The government is asking private investors to fund new schemes aimed primarily at helping families in poverty.
The social impact bonds aim to fund initiatives which break the cycle of poverty. A share of the long-term savings for the taxpayer are then provided to the private investor as returns.
It costs the taxpayer around £4bn a year to support the 46,000 most deprived families in the UK, at an estimated cost of around £100,000 per family.
By investing in schemes which result in public sector savings, private investors are able to get a variable return depending on the cost saving achieved by that scheme.
The first social impact bond in the UK was launched in March 2010 by the then justice secretary Jack Straw.
It was operated by Social Finance and consisted of a six-year social impact bond with 3,000 short term prisoners at Peterborough prison receiving intensive support both in prison and in the community following their release.
If reoffending rates are reduced by at least 7.5% over the term of the scheme, investors will see a return on their investment.
Investors would not see a full return of their capital if reoffending rates are not reduced by at least 7.5%. If better results are achieved, investors will receive a return of between 2.5% and 13%.
New social impact bonds are expected to work on a similar basis, although they are likely to have different terms for investors.
These schemes are likely to attract socially responsible investors or investors looking for a way to help their local community. They clearly involve risk to capital, although with government backing they are more secure than structured investment products from banks, assuming cost saving targets are met.
It is always difficult to fully assess any new investment concept until the full details are known and it has a proven track record.
With memories of rioting and looting from earlier this month still fresh in our minds, the launch of social impact bonds is likely to capture the imagination of many people who feel they should make more of a contribution to fixing elements of broken Britain.
Photo credit: Flickr/mikecogh
