Incentives for impact: An idea for a Social Innovation Fund

Social investment has got a lot of air time recently, particularly since the G8’s report on the opportunity to create a global social investment market. The focus for unlocking the next billion, trillion or [insert large number here] has been concentrated on so called ‘mainstream’ investors such as pension funds and banks. But not much has been said about one of the world’s biggest investors – government.

In the G8 report, government was cast as an ‘enabler’ for social investment; creating the environment for it to flourish. It should improve commissioning, create institutions to seed social finance, like Big Society Capital, and support the development new business models to support social entrepreneurship. All of these are good things, particularly improving commissioners, but government as a social investor in its own right is hardly ever considered, or if it is, it is consigned to cursory paragraphs.

This seems odd as in the vast majority of the areas where social investment is likely to develop government is the commissioner and main revenue stream. Whilst government is seen as a dependable funder of social outcomes, it is not seen as an initiator of social investments and its return from social investment is limited to the savings generated through successful projects.

In part this is due to the idea that social investment is about unlocking resources to tackle issues which government cannot afford to do. There is also a traditional scepticism about whether government is able to ‘pick winners’.

However, even steep cuts to budgets leave government commanding of hundreds of billions of pounds of resources and employing a legion of commissioners/experts in fields such as health, education, environment and welfare. Government, therefore, has the resources and expertise to be an engaged social investor in its own right. The potential for local government, for example, to be a social investor was made recently by CAF in its think piece on social investment (PDF) .

Moreover, the process of making ‘investments’ may also help to shift the perspective of government from short term responses towards longer term preventative spending – a key ask in NCVO’s manifesto (PDF) for the 2015 election.

Towards a Social Innovation Fund

In its Breakthrough Britain 2015 report (PDF), the Centre for Social Justice asked for the government to unlock £400m in dormant insurance policies to ‘fuel a new generation of social innovation’ through a Social Innovation Fund (SIF). Leaving to one side whether this money can be accessed, getting money from dormant accounts can be a tricky business, a fund of this kind has the potential support to preventative spending with the voluntary sector.

Funding from this source could be used to seed an endowment which could make grants to voluntary organisations to deliver preventative projects, recognising that grants are an effective way to support innovation.  But a downside of grants is that there is no incentive for recipients to maximise the impact of the service they are delivering, beyond objectives set. Innovation in grant funding is usually focused on broadening the scope of projects or providing ‘new’ services; not in intensifying the impact of interventions, which can be just as effective. This point is made very powerfully in one of the Working Group papers (PDF)  for the UK G8 Social Impact Investment Taskforce by Impetus-PEF.

A model which may be able to combine the benefits of grant funding alongside incentives for an organisation to maximise its impact, is the Social Impact Bond (SIB) model.

There are a number of weaknesses with SIBs. They are expensive and lengthy to set up and there is the problem of how to set targets and attribute outcomes. However, there are also benefits for voluntary organisations. Most importantly, they provide long term funding certainty for delivery organisations, usually over three to five years, in the form of grants or contracts avoiding risky funding models such as Payment by Results. They also align incentives for the commissioner, social investor and delivery organisation so that all partners have a reason to maximise the impact of their intervention.

At present, social investors take the risk for delivering an intervention by providing funding to an organisation (or group of organisations) to deliver an intervention. They receive a return for their investment by taking a cut of the savings to government resulting from the success of the intervention. Some voluntary organisations are also ‘investors’ and receive additional returns if their projects are successful in meeting agreed targets.

But is a private social investor necessary for this model to work? Could a Social Innovation Fund take the role of the social investor, with returns on the investment being recycled into additional preventative spending with the sector?

Cutting out the middle man?

Using the SIB model, a new government SIF could contract directly or provide grants to voluntary organisations, or groups of voluntary organisations, to deliver an intervention sponsored by a commissioning authority (e.g. a local council, Clinical Commissioning Group or Police and Crime Commissioner) that wants to commission a preventative project but cannot afford the upfront cost. The savings generated through the intervention could then be shared between the SIF, providing an opportunity for funding to be recycled into other preventative projects, and the commissioning authority.

In order to encourage maximum impact, for outcomes achieved in excess of an agreed target, voluntary organisations could receive a share of the savings generated. For example, for every additional individual in a cohort that is successfully rehabilitated beyond an agreed target, the voluntary organisation could receive a slice of the additional savings accrued to the commissioning authority and SIF.

This would provide a financial spur for delivery organisations to focus on continuous improvement of their interventions without generating additional risk for delivery organisations – not Payment by Results but ‘Incentives for Impact’. The cost of delivering the intervention would be covered by the SIF and the ultimate risk would sit with it, not the delivery organisation. The public would also win as success beyond agreed targets would not only save public money but any additional funding to voluntary organisations would be recycled into other work that generates public benefit.

The Fund could also use its resources to spread the lessons from these investments, inspiring further innovations, supporting the development of common outcome measurements and identifying successful interventions that can be rolled out nationally; supporting wider ‘social innovation’.

What do you think?

There are other ways that government could act as a social investor and other ways that government could be encouraged to spend more on preventative measures. But what do you think? Could we have ‘social investment’ without a private social investor?

Please let me know your thoughts in our comments box below.

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Andrew was NCVO’s senior policy officer. He covered issues around funding, social investment, tax and the impact of the economy on the voluntary sector. Andrew has left NCVO, but his posts are kept here for reference purposes.

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