Social Impact Bonds provide a funding stream to support innovative ideas that can help in tackling complex social issues through prevention and early intervention. Examples of their use include reducing re-offending and tackling alcohol and drugs abuse. The use of Social Impact bonds is likely to receive a boost in the forthcoming Open Public Services White Paper.

The advent of community budget pathfinder schemes in April 2011, which will move spending decisions from Whitehall to the local area, will open the way for funds to be invested in ways which reduce the burden to the taxpayer in the longer term and which also provide a better outcome. See Public Service White Paper delayed.

In parallel with this development Social Impact Bonds will achieve the same ends with existing structures and processes.

The Bonds are based on a commitment from government to use a proportion of the savings that result from improved social outcomes to reward investors that fund the early intervention activities. The investors, who can be public or independent bodies, receive repayments which depend on the social impacts achieved.

A pilot scheme launched at Peterborough Prison in July 2010 aims to tackle reoffending by incentivising private organisations to run programmes by setting targets for income based on their success rates. The Social Impact Bond involves paying private groups to cut reoffending. The social investors will only be repaid if they reduce the reoffending of short-sentenced prisoners. If the scheme cuts reoffending by seven and a half per cent or more investors receive a share of the long term savings. The funds have been raised from trust funds and philanthropic organisations.

There are different models of Bond. In the Peterborough the contractors have raised their own capital. Another model is model where a local authority or a local strategic partnership borrows on existing markets for a package of investment in a social impact programme, for example teenagers at risk of NEET status. They would receive a series of payments in the future from national government if particular milestones are achieved associated with lower costs for national government.

A third alternative is to share the risk for a bundle of interventions, with finance raised from the market. Investors would take some of the risk for non-achievement of social outcomes. Payments would be based on results against benchmarks.

Social Impact Bonds have the potential to break the cycle of behaviour which leads to a great deal of suffering and is costly to the taxpayer.