One of the most exciting innovations of recent times has been the development of social-impact bonds. These are loans raised in the markets or from private investors where the money is invested to finance and improve the social outcomes delivered by publicly funded services and the return on the bonds is linked to the success of the venture.
Thus there are bonds financing schemes to reduce youth unemployment, cut the number of prisoners who reoffend, and lower the number of children in at-risk families who get taken into care. If the outcomes are not better than they were before the schemes were put in place the investors lose out. If they do deliver, investors get a better-than-average return.
One of my more stimulating meetings this week was with Jim Clifford, head of the not-for-profit advisory arm of the accountants Baker Tilly who, on Wednesday, launched one of the most ambitious projects yet: a scheme to increase the numbers of successful adoptions of hard-to-place children. He knows of which he speaks. He has nine adopted children of his own and was himself adopted as a child.
The easy children to get adopted are white, male, single and under 12 months old. Anything away from that becomes more difficult, so that by the time a child gets to seven or eight, and particularly if there are siblings who need to be kept together, it becomes a much tougher task for the adoptive parents. Thus, in the UK, about 5,000 children seek adoption each year; of these, half are placed by local authorities, with the remainder put on the national adoption register. Each year about 2,000 of these never get placed.
Mr Clifford announced on Wednesday that he had raised £2m to finance a plan which will find homes for 100 children a year, and assuming it works, hopes for a second phase to raise more funds and boost the total to 300. The essence of his new scheme is that it brings together a network of adoption agencies and will provide the money for them actively to seek out families willing to adopt.
Crucially, it will then provide two years of pre and post-training so the parents have far more knowledge and support in dealing with the challenges thrown up by children who initially may well have severe behavioural problems.
A clever variation in the financing is that the bonds issued to raise the initial £2m pay a 4 per cent guaranteed return with the possibility of an additional success fee. The guaranteed return makes these a permitted investment for local authorities, in contrast to conventional social-impact bonds, which are ineligible investments because of the lack of certainty. Thus the initial finance comes from local authorities who would have to look after the children anyway at far higher cost.
The income to pay the interest on the bonds comes from local authorities who have responsibility for the children and who will pay fees related to the number of children adopted – fees which are significantly less that the costs of keeping them in care. Thus a second clever feature is that when the bonds are repaid in a few years’ time there should be sufficient surplus funds to refinance the scheme into the future, so it will become a permanent feature of the adoption scene. So it really could be a case of a social-impact bond delivering a permanent improvement in outcomes.