A brief introduction to the concepts of Social Impact Bonds and Community Interest Companies by Private Public Associate Director Simon Morys

1. A beginner’s guide to Social Impact Bonds & Community Interest Companies Simon Morys Private Public Ltd November 2011

2. Social Impact Bonds t Master title style What is a Social Impact Bond? It is a payment by results contract with a public sector commissioner where up-front funding for a service provider of an intervention to improve social outcomes is paid for by investors. If the intervention works, investors get paid by the government. Social Impact Investment: the challenge and opportunity of Social Impact Bonds – Mar 2011 – The Young Foundation http://www.youngfoundation.org/social-impact-investment-november-2010

3. Early take-up The first SIB in the world is a prisoner rehabilitation scheme in Peterborough, where the bond raised £5 million . Lots of interest in central government and in local authorities. The idea is being taken up in the US and Australia too. Who invests and who might invest in future? The Peterborough bond was funded by foundations and philanthropists . The intention is that commercial investors will be attracted to future bonds if reasonable returns can be made. One potential source of investment is from the investment funds of endowed charities , rather than just from their grant-making allocations. This massively increases the pool of funds – there is about £100bn in endowed funds in UK charities which SIB organisers could potentially access. www.thirdsector.co.uk/news/Article/1055662/Analysis-social-investment-bonds-help-tackle-social-problems/ www.publications.parliament.uk/pa/cm201012/cmselect/cmpubadm/c902-iii/c90201 Investing in Social Impact Bonds

4. The St Giles Trust scheme is called Through the Gates. It reduces reoffending by providing a number of services including pre-release assessment, accommodation, training, support services for drugs and alcohol, and help in reintegration and job search. An assessment of the scheme by Frontier Economics in December 2009 (in the pre-bond period) found the benefits to be substantial, with a cost benefit ratio of 10:1. High ratios are possible because of the very high cost of prisoners – £50,000 a year – a reoffending rate of 61% for people who have been in prison for less than a year, and a very successful intervention. The Frontier assessment calculated that reoffending rates had been reduced by 40%. The treatment group for the scheme is taken as the whole of the Peterborough prison population serving sentences of less than a year, rather than just those enrolling in the scheme, so there is no cherry picking. http://www.frontier-economics.com/_library/pdfs/frontier%20news%20-%20through%20the%20gates.pdf http://sentencing.justice.gov.uk/?id=2&id2=gpfacts Peterborough Re-Offending: The St Giles Trust

5. With £5m invested, bond holders will get an annual return of 7.5% if offending falls by 10%. The maximum return is capped at 13% . There is no guarantee of a return - investors could lose all their money. How the Peterborough scheme is structured www.socialfinance.org.uk/sites/default/files/SIB_Launch_PR.pdf www.socialfinance.org.uk/sites/default/files/SF_Peterborough_SIB.pdf

6. Commissioning In other payment-by-results schemes, government has had control over the selection of providers. In Peterborough the government left the selection to an intermediary. Outcome measures The development of a methodologically robust outcome measure, which had the confidence of all stakeholders, was a time-consuming and analytically complex process. Statistical significance and attributing change to the intervention were crucial elements. Data management There is a SIB data management group comprising Social Finance, MoJ and an independent assessor. The group has already agreed several contractual clarifications or amendments which aim to ensure that the contracts describe accurately and precisely the data to be used in calculating outcomes. Outcome measurement relies upon comparison with a control group. Materiality SIBs work when the costs of achieving the target outcome are substantially lower than the level of the resulting public sector savings. This is essential to developing a financially viable investment proposition on which to raise capital. And a reasonable time horizon for the investment is critical. Lessons learned from the planning and early implementation of the Social Impact Bond at HMP Peterborough Disley E et al – May 2011 Early lessons from the SIB development process

9. Financing in early days is likely to come from charitable trusts and foundations, individual philanthropists and social entrepreneurs, and social banks like the Social Investment Business. Expected returns will vary between investors, depending in part on the assessment of risk. One social bank has an average value per loan of £100k, an average length of finance of two and a half years, interest rates of around 8%, and a failure rate of 5%-10%. Required returns will depend, for a serial investor, on expected returns on a range of investments, with high returns on some compensating for those that work less well. The table below shows the average rates of return that would be sought, depending on various rates of success and required average returns. Given the history of public sector programmes, achieving a sufficient level of success may be difficult. Social Impact Bonds funding and returns Social Impact Investment: the challenge and opportunity of Social Impact Bonds – Mar 2011 – The Young Foundation http://www.youngfoundation.org/social-impact-investment-november-2010 Return per investment with overall desired return of:` % success rate of portfolio: 95% 90% 75% 50% 0% 3% 5% 15% 41% 10% 13% 16% 27% 56% 20% 23% 26% 39% 70%

10. For more information on Social Impact Bonds please contact [email_address]

11. What is a Community Interest Company (CIC)? CICS are limited companies created for the use of people who want to conduct a business or other activity for community benefit, and not private advantage. By using business solutions to achieve public good, social enterprises have a distinct and valuable role to play in helping create a strong, sustainable and socially inclusive economy. A CIC has to carry out activities which fulfil a community purpose. There are a huge variety of purposes which meet the community interest test. These range from healthcare for a particular community, providing employment opportunities, or promoting climate change awareness. A CIC also has a lock on its assets. This prevents profits from being distributed to its members or shareholders other than in certain limited circumstances. It also means that all assets must be used for the community purpose. If the CIC is wound up, its assets must be transferred to another, similarly asset-locked body. Community Interest Companies

12. Charities can trade to pursue their public benefit purposes However, being a charity is not the best route for many social entrepreneurs because of the basic rule of charity law that charities must in most circumstances have volunteer boards. A major advantage of CICs is that their directors can be paid a salary This means that the founders of the CIC can retain strategic control of the enterprise by sitting on the board as paid directors. At the same time, the asset lock and community purpose requirements ensure that the social mission is protected CICs are less heavily regulated than charities. Nonetheless, other organisations, including local authorities and other public bodies, may be more willing to contract with a CIC than a commercial company. And as the social purpose is protected, CICs are also increasingly successful in attracting the kind of grant-funding traditionally restricted to charities. However, CICs do not currently benefit from any of the tax advantages that charities do.... How do Community Interest Companies work?

13. A CIC can be financed by loans or bonds There are limits on the amount of interest that can be paid, if the CIC agrees to pay interes,t at a rate linked to the CIC's financial performance. A CIC that is a Company Limited by Shares (CLS) can issue shares, but if the CIC buys back those shares only the capital paid for the shares can be repaid pound for pound, with no uplift In other words, all capital gains on buy back will belong to the CIC and not to shareholders or members. However, there is no restriction on the price at which shares in a CIC can be sold to somebody else. Where the CIC is a CLS, the payment of dividends is permitted up to 20p in every £1 nominal value There is also be a ceiling of the amount of a CIC's profit that can be distributed by way of dividends, currently 35%. Community Interest Company financing

14. Community Interest Companies: in numbers Source http://www.bis.gov.uk/cicregulator/

15. Culture and Sport Glasgow Trading CIC – museums, galleries and leisure services Culture and Sport Glasgow Trading CIC was established alongside a charitable trust – Culture and Sport Glasgow – to run the city’s museums, galleries and leisure services. The creation of these two new bodies has allowed services to be delivered more efficiently, with savings over the four years now reaching more than £35m. The CIC trading arm oversees the management and development of commercial activities that Culture and Sport Glasgow cannot undertake as a charity. Women Like Us - an award-winning CIC getting mums back to work Set up in north London to help women with children get back to work and help employers find experienced part-time workers. By offering careers advice and training, such as writing CVs, completing application forms and interview skills, a vital part of their work is to help women regain the confidence to rejoin the job market. And they combine that with an award-winning recruitment service, specialising in part-time jobs for employers across the capital. Isle of Skye Ferry - a CIC set up to safeguard an economic lifeline This boat crossing from Glenelg to Kylerhea on the Isle of Skye has run for almost four centuries, but in recent years its future looked uncertain. The owner of the ferry wanted to retire. Without a new buyer, the remote community would be in jeopardy. In early 2006, a steering group made up of residents created the Isle of Skye Ferry CIC. After initially leasing the ferry, grant funding allowed the CIC to buy the boat outright. Bookdonors has found a way to turn a burden – unwanted used books – into an asset Bookdonors receives second-hand books from charities, libraries and other organisations, and it sells them on the internet. Around a quarter of the money raised goes back to each supplier, helping them to fundraise for their cause (an economic bottom line). Tons of books are diverted from landfill (an environmental benefit). And Bookdonors provides training and employment to people with disabilities and the long-term unemployed (the social bottom line). It employs 22 staff and it has released more than £200,000 to charities so far. For more details on these case studies, and others, see the CIC regulator website : http://www.bis.gov.ukcicregulator/case-studies Community Interest Companies: examples

16. For more information on Community Interest Companies please contact [email_address]