8.4 percent compared to the national experience.  If this trend continues, investors in the transaction will recoup their principal and earn a positive return when the project concludes in 2016, as this reduction exceeds the performance threshold of 7.5 percent.[1]

Beyond remaining on track to deliver social and financial returns to investors, the project at Peterborough is also demonstrating some of the core benefits of SIBs.  The project catalyzed a policy conversation throughout the United Kingdom about how to better rehabilitate short-term offenders, and the Ministry of Justice recently announced a nationwide program to deliver services to this population.  This underscores the potential for SIBs to spur government reform.

Additionally, the program illustrates substantial operational improvement over time, reflecting the power of data-informed project management and flexibility that are core to the SIB model.  Engagement and uptake of services in prison increased from 74 to 86 percent since services began, and from 37 to 71 percent post-release as One Service adjusted its operations.

As the world’s first SIB, Peterborough has become an iconic program, and in that context we are pleased and encouraged by these results – both as a sign of progress for the Peterborough project itself, and for the evolution of the entire sector.  They indicate that active performance management is critical, that investors are indeed taking on risks, and that the deal was well-structured to benefit all stakeholders in a fair and reasonable manner.  As clear-eyed practitioners in the field, we are well aware of the challenges inherent in launching a new financial instrument, and are mindful of the need for continual learning.  In that sense, early data points like these are valuable to all of us seeking to advance and build a strong field.

Perhaps most important, however, today’s announcement reminds us that the real value of SIBs lies in their ability to improve lives for vulnerable and underserved populations; the financial instrument is a means to an end.  As rigorous evaluation now reveals that the Peterborough project is delivering a meaningful improvement in life outcomes for formerly incarcerated individuals, which translates into fewer crimes, fewer families divided by the return of a father or son to prison, and increased numbers of ex-offenders who find gainful employment. This is the real bottom line, conveying the promise and power of the SIB model.


[1] There was a provision for early outcome payments in August 2014 had the program outperformed and delivered a 10 percent reduction in recidivism for the first cohort.  Investors will not be receiving these early payments, but are well on track to receive outcome payments for both cohorts as scheduled in 2016.

Entry by Jane Hughes, Director of Knowledge Management 

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Guest Blog from SFUK Director of Peterborough Project: The One Service Delivers Results for Peterborough Prisoners

Finally we can answer the question about how things are going in Peterborough. All the indicators so far had been positive but it’s great to hear that reconvictions are down by over 8%. If we keep up our hard work, our investors look likely to make a return in 2016.

This project oozes innovation and it has been so exciting to be part of it. The team of staff and volunteers are incredible, as are our local partners, so it is no surprise to find that we have had a positive impact. You often hear people talk about multi agency working but I’ve never experienced it quite like this before. The fact that we had seven years, a flexible budget and one outcome, to reduce crime, resonates with agencies across the spectrum and their buy-in has been fantastic.

It’s been hard to get an accurate sense of performance up until now as the control group hadn’t been created. We do know that clients and stakeholders have been reporting that crime is down and people are changing habits of a lifetime but it is so good to see it in black and white. (It’s official!)

Our clients face multiple barriers and often have entrenched behaviour patterns so this journey hasn’t been an easy one. I am so proud of the way they have embraced the opportunities and made efforts to change their lives. It has been really exciting to see them open up and engage with the service. Some take time to build trust, and progress has been slow and steady over the last three years. This reinforces my view that projects like this need to be long term, so we can establish meaningful relationships and integrate fully into the local landscape. It’s been really hard work and at times immensely frustrating but it’s great to know that it is working.

The One Service was set up to be a seven year project and that is what we all signed up for, so it could evolve and improve further over time. It is a big personal disappointment that it was brought to a close two years early and it is a decision that clients and stakeholders are also struggling to accept. The team will however do our best for the remainder of Cohort 2 and use the learning to date to continue to improve. Thanks for everyone’s support!!

Entry by Janette Powell, Social Finance UK Director of the One Service and the Peterborough Social Impact Bond

Social Impact Bonds: Healthy Dialogue on a Young Sector (from The Nonprofit Quarterly)

This article was originally published in The Nonprofit Quarterly and may be found online here: https://www.nonprofitquarterly.org/policysocial-context/24198-social-impact-bonds-healthy-dialogue-on-a-young-sector.html

 

Those of us with Google Alerts tuned to Social Impact Bonds, or SIBs, have found our in-boxes busier than ever in recent weeks. Toward the end of April, the UK government announced that the world’s first SIB, at Peterborough prison, would wind down early because the government would be financing the program itself starting in 2015. Barely a week later, there were Senate hearings on SIBs, which we found to be both balanced and intelligent, so we were surprised to discover that Rick Cohen seemed to have a different impression.

Now seems like a good opportunity to reflect on questions and concerns regarding SIBs. We at Social Finance share some observers’ worry about the gap between the hype and the reality of SIBs. Senator Angus King’s question, voiced at the Senate hearings, “Why doesn’t the government try to get it right?”—instead of financing social programs with private capital—resonates with us as well. And we understand Senator Kelly Ayotte’s puzzlement when she wondered aloud why the Massachusetts SIB involved $12 million in private capital but $27 million of outcome payments.

We view this as part of a healthy dialogue on an innovative and new mechanism to re-imagine the role of capital markets in social services; we welcome and even share many of these questions and concerns. The Senate hearings were an important part of this dialogue, in which senators posed questions that deserve a more thorough response than the limited time frame and format of the hearings allowed.

Do SIBs save the government money?

Senator Ayotte’s question about the $12 million to $27 million gap is the most easily answered, but unfortunately the Senate hearings did not allow time for a full response. The Massachusetts project involves $12 million in private capital, plus $6 million in recoverable grants (philanthropic grants that will be recycled for other philanthropic purposes). The $27 million is the maximum outcomes payment possible under the contract; at this level, the state would realize around $18 million in net savings—after the outcome payments have been made.

Indeed, a hallmark of all SIBs, including the New York State Social Impact Partnership led by Social Finance US, is the understanding that performance-based outcomes payments from government never exceed the savings and benefits accruing to the public sector. In the New York State project, for example, should a 40 percent reduction in prison recidivism be achieved, the outcome payments would total $21.54 million while the public sector benefits total $37.34 million. These numbers should lay to rest the suggestion that SIBs do not deliver cost savings.

Two of the Senate witnesses, who worked on a SIB analysis for the state of Maryland that recommended against the use of SIBs, referenced their report in citing a lack of cost savings. However, we challenge some of this report’s key assumptions, including those around marginal costs, multiple streams of value, recidivism and victimization reduction, and target population. The report assumes, for example, that a SIB would be focused on offenders with the average recidivism rate. However, a SIB targeting higher risk individuals (like those in Massachusetts and New York) would yield a larger absolute reduction in recidivism and, thus, more savings.

Also, SIBs are about much more than short-term savings. As Senator Mark Warner observed at the hearings, SIBs are “designed to ensure that government only pays for what works.” This stands in stark contrast to the “base budgeting” norm, which is framed by the prior year’s funding level rather than outcomes. Referring to base budgeting, Senator Ayotte quoted Ronald Reagan’s remark that “There’s nothing closer to eternal life than a government program.” SIBs are designed to break this mold.

SIBs also support evidence-based spending patterns and incentivize public-private partnerships. The Peterborough SIB, for example, is ending early not because it hasn’t worked, but because it has. Partly thanks to the SIB-financed project, government has become convinced of the value of funding reentry services for all short-term ex-offenders like those being served at Peterborough, and is taking on the responsibility for funding nationwide programs in the future. As Professor Jeff Liebman noted at the Senate hearings, SIBs are “useful for breaking through…obstacles to reform.”

And perhaps most important, short- to medium-term cost savings are only one aspect of the social and economic value that SIBs can deliver. We can monetize the budgetary savings achieved when SIB-financed support services succeed in keeping an ex-prisoner out of prison and gainfully employed over a 3-5 year time frame. What is left out of that equation, though, is the broader social improvement that derives from lower crime and a more productive citizenry.

Do investors demand an exorbitant risk premium?

Senator King suggested that the only way SIBs would work was if the funders took on substantial risk—for which they would expect to be compensated by a substantial risk premium, i.e., high returns on their investment. In a similar vein, some articles about the Peterborough events have suggested that future investors will be deterred from participating in future SIBs because of the early winding-down of Peterborough.

In fact, these statements reflect a misunderstanding of the motives of SIB investors. SIBs do not and should not appeal to finance-first investors, who are primarily motivated by profit maximization. Rather, SIBs are designed for double bottom line or impact investors, who seek social value alongside financial value. As Bank of America Merrill Lynch Managing Director Liam O’Neil recently remarked of their participation in the NYS project, “We were increasingly being told by our clients that they wanted their investments to be reflective of their values.”

Thus, expected returns on the Massachusetts and New York State transactions are in the low-to-mid-single digit range, which does not reflect a substantial risk premium. And from the Peterborough investors’ point of view, if the SIB contributed to government policy reform that removed the need for SIB financing, that is definitely a win.

Do these complex programs make heavy demands on scarce government resources?

Senator Ayotte worried, quite rightly, about the complexity of SIBs and the resultant demand on scarce government resources to structure and manage the projects. One of the witnesses argued that smallish pilot programs like Peterborough do not generate “significant” cost savings.

They’re right.

But this is the very nature of pilot programs and new models; as Senator Warner pointed out, SIBs are “a tool to leverage innovation.” Senator Whitehouse underlined this by commenting that government doesn’t do the “prototyping function” very well. In fact, all of the witnesses agreed that SIBs facilitate the innovation process by bringing in private capital to shoulder the risks of innovation. If all goes well and the SIB proves the value of up-front investment in preventative social services, then these services will become policy and the SIB financing is no longer needed. As in the Peterborough case, this counts as a win.

Why doesn’t government do this itself?

We wish they would. If government fully funded effective, evidence-based social programs aimed at preventing the emergence of serious problems like homelessness and substance abuse, then SIBs wouldn’t exist – and the world would be a better place.

But the fact is that they don’t. The Nurse-Family Partnership, which provides home visiting services to low-income, first –time mothers, is one of the most effective service providers in the U.S. As columnist Nicholas Kristof wrote in the New York Times,

This organization sends nurses to visit poor, vulnerable women who are pregnant for the first time. The nurse warns against smoking and alcohol and drug abuse, and later encourages breast-feeding and good nutrition, while coaxing mothers to cuddle their children and read to them. This program continues until the child is 2.

At age 6, studies have found, these children are only one-third as likely to have behavioral or intellectual problems as others who weren’t enrolled. At age 15, the children are less than half as likely to have been arrested.

For all of its clear value, however, Nurse-Family Partnership only has the resources to serve four to five percent of its target population every year.

In the absence of adequate funding from government and philanthropy – in the imperfect world that we inhabit – there is a role for private capital to help fill this gap.

No more silver bullets

Finally, let’s agree to retire the “silver bullet” charge once and for all. Those of us with knowledge and experience in the SIB market have never and will never assert that SIBs are a silver bullet for all social problems; this is nothing more than a straw man that SIB opponents like to use. Let’s agree to free our future dialogue of empty claims, hype and hyperbole—for the benefit of all.

In this frame of mind, we welcome the probing questions that have arisen around the Senate hearings and Peterborough announcement, and we appreciate the opportunity to add our thoughts. SIBs embody a new approach to private-public partnerships, so the field is enriched each and every time a creative dialogue emerges.

 

Entry by Jane Hughes, Director of Knowledge Management at Social Finance US, and Alisa Helbitz, Director of Research and Communications at Social Finance UK.

Peterborough SIB developments underline its flexibility and innovation

As you probably know by now, the prison recidivism project at Peterborough that was developed by our colleagues at Social Finance UK – the world’s first SIB — is winding down. The UK government has introduced a wide-ranging policy initiative to reform the entire probation system; as a result, support services will be offered to all short-term ex-offenders like those served through the Peterborough project. This means that the third and final cohort of the SIB will have access to services funded directly by the government rather than the SIB.

We see this new development as an opportunity to pause and reflect on its meaning for the entire SIB sector. Our colleague Toby Eccles, who pioneered the SIB concept at Social Finance UK, wrote the following analysis; we can do no better than to reproduce his words:

To understand this a little better, it is worth going back to why we developed the SIB model and set up the Peterborough pilot in the first place.

  • Enable innovation: It was felt that government struggled to try out new models or areas of public service delivery for fear of failure and the perception that if they spent money on something that didn’t work they would be accused of wasting it.
  • Enable flexibility and focus on outcomes: Organisations were frustrated that they were being procured to provide a series of defined inputs and processes, and then held to account to deliver exactly and only that. This produced two problems: firstly, for those providing a more holistic service they were often more expensive than another organisation that bid simply to provide the limited brief that they were asked for; and secondly programmes provided little room for learning. Success was to deliver what was pre-agreed, regardless of what was discovered during delivery.
  • Bring rigour to prevention: Preventative work was commissioned but often only for short periods of time, or unsustainably. Preventative services were perceived as a good idea, but usually weren’t being measured effectively. So they were at risk on the low end of the budget cycle, when money was tight, as they hadn’t built the evidence of their effectiveness.
  • Better alignment: Foundations often had quite a negative view of government. They fund things in the belief that if successful government will take them on, only to find that too often that is not the case and they are left with a dependent organisation on their hands. The SIB was designed to give each of government and foundations or social investors clear roles in the structure, allowing them to work together.
  • Investment in social change: We felt that creating positive social change at scale needed more than grant money. We thought that creating a structure that enabled investment in positive social change could, if successful, create an engine for further change and improvement to society.

When first considering the SIB model we looked at a range of areas, including reducing reoffending. When analysing reoffending it quickly became apparent that the lack of support for short sentence offenders, the lack of attempt to move people onto a different path, was simply wrong. So we gained a new objective, to demonstrate that we, as a country, should be working with short sentence offenders, rather than simply watching them going round and round the system creating more and more damage to themselves and others.

So how is Peterborough doing against those objectives?

  • Enabling innovationSuccess, the model was implemented, when without the SIB structure the project would not have been put in place.
  • Enable flexibility and focus on outcomesSuccess, as can be read in the RAND report, there are numerous citations from stakeholders that the model has enabled indeed required the service to adapt to the needs of service users and improve over time.
  • Bring rigour to preventionSuccess, what other prevention pilot do we know of that has had detailed figures published while it was ongoing? Admittedly, actual results according to the payment metric aren’t out yet, but this level of rigour simply isn’t normally seen.
  • Better alignmentSuccess, investors in the pilot were keen, and investors in further SIBs have also been keener to fund the programme than they would have been had it been a traditional grant funded project with no connection to government.
  • Investment in social change: Still building… We need more SIBs before we can claim that we have created a new investment community, though Bank of America Merrill Lynch distributing Social Finance’s New York State SIB to their wealthy clients is a significant step in this direction.

And finally, most importantly, have we made a difference to short sentence offenders? YES!!! There is a new statutory obligation to work with short sentence offenders across the country. Whatever the merits or otherwise of the wider… agenda, this is a very significant change on which many have been campaigning for a long time. Obviously it wasn’t just the Peterborough SIB that caused this change, but it clearly played a significant role…[Note: Final data using the SIB’s outcome metrics are not yet available, but early data indicate that while reoffending among short-term prisoners rose 10% nationally in 2013, at Peterborough it fell by 11%.].

Peterborough was not designed to be a test case for a national payment-by-results programme, but to enable innovation, to demonstrate the value of flexibility and focusing on outcomes, to bring greater rigour, and most importantly to shine a light on the woeful situation this country has with short sentence offenders. Against these objectives it has been and remains an iconic success, and a cause for celebration.

Entry by Jane Hughes, Director of Knowledge Management