1.A Technical Guide to Developinga Social Impact Bond:Vulnerable Children and Young PeopleMarch 2011

2. Encourage a broad diversity of service providersIntroductionP and collaboration between providers;This guide aims to set out the steps that are requiredP Create more market discipline and offerto assess the feasibility of a Social Impact Bond (SIB)predictable revenue streams for service providersidea. It starts with the identification of a socialto enable those that are effective to thrive; andissue where a SIB might be applicable and examineseach factor that must be considered if a SIB is toP Align public sector funding more directly withbe effective. The guide is written to assist those improved social outcomes.developing SIBs to reach a stage where it would beThe first Social Impact Bond was launched inpossible to establish a contract between a publicSeptember 2010 at Peterborough Prison. It fundssector commissioner and investors.rehabilitation services for short-sentence prisonersThis guide is one in a series of technical guides. Each released from the prison, with the express aim ofdocument focuses on how a SIB can be developedreducing re-offending. Social Finance is currentlyto address the root causes of a specific social issue.exploring a number of potential applications ofSIBs in areas such as health, drug rehabilitation andChildrens Services. What is a Social Impact Bond? P A Social Impact Bond (SIB) is a contract with SIBs and Childrens Servicesthe public sector in which it commits to payChildrens Services departments across the countryfor improved social outcomes. address a range of needs when working to improvethe lives of children in their areas. These range from P On the basis of this contract, investment israised from socially-motivated investors. providing Childrens Centre services for the earlyyears to accommodating vulnerable children where P This investment is used to pay for a range of there are fears for their safety. Many of the activitiesinterventions to improve social outcomes. carried out by Childrens Services are statutory required by law to be provided by the State. Others P If social outcomes improve, investors willreceive payments from government. are more of a preventative nature trying to addressunderlying needs before they escalate into crisis. P These payments repay the initial investmentplus a financial return.Social Finance is developing a working hypothesisof how a SIB might fund more preventative services P The financial return is dependent on therelated to the activities of Childrens Services, withdegree to which outcomes improve. the objective of improving the wellbeing andprospects of vulnerable children and young people.Over time, if such interventions succeed, they shouldSIB Objectivesenable a shift in expenditure away from acutespending towards expenditure on early interventionSocial Finance has created SIBs - an outcomes-services reinforcing cycles of positive spending andbased funding mechanism to provide newoutcomes. There will undoubtedly be a range ofinvestment to improve social outcomes. SIBs fundareas in which a SIB could help to improve socialpreventative and early intervention programmesoutcomes of children and young people. In this guidewhich tackle the underlying causes of specificwe use our SIB working hypothesis as one examplesocial problems. Incentives are aligned acrossto demonstrate how to assess the feasibility of suchpublic sector commissioners, external investors and projects.service providers, all of whom are acting to achieveIn Box 1, we set out our working hypothesis for aimproved social outcomes as defined in a contract.SIB focused on reducing or preventing time spentThe main objectives of the SIB are to:in care by adolescents experiencing behaviouralproblems or family breakdown. The rest of thisPIncrease the pool of capital available to fundguide illustrates a SIB feasibility assessment basedearly interventions;on this hypothesis.Technical Guide: Vulnerable Children and Young People2 3. Box 1 Vulnerable Children and Young People: SIB Working HypothesisP There are significant numbers of adolescents in and at the edge of the care system due to behavioural problems or family breakdown. Typically, over 30% of looked after children are in the adolescent age range.P For many adolescents entering care there is a strong probability of staying in care long-term.1P Outcomes for looked after children are significantly worse than for children in the population as a whole. One example of this is educational attainment: 14% of looked after children achieve 5 GCSEs A*-C, compared to 65.3% for children overall.P The financial costs to Local Authorities of young people entering and remaining in the care system are high. The estimated expenditure on looked after children is more than 2 billion per year in England.2P The direct cost of placement for a looked after child is, on average, 40,000 a year. Placement costs range from 25k to 250k per child per year, ranging from foster care to specialist residential care.P There are interventions which address the needs of vulnerable young people and those of their parents, stabilising the situation and enabling the family to remain together. Such interventions range from those of a practical nature to the more therapeutic.P A Social Impact Bond could raise investment to fund interventions intended to reduce preventable family breakdowns and the number of young people entering care. A SIB could also fund support for those who have recently become looked after, aiming to swiftly reunite them with their families, where measures are in place to address the underlying needs of the young person and their family.P A lead outcome indicator may be one linked to reducing or preventing time spent in care which in turn can be linked to cashable savings and improved social outcomes. This would need to be balanced by a basket of indicators to reflect the well-being of the child.Beginning the processSocial Impact Bonds will not apply in allFigure 1 summarizes the key components ofcircumstances. In many areas, traditional fundingthe feasibility assessment process based on thestreams will remain the most appropriate. To hypothesis outlined above.determine whether a SIB could apply to tackling aspecific social problem, a number of factors must beconsidered. We set out below the various stages ofthe feasibility assessment process and a series of keyquestions to be addressed.1Sinclair, I. et al. (2007) The Pursuit of Permanence: A Study of the English Child Care System. The research shows that the chance of leaving care is greatestin the first 50 days of the child being in care. After that, the rate of leaving decreases rapidly.2The NHS Information Centre (2008) Personal Social Services Expenditure and Unit Costs England.Technical Guide: Vulnerable Children and Young People3 4. Figure 1 Feasibility Assessment Process Key QuestionsActivities P What is the social issue you areP Assess stakeholder engagementtrying to solve?P Assess the feasibility of De ne the social issueP Which population should this measurement with each targettarget?population P What age range? P What geographical area? Key Question: Is there an engaged commissioner interested in tackling the social issue? P What are the needs of the targetP Analyse research reportspopulation? P Consult with public and voluntary P What is the intervention point? sector organisations that work with P What are the gaps in service young people in the local areaprovision?P Focus group with young people P What services will meet the Develop social P Develop hypothesis on the mostneeds of the target population tointervention strategy improve the outcome? appropriate intervention strategy Key Question: Are there compelling intervention programmes to solve the social issue? Operating model and budget P Mapping landscape of potential P What are the programmes that providerscould be funded as part of a SIB?P Reviewing quantitative evaluations P Do these programmes have a track of programmes that meet youngrecord of improving outcomes?peoples needs P What do these programmes cost toP Reviewing budgets of servicedeliver? providers to understand cost of P How do programmes operateservice delivery Develop Developalongside each other?P Working with Local AuthorityoperatingoutcomesDevelop metrics and controlmodel Valueand independent researchers tometricsP Which metric should be used to outcome evaluate the range of alternativesand evaluate the outcome?controlP What size of population is needed P Ensure that the proposed metric isfor measurement to be statisticallyoperationally feasiblesignificant?P Ensure that the proposed metric P How do we structure a baseline/will meet investors needscontrol against which to measureP Working with the Local Authoritysthe impact? analytical team to estimate the Value of outcomecost saving from an improved EstimateP Which departments generate outcomebudget forcost savings from an improvedservice outcome? P What is the value of the cost saving? Key Question: Can a robust outcome metric be developed? P Can the SIB financial model work? P Build a financial model and run a range of scenarios P What proportion of cost savings willneed to be shared with investors? Develop nancial model Key Question: Does the financial model generate savings to the Local Authority and a return to investors in an acceptable time frame? Basic SIB structuredeveloped Technical Guide: Vulnerable Children and Young People4 5. Defining the social issueSocial Impact Bonds raiseIllustration of target population and referral point:investmentto alleviate adolescents aged 1015 years old, with behaviouralDe ne the social issuesocial neproblems. The SIBDethe social issueDe problems, who are referred social issuene the social issueDe ne the to the Childrensfunds interventions whichResource Panel of a Local Authority. Examples ofaddress the needs of a eligibility criteria of such adolescents might include:target group when there is siblings already looked after, family subject to other Develop social either Develop social no existing provision services, prior history of being looked after, at risk Develop socialDevelop socialintervention strategyintervention strategy intervention strategyintervention strategyor the existing provision is or record of youth offending.inadequate.If the definition is not sufficiently focused the DevelopIllustration of social issue: Developinterventions may be too diffuse to have a significant DevelopDevelopoperatingmodelDevelopadolescents between theoperatingmodelDevelopimpact on the target outcome. If the definition isoperatingmodelDevelop operating modelDevelop outcomesoutcomesoutcomes outcomesmetricsValueages 10-15 make up themetrics Valueoutcometoo metrics narrow, the target population may be too small Value metricsValueand outcome and and outcomeand outcome Estimatebudget forcontrol largest control Estimate age group enteringbudget for Estimate demonstrate a statistically significant effect.to controlbudget forEstimate budget for controlservicetheservice system. This groupcare serviceserviceis more likely than otherA Social Impact Bond requires an engagedage groups to remain incommissioner who is open to outcomes-based Develop Develop Develop Develop nancial modelcare and not return home.3 nancial model contracting where paymentsnancial model nancial model are made if agreedTheir needs are oftensocial outcomes are achieved. It is important toBasic Basiccomplex structurecould involve and work in conjunction with an engaged commissioner,Basic BasicSIB structureSIBSIB structure SIB structure developedsignificant breakdown in developed through access to data and discussion, in order to developed developedfamily relationships. Thosedevelop outcome metrics and target populationwho stay in care long term often experience poorer definitions.outcomes in health and education. Social Finance is currently working with threeOn the basis of the stated social issue, it is necessary Local Authorities Essex County Council, Liverpoolto clearly define the target population. It is thisCity Council and Manchester City Council. Wegroup for whom interventions will be funded andhave embarked on 6 month feasibility studies tooutcomes improved. There must be clear criteriainvestigate the potential for a SIB to fund servicesagainst which the target population can be targeted at vulnerable children, young people andidentified and a process through which referrals can their families.be made into the SIB-funded interventions.Key Question:Is there an engaged commissioner committed to tackling thesocial issue for a defined target group?3 Sinclair, I. et al. (2007) The Pursuit of Permanence: A Study of the English Child Care System.Technical Guide: Vulnerable Children and Young People5 6. Development of the social intervention strategy We are looking to develop To determine the feasibility of the intervention SIBs that tacklethe programme for SIB funding it is necessary to De ne the social issueDe ne the social issue De ne the social issue underlyingneedsof establish the impact the programme is likely to have vulnerablechildrenand on the target outcome. young people. Given that these individuals often comeThis is dependent on two considerations:Develop socialDevelop social Develop social intervention strategy from a family environment intervention strategyintervention strategy PThe degree to which interventions are well in which multiple risk factors understood and can be evidenced. are present, we recognise that no single intervention p Illustration of intervention development:Develop is suitable in all cases.Develop Develop operating modelDevelop operating model Develop operating modelSocial Finance is undertaking a review ofDevelopoutcomes Therefore, SIB funding aims outcomes outcomesemetricsValue metricsValuethe Value metrics interventions relevant to the definedme and outcome to bring togetheroutcome suiteand aandoutcomeEstimate control Estimate control Estimatetarget group. This involves investigating control budget for of interventions that arebudget for budget for serviceserviceservicequalitative and quantitative evaluations, tailored to address the needsinterviewing service provider staff members of both the young person Developand analysing how these interventions and his/her family members, DevelopDevelop nancial model nancial modelnancialmeet the needs of the target group and model and which reflect the localimprove their outcomes. Basic circumstances Basic which the inBasic SIB structure programme operates.SIB structureSIB structuredevelopeddeveloped P Whetherdevelopedthere is a gap or scarcity of service provision to the target population such thatA first step is to identify the SIB investment is likely to lead to a significantunderlying needs of the change in the target outcome. target group, which the selected interventions will tackle. Once the profile of needs is understood anp Illustration of intervention development: intervention programme can be developed. To do this, If there were little existing support for there needs to be a review of both national and localfamilies of young people who are at risk service providers to identify where complementaryof entering or who have entered the interventions could best meet the needs of the care system then investment in this area target population and achieve the desired outcome. is likely to yield higher social returns and The SIB funding structure encourages all service consequently financial returns to investors. providers to work collaboratively towards achieving the target outcome.Key Question: Is there a compelling intervention programme to solve the social issue?Technical Guide: Vulnerable Children and Young People 6 7. Building the business case Developing the business case a metric needs to be linked to cashable savings for a SIB comprises severalon the part of the public sector commissioner. De ne the social issueDe ne the social issue parallel work streams whichWhether or not suitable metrics can be identified are set out below. is a key determinant of whether or not a SIB isthe appropriate instrument for addressing an Developing the Operating identified social issue. Care should be taken that theDevelop social Model & Intervention CostsDevelop socialselected metric avoids perverse incentives. In order intervention strategy intervention strategy Given that SIBs are likely toto measure the direct impact of the SIB-funded fund a consortia of serviceinterventions on outcomes, a baseline or control providers, it is necessary togroup is required. Whether a historical baseline canDevelop operating have aoperating robust understanding Developbe used or a comparison group is required depends modelDevelopoutcomes of the total programmemodelDevelop outcomes on the stability of historical data and the availability metricsValue metricsValue and outcome deliverycosts, outcomeand including of a suitable comparable population. Estimatecontrol Estimate controlbudget forservice infrastructure and overheadbudget forservice costs. The development ofIllustration of outcome metrics: the outcome an indicative budget for the metrics against which success can be assessed are Develop proposed suite of services Developlikely to include a combination of objective and nancial model nancial model will determine the level ofsubjective metrics. The basket of metrics might funding that will need to be include an objective indicator linked to cost savings BasicBasic SIB structure raised from investors throughSIB structure such as a percentage change in those entering caredevelopeddeveloped the SIB. or a percentage reduction in the number of careweeks. Alongside this there might be a robust indexIt is important at the feasibility stage to consider theof target population well-being. The inclusion ofpractical implications of how the SIB can operate.a well-being measure in the portfolio of outcomeEngagement with a commissioner is helpful tomeasurements would help guard against perverseunderstand how the portfolio of SIB interventions incentives whereby a young person was preventedcould sit alongside the local authoritys business asfrom becoming looked after when it was in theusual processes. best interests of that young person to be lookedafter. Another outcome metric to consider is thatIllustration of Operating Model: discussions with of school attendance. This is an indirect outcomethe local authority commissioner may result in an metric but one which could be linked to betteragreement that referral to the SIB occurs at a pointlong-term outcomes for the young person. Socialwhen cases are taken to review at the ChildrensFinance is undertaking a detailed study of potentialResource Panel. An agreed set of eligibility criteria outcome metrics and associated comparison groupwould be required so that social workers reviewingdesign for a SIB based on our hypothesis above.the cases could easily identify those who should beconsidered for the SIB intervention. There wouldOutcome Valuationneed to be a plan in place for systematic monitoringThe outcome valuation for a SIB is the average publicof performance and collection of data through a sector cost saving resulting from an improvementcase-management system dedicated to the SIB. Ain the outcome. It should be noted that for thesystem of governance would need to be outlinedpurposes of analysing the potential returns tofor the SIB.investors, the outcome value is narrowly defined interms of the cost savings accruing to specific publicDetermining the Outcome Metric & Control Groupsector budgets.The outcome metrics form the foundation of the SIBcontract between the public sector and investors. All Illustration of outcome valuation: Local Authoritystakeholders need to trust that there is an objective social care cost savings due to a reduction in caremechanism for assessing and agreeing the degree placement costs. This potentially could be combinedto which social outcomes have been achieved. Such with other sources of savings where the relevantTechnical Guide: Vulnerable Children and Young People7 8. Figure 2: Illustrative Outcome Valuation average placement cost of a young person Type of placementProbability of admissionAverage cost per careEstimated average lengthinto placement (Column A) week (Column B)of stay in care for 10-15 year olds (Column C) Fostered (In-House)40%400 Fostered (External)20%900 60 weeks Residential20% 3,500(based on the estimation that Placed with parents 3%200majority will stay Kinship15%200in care for less than 2 years) Secure accommodation1% 5,000 Other 2%200 Calculation: Step 1 - Column A x Column B = Average cost of placement per person per week Step 2 - Average cost of placement per person per week x length of stay in care (Column C) Average placement cost throughout individuals care journey = 68,000 (excluding social services and legal costs)outcomes were achieved as a direct impact of theA quantification of broader social outcomes (e.g.SIB-funded interventions. Some examples include:safer communities due to reduced antisocialbehaviour, improved school attendance leadingP a reduction in local youth offending costs ifto better qualifications) reflect important social the SIB-funded interventions reduce offendingbenefits, but do not release cash from public sector behaviour amongst adolescents in the targetbudgets that could be used to make outcomes-based group. payments to investors in a realistic time frame. Thismay change over time.P a reduction in costs of places at Pupil Referral Units if school exclusions were reduced amongst the target group.The calculation set out in Figure 2 illustrates howone might start to value the outcome of preventinga young person from entering care. Key Question: Does the financial model generate savings to the Local Authority and a return to investors in an acceptable time frame? Technical Guide: Vulnerable Children and Young People8 9. Developing the financial model The financial model aims to This is essential to developing a financially viable reflect the economics of theinvestment proposition on which to raise capital.De ne the social issue SIB. It estimates the costs of interventions, overheads A reasonable time horizon for the investment is and other fixed costs which critical. Investors would prefer to see a SIB that together determine the levelmatures within a time horizon of around 5 years. of investment required over Therefore there needs to be a tight timescale Develop socialintervention strategythe period of the SIB. Setbetween intervention, measurement of impact against this will be the shareand payment on outcomes achieved. This is a of the cost savings agreedconsideration particularly in examples such as early by the commissioner to be years intervention (0-5 year olds). If the outcome Develop distributed to investors should metric is educational attainment, but it is necessaryoperatingmodel Developoutcomes a sufficient improvement in to wait 11 years (age 5 to 16 years old) to measureValue metrics and outcome outcomes be achieved. GCSE results for the target population, this will not Estimatecontrolbudget for make for a feasible SIB. For such a model to work,service The financial model requiresan earlier measure regarded as a reliable predictor consideration of threeof future performance is necessary. Develop factors: nancial model The focus on adolescents (aged 1015 years old) P Intervention costs provides a relatively compact time frame over Basic which to measure outcomes. For this age group, SIB structure P Outcome values research shows that if a young person remainsdeveloped looked after for more than a short time period (e.g. P Time horizon to realise 3 months), the likelihood of remaining looked afterinvestment returns on a long-term basis increases. Outcomes for theSIBs work when the costs of achieving the target young person become much worse with long-termoutcome (intervention costs plus overheads and care. Therefore one approach could be to measurefixed costs) are substantially lower than the level of placement-related outcomes at 3 or 6 months post-the resulting public sector savings (outcome value). intervention. Key Question:Does the financial model generate savings to the Local Authority and a return to investors in an acceptable time frame?Next stepsWe hope the process outlined above is helpful in We invite you to join the Social Impact Bond forumdeveloping a feasible SIB model. Social Financeto connect with other interested stakeholders, orwould be delighted to engage with you in order toparticipate in our ongoing series of webinars.support progress towards implementation. As a firststep we would ask you to submit your responses towww.socialfinance.org.uk/forumthe key questions set out in the appendix. We wish you all the best with your SIB developmentFor more informationplease review ourand look forward to working together.publications:Towards a New Social Economy Blended valuecreation through Social Impact Bonds (March 2010).Social Impact Bonds Unlocking Investment inRehabilitation (September 2010).Technical Guide: Vulnerable Children and Young People9 10. Appendix: Key SIB Questions 1. Social issue What is the social issue you are trying to solve? e.g. Improve outcomes for vulnerable young people in and on the edge of care What are the systemic causes of this issue? e.g. under-provision of services that address both the needs of young people at risk and their families Are there interventions that have been shown to improve this issue? 2. Outcomes What would the desired outcome of the social impact e.g. Reduced entry into care or number of bond be?care weeks; improved social outcomes for young people How would the improvement in the social outcome bee.g. Comparison data from other Local measured? Authorities, distance travelled Are there existing objective measures of the outcome? e.g. Government data on looked-after children population numbers and outcomes; National Indicators reflecting social outcomes What is the current outcome for the target group? e.g. 10-15 year olds make up more than 30% of those entering care; poor health and education outcomes 3. Target population How would you define the target group who would e.g. 10-15 year olds with behavioural receive services funded by a SIB? problems referred to a resource panel in a particular Local Authority Can you define the target group objectively?e.g. 10-15 year olds, referred to particular panel What criteria would you use to define the target group objectively? How do we identify people who are in the target group? How many people are in the target group? What are their needs? e.g. Behavioural and emotional problems, domestic violence, offending behaviour, mental health problems, drug/alcohol abuse How does the support need vary across the target group?Technical Guide: Vulnerable Children and Young People10 11. 4. Interventions What are the proposed interventions to be funded by ae.g. Adolescents or family support services, SIB? counselling services, drug/alcohol services What are the proposed organisations to be funded through a SIB? Is there evidence that these interventions are effective at achieving the desired social outcome? Is there a quantitative (statistically significant) evidence base? Has an independent evaluation of the intervention been undertaken? How have these interventions improved the outcome How much do these interventions cost to deliver pere.g. 5000 per family over 6 months person who receives them? 5. Value of the outcomes Which government department(s) will financially benefit if e.g. Local Authority Childrens Services the social outcome is achieved? How will these cost savings be achieved? e.g. Reduced placement costs How much will the government save if the outcome ise.g. Average placement cost per young achieved?person per year around 40,000 Are these cost savings cashable? i.e. Can the savings be realised (e.g.placements that are spot purchased are easilycashable)Technical Guide: Vulnerable Children and Young People 11 12. About the authorsLisa BarclayDiane MakLisa is a Director at Social Finance. She joined Social Diane is an Associate at Social Finance, prior to whichFinance from Bridges Ventures where she was anshe was a Fellow at the International Growth CentreAssistant Director. She focused on making private at the London School of Economics, which offersequity investments which would yield both financial independent advice on economic growth to countriesand social returns. Prior to this, Lisa founded anin Africa and Asia. Before that, Diane worked ine-government software business and worked as athe Policy and Research team of Transparencystrategy consultant for Marakon Associates. LisaInternational, where she was Contributing Editorstarted her career as a public policy advisor focusingof the Global Corruption Report. Diane started heron Treasury, Transport and Employment policy areas. career in the investment banking division at CitigroupShe was a Special Advisor at the Department for Global Markets, where she worked on a number ofEducation and Employment. Lisa holds a BA in Social M&A and capital raising transactions in the consumerand Political Sciences from Cambridge University andand retail sector. Diane holds a Master in Publica MBA from London Business School.Administration in International Development fromHarvard Kennedy School, and has a BA in Economicslisa.barclay@socialfinance.org.uk from Trinity College, Cambridge.diane.mak@socialfinance.org.ukDisclaimer and Terms of UseThis report is not an offering of any Notes for Sale and is provided by Social Finance solely for informationpurposes.Neither Social Finance nor any of their respective affiliates, directors, officers, employees or agents makesany express or implied representation, warranty or undertaking with respect to this Document, and none ofthem accepts any responsibility or liability as to its accuracy or completeness. Social Finance has not assumedany responsibility for independent verification of the information contained herein or otherwise madeavailable in connection to the Document.The text in this Document may be reproduced free of charge providing that it is reproduced accurately andnot used in a misleading context. The material must be acknowledged as Social Finance copyright and thetitle of the document be specified. 13. Social Finance is building a pioneeringorganisation to develop financial products thatmarry the ambitions of investors and the socialsector. We support social organisations to raiseand deploy capital; we work with governmentto deliver social change; and we develop socialinvestment markets and opportunities.Many charities and social enterprises faceseriousfinancial challenges that stop them from carrying out theirwork effectively. We believe that, if social problems are to betackled successfully, organisations seeking to solve them needsustainable revenues and investment to innovate and grow.Our role is to devise the financial structures and raise the capitalto enable this to happen.Social Finance injects market principles into funding in a waythat stands or falls on results both social and financial. Ourfinancial products forge essential links between the market,government and society.In these times more than ever, there is a pressing need toharness social investment to make a long term difference tosociety. This is our ambition.Social Finance Ltd131151 Great Titcheld StreetLondon, W1W 5BBt: +44 (0) 20 7667 6370e: info@socialnance.org.ukwww.socialnance.org.uk Social Finance 2011 | Social Finance is Authorised and Regulated by the Financial Services Authority FSA No: 497568