Sir Ronald Cohen has faith in the financial sector to innovate for social impact – but we must also think about creating new currencies

February 3, 2011 at 6:19 pm 2 comments

By Alan Lockey

Last Monday I went to the RSA to attend a Keynote speech by Sir Ronald Cohen, the former chairman of the Social Investment Task Force  (click here to listen to the speech). The Social investment Task Force was a ten year investigation into capitalising the social enterprise sector and published its findings in April last year. More recently Sir Ronald has been leading the lobbying drive for one of the Task Force’s main recommendations, the creation of a centrally run social investment capital wholesaler, to be funded by claiming the assets of bank accounts that have laid dormant for 15 years or more.  This Social Investment Bank, or ‘Big Society Bank’ in coalition parlance, is due to be put in place in April this year and is expected to raise between £100m and £400m for social entrepreneurs.

Yet without diminishing the considerable shot in the arm this would give to the not- for-profit sector, it is fair to say that it was Sir Ronald’s role as a director of Social Finance, the organisation that has been running the Social Impact Bond pilot at Peterborough prison, which most palpably fixed the audience’s attention. With social policy think-tanks’ long-heralded cries for early intervention and preventative policies seemingly being taken seriously in Westminster following  Graham Allen’s recent report (to see Sarah’s great blog on this click here), social impact bonds (and their ilk) are very much the policies of the moment.

A ‘social impact bond’ is a bond where an investor buys bonds to fund preventative social policy measures now. The bond issuer (the government) will repay the bond with an agreed return on top at a specified later date, when an agreed set of outcomes have been realised. The bond then acts as an incentive to the service deliverer – don’t attain the outcome and you stand to lose on the investment.  In Peterborough this method has been applied to recidivism in young offenders with impressive results. The level of return is flexible, ranging between 7.5% and 13%.  In this way cream-skimming, the practice of focusing on the easiest to reach, is discouraged.

As Sir Ronald spelt out in more detail the challenges social entrepreneurs faced in raising capital and how they could be overcome by a combination of clearly defined outcome metrics and innovative financial products, I was struck by how much of his thinking chimed with the research the Innovation Unit and NESTA are currently undertaking into public sector commissioning.  As part of that work we have been exploring ways of creating ‘new currencies’ – such as Social Impact Bonds – as a way of moving towards a more innovative model of commissioning.

When we think about social innovation we usually think about new ways to design or deliver services – what they look like, what they do, who delivers them and how they are structured. The process aspect, how those services are commissioned, funded and by whom, tends to receive significantly less attention.

But this imbalance is misplaced when the process itself acts as a barrier to innovation; in this case, ends and means are inseparable.  If small social enterprises are going to play a larger role in public service delivery and the ‘big society’ is to become a reality then the process of commissioning is the metaphorical ‘eye of the needle’ through which the camel must pass.  In an age of austerity the temptation is to drive through efficiencies by contract aggregation – longer contracts with larger ‘prime’ providers, thus reducing transaction costs. But this merely exasperates the capital barriers faced by innovative social entrepreneurs who struggle to compete with the primes’ more secure capital foundations. The need to create new currencies is clear.

Social Impact Bonds are by no means a panacea; there are parts of public services where the application of any payment by results approach would be inappropriate. Well documented difficulties – how to isolate the intervention (and/or agency) that delivered the outcomes in more complex cases than recidivism and how to stretch the bonds over longer time periods whilst maintaining the attraction for investors – were again raised by the audience. But it was hard not to be persuaded by Sir Ronald’s confident prediction that the innovative capacity of the financial sector is capable of creating a range of different financial products – provided the investments are sufficiently attractive (a prediction unlikely to be disputed by students of the credit crunch!).  But this should not be the sole responsibility of the financial sector. As social innovators we must think long and hard about new investment models and different ways to leverage capital – we too need to develop new currencies.

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Entry filed under: Admin, Big society, Government Departments, Innovation Policy.

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2 Comments Add your own

  • 1. alex  |  February 4, 2011 at 9:24 am

    Alan

    Sir Ronald may be keen but HM Treasury seems deafeningly silent on SIBs.

    Any clues as to why, since the idea appears to have merit.

    Reply
  • 2. Innovating social currencies  |  February 21, 2011 at 10:06 am

    […] Sir Ronald Cohen recently argued at the RSA that we will being seeing much more financial innovation to fund social impact. Read more here. […]

    Reply

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