1. NEW MODELS FOR FUNDING COMMUNITY HEALTH & SOCIAL CARE Richard Todd richard.todd@socialfinance.org.uk Social Finance is authorised and regulated by the Financial Service Authority FSA No: 497568 18 OCTOBER 2012

2. ©Social Finance 2011 2 SOCIAL FINANCE IS PASSIONATE ABOUT IDENTIFYING NEW WAYS OF TACKLING ENTRENCHED SOCIAL ISSUES – WAYS WHICH ARE SUSTAINABLE AND SCALABLE

3. ©Social Finance 2011 WHAT WE SEEK TO ACHIEVE 3 Social Finance aligns government, investors and social organisations to address key social issues We are a team of finance and social sector specialists Social Finance is a not-for-profit organisation regulated by the FSA Financial structuring Capital raising Research & development Key social issues SOCIAL VALUE SOCIAL ORGANISATIONS Children in care Financial inclusion Criminal justice Employment Health care Affordable housing Excluded youth INVESTORS Trusts & foundations High net worth individuals Private banks Mass affluent Institutional investors Big Society Capital GOVERNMENT Central government Local government Commissioners Ministries Policy-makers

4. ©Social Finance 2011 Develop deep understanding of key social issues Identify effective interventions; analyse where the costs of failure rest Develop new revenue models which reward effective social action Build investor confidence in the financial and social value of these models Expand the range of investors able to support these models Work hard to make the models deliver in practice Build and share evidence of what works Change the way government seeks to tackle problems Help build and support growth of strong, effective social enterprises Expand the range of investors able to participate in social investment WHAT DO WE DO? IN ORDER TO AND THEREBY DELIVER SOCIAL CHANGE 4 Developing opportunities to deploy capital for social change Building the investor market Performance management Supporting market growth

5. ©Social Finance 2011 WHAT IS SOCIAL INVESTMENT? 5 Social investors seek a combination of financial return and social impact. 1,2 Social investment in the UK has grown from £0 to c. £200m pa over the last decade. The development of Big Society Capital should stimulate a more rapid development in the years ahead – BCG have forecast growth to c.£1bn by 2016. Charitable Trusts and Foundations have been behind much social investment, but affluent retail investors could also be an important source of funds. Total income to charities £50+ billion UK Social Investment £150-200m Charitable Donations £10 billion The financing landscape today:

6. ©Social Finance 2011 IMPACT OF SOCIAL INVESTMENT 6 Controlled innovation Due diligence rigour Immediate capital requirements Investment in management, skills & info. Service integration & partnerships Active investment Impact New service delivery landscape Social investment can often help support services develop, not just provide capital

7. ©Social Finance 2011 WHY COULD SOCIAL INVESTMENT PLAY AN IMPORTANT ROLE IN IMPROVING HEALTH AND SOCIAL CARE? 7 Despite the scale of investment in the health system, there remain areas where radical improvement is needed, but traditional NHS or private sector financial structures have been unable to effectively meeting this need. 1 Delivering the Cancer Strategy, NAO, 2010; 2 The Princes Royal Trust for Carers, 2011; 3 See for example Bauld et al, Journal of Public Health V32.1, Evaluation of Smoking Cessation Services, Tobacco Control 2003 Challenge facing health and social careOpportunity for social investment Funding on the basis of historical activity, not new opportunities e.g. a 2010 NAO report on the Cancer Reform Strategy noted commissioners reported difficulties in moving funds from hospitals for services in non-hospital settings; despite being a focus of the strategy, only 26% of PCTs carried out cost benefit analysis on different ways of delivering services 1 Flexibility to deploy capital unrestricted by existing structures and outside of traditional annual budget cycles Investment in R&D and ‘mainstream’ services, not the roll-out of new practice e.g. despite DH promoting the need to roll-out better support for carers, a recent survey of PCTs found spending on programmes actually fell £2.4 million in 2010 2 Ability to provide risk capital to fund the expansion of services Variable implementation of preventative and complex programmes e.g. multiple studies have highlighted the variation in outcomes achieved by NHS smoking cessation programmes 3 Stimulates a focus on performance management to protect investment

8. ©Social Finance 2011 TWO EXAMPLES OF SOCIAL INVESTMENT SUPPORTING SERVICE DEVELOPMENT 8 Structured SPV, performance management resources and social investment to support new payment-by-outcomes project delivered by multiple social sector service providers Project Aims to reduce re-offending amongst cohort of c. 3,000 short term male offenders (those serving less than 12 months) from Peterborough prison Individuals receive a range of intensive interventions from different third sector providers with a proven track records, both in prison and following release Funding Initial investors are socially-motivated, primarily charitable trusts and foundations, who are focused on improving social outcomes Outcome risk is transferred to investors - if convictions are reduced by more than 7.5% against a matched cohort, investors will start to make a return. If the services are unsuccessful, the original investment is not returned Peterborough Social Impact BondCare and Share Associates Development funding from Bridges Ventures to finance expansion of social enterprise Project Employee-owned provider of UK homecare, with five units in operation providing over 13,000 hours of care per week Company reports considerably lower staff churn than wider industry, allowing service-users to benefit from greater continuity of care Funding Bridges Ventures is an investment firm that aims to achieve dedicated social and/or environmental goals as well as aiming to achieve financial returns for investors Fund aims to address the funding gap often faced by social enterprises looking to scale, whilst allowing the fund to make a reasonable financial return to demonstrate a sustainable funding source for social enterprises INNOVATIVE FUNDING STRUCTURE FOR PREVENTATIVE SERVICES CORE INVESTMENT IN SINGLE SOCIAL ENTERPRISE TO SCALE-UP ACTIVITIES

9. ©Social Finance 2011 SOCIAL ENTERPRISES MAY REQUIRE CAPITAL TO DELIVER LARGER CONTRACTS 9 Number of contracts won by organisation typeAverage value of contracts won by organisation type 1 Survey of contracts awarded in 2011 identified as with the search term “community health” as detailed on UK health procurement portals (primarily http://www.supply2health.nhs.uk/default.aspx and http://www.publictenders.net/). Value of GP consortia contract not available. http://www.supply2health.nhs.uk/default.aspxhttp://www.publictenders.net/ Charities and social enterprises are already providing valuable services to the NHS, but these are often small and at the margin of core services. An analysis of a sample of 2011 community health contract awards by provider type 1 illustrates the issue. Anecdotal evidence suggests that financial barriers remain for third sector providers in winning core service contracts.

10. ©Social Finance 2011 EMPLOYEE-OWNED MUTUALS ARE AN EXAMPLE OF ORGANISATIONS OFTEN REQUIRING CAPITAL TO GROW 10 Small Day CentreLarge Health and Social Care Provider Large employee-owned social enterprise providing community health and adult social care that has recently spun-out of the NHS and local authority. c. 1,700 staff, turnover £52 million pa with a 5 year contract, net assets c. £250k Investment requirement Investment and working capital required to develop core business and to pursue asset-backed investment, such as developing care villages Potentially offering services to local health commissioners on a payment-by-outcome basis The centre is a small (c. 15 staff) provider of social care support. Staff are expected to spin-out to form an employee-owned social enterprise in April 2013 The staff aim to use the shift to a social enterprise to became a re-enablement organisation, spanning health and social care Investment requirement Initial funding is enabling capital improvements In the long-term to develop a ‘hub and spoke’ service model covering a wider geographical area Many new community health mutuals have high turnovers but relatively few capital assets, generating a need for finance if they wish to expand. 1 OrganisationTurnoverNet current assetsOperating margin Provider one £ 43,508,000£ 1,871,4391.1% Provider two £ 26,967,000£ 722,0000.03% Provider three £27,671,000£353,0003% 1 Source: Company accounts and internal management accounts

11. ©Social Finance 2011 SOCIAL IMPACT BONDS 11 Social Impact Bonds are a way of raising investment for new and innovative services A Social Impact Bond (SIB) is a contract with a public sector commissioner in which it commits to pay for improved social outcomes, such as reduced re-offending or improved health and well-being. On the back of this contract, investment is raised from socially-motivated investors. This investment is used to pay for a range of preventative services which improve outcomes and which reduce spending on costly acute services. The financial returns investors receive are dependent on the degree to which outcomes improve. A SOCIAL IMPACT BOND IS AN INSTRUMENT THAT CONTRACTUALLY SEEKS TO ALIGN FINANCIAL AND SOCIAL VALUE

12. ©Social Finance 2011 HOW IS A SIB DISTINCT FROM OTHER PBR APPROACHES? 12 A SIB is distinctive amongst payment-by-results structures in being explicitly designed to bring in new investment. COMMISSIONER TARGET POPULATION SERVICE PROVIDERS Service delivery SOCIAL INVESTORS COMMISSIONER SERVICE PROVIDERS Payment-by-results: % of savings from improved outcomes Implementation risk transferred to investors Up-front funding for interventions Payment-by- results contract TARGET POPULATION Service delivery Improved social outcomes leading to public sector benefits Services reliant on funding through existing resources of service providers Payment by results contractSocial Impact Bond Support for rigour in implementation

13. ©Social Finance 2011 SOCIAL FINANCE LAUNCHED THE FIRST SOCIAL IMPACT BOND IN PETERBOROUGH IN 2010 13 Providing a community base and volunteers INVESTORS £5 million SOCIAL IMPACT PARTNERSHIP Support in prison, at the prison gates and in the community Support to prisoners’ families while they are in prison and post release Support needed by the prisoner, in prison and the community. Funded as the need is identified 3,000 male prisoners sentenced to less than 12 months Reduction in re-offending MINISTRY OF JUSTICE/BIG LOTTERY FUND Payment on basis of reductions in re- offending St. Giles TrustOrmiston TrustYMCA & SOVA Other Interventions

14. ©Social Finance 2011 14 SOCIAL IMPACT BOND APPROACHES HAVE NOW BEEN DEVELOPED TO PROVIDE UP-FRONT FUNDING FOR A NUMBER OF NEW SERVICES - Essex County Council is commissioning a SIB to reduce the number of adolescents entering the care system. Investors will fund a new Multi- Systemic Therapy service to work with families. -Manchester City Council is procuring a new intensive fostering service, paid for on the basis of outcomes, with investors likely to cover the upfront service development costs and working capital requirements. - DWP has entered into a number of contracts with investors where payments are made if fewer young people become NEET. - The GLA has commissioned a SIB to reduce rough sleeping in London. Investment and commissioning models vary between these projects, but the aims are generally to incentivise better delivery, ensure sufficient upfront funding for new services and transfer implementation risk from commissioners. Manchester City Council (MCC) Children’s Services SIB Objective: Develop a new intensive fostering service for adolescents to improve outcomes and reduce use of residential fostering. Outline model: Providers/Investors fund the up-front development of the service and working capital requirements. MCC makes payments-by- results when young people are not requiring residential care and when other wellbeing outcomes improve. Rationale: Well-designed payment-by- results contract and investment should incentivise greater rigour in service delivery. Implementation risk transferred to providers/investors.

15. ©Social Finance 2011 WHEN IS A SOCIAL IMPACT BOND MODEL MOST APPROPRIATE? 15 1. A compelling social need that is a priority for public sector commissioners. 2. A promising, evidence-based intervention to meet this need that could be supported with up-front investment to scale. 3. Clear benefits from using social investment to fund interventions, e.g.: Enhanced rigour; Risk transfer. 4. The ability to structure social investment to address the problem: Investee organisation; Willingness to develop new delivery models. 5. The ability to structure an outcomes-based contract: Robust outcome metrics with clear attribution; Identifiable target population; Sufficient saving for investors and commissioners. 6. The opportunity to create social impact and develop a proposition that is attractive to social investors. Social Impact Bonds are most appropriate where a number of conditions are met:

16. ©Social Finance 2011 HOW CAN PROVIDERS ENGAGE WITH SOCIAL INVESTORS? 16 Developing a Social Impact Bond Working with providers and commissioners to identify gaps in provision that would benefit from up- front investment Detailed feasibility study work – typically 3-6 months to develop business case Note, minimum scale of investment to justify complexity of model Readiness for social investment Development of clear strategy and robust business plan for service expansion Identification of scale and type of capital need to support growth Potential application for grant funding to support development work (e.g. ICRF) Social Finance supports providers in accessing social investment

17. ©Social Finance 2011 DISCUSSION / NEXT STEPS 17 Where has the availability of investment restricted the ability of your organisations to deliver social impact? Where could up-front investment in preventative programmes improve social outcomes and deliver deliver public sector savings?

18. ©Social Finance 2011 18 THANK YOU