A member of the London Assembly’s budget and performance committee has criticised the structure of the Greater London Authority’s first social impact bond for being too risky for the charities involved.

Meanwhile, a new report from the Social Market Foundation out today has warned that social impact bonds will be unlikely to appeal to mainstream investors because of the “impossibly” high risk they have to shoulder.  

This month, the architects of Greater London Authority’s (GLA) first social impact bond, designed to tackle rough sleeping, gave evidence to the London Assembly budget and performance committee.

The social impact bond will see St Mungo’s and Thames Reach support around 800 rough sleepers in London. Triodos has raised around £900,000 in capital for the social impact bond from investors. The social impact bond will run from 2012-15 and if it meets prescribed outcomes investors can expect a return of 6 per cent per year.

However, Assembly member Liberal Democrat Stephen Knight, criticised the structure of the bond, where as well as delivering services, both St Mungo’s and Thames Reach are investors.

“I believed the idea of social impact bonds is that charitable providers were not at financial risk, and philanthropic and private investors took on the risk. But in this case, Thames Reach is putting money in.

“Why would it be structured like this? Why place this risk on charities?” he asked.

Kelly Glaser, a social investment and finance adviser for the Cabinet Office, who gave evidence on behalf of government, said the structure was unusual: “This is the only one I know of where providers take on the risk. The upside is if you do well you gain more,” she said.

Thames Reach: We assessed risks

Audrey Mitchell, a director at Thames Reach, defended the social impact bond’s structure, saying that it was keen to put in its own funds to show its commitment and confidence.

“It is a different model,” she admitted. “But people will tweak the model as it develops. We did a huge risk assessment. We did not enter into this lightly.”

But Knight maintained the structure was too risky for the charities involved. During the meeting, Assembly members were also keen to establish whether social impact bonds would be rolled out across government - broaching the subject twice during the one-hour hearing. 

Government representatives said they were not aware of any plans. 

Later in the meeting, Mitchell praised the flexibility of social impact bonds. "Contracts are constraining and tightly restricted," she said. "In a social impact bond there is no daily timetable. You can spend all day with someone if necessary." 

Shared risk

Speaking to civilsociety.co.uk on its involvement in the GLA social impact bond, Jeremy Swain, chief executive of Thames Reach, said: “We chose to contribute just over a quarter of the working capital that we anticipate that we would require to deliver on the initiative.

“From conversation with potential social investors it was clear that this was seen as a positive thing – a vote of confidence in ourselves, so to speak.  The nature of social investment in this context is to share the risk but this doesn’t mean that an organisation delivering the service shouldn’t directly take a financial risk itself.”

Thames Reach would not disclose how much it has invested in the social impact bond. St Mungo’s has invested £97,000. St Mungo's will use any returns it gets on its investment to create a fund, where beneficiaries helped as part of the GLA social impact bond, will be able to access money to pay for something in the next chapter in their lives.

A spokeswoman for Social Finance, which helped design the GLA social impact bond, added: “We are delighted that different contracting models are emerging for the social impact bond market. VCSE organisations who fund the interventions show a high level of financial commitment and confidence in the service they are providing. They also retain the financial return.

“Likewise, the growth of a social investor base prepared to take on the financial risks to allow more VCSE organisations to participate in the outcomes based arena and at greater scale, is very encouraging."

Impossibly high risk

However, a new report from the Social Market Foundation (SMF) on social impact bonds has warned that there are big constraints on growing the social investor base for social impact bonds as they are unlikely to appeal to mainstream investors because of the “impossibly” high risk they would have to shoulder.

The Risky Business report explores the scope for developing a significant market in social impact bonds. It warns that would-be pioneer of social impact bonds face disproportionately high capital and transaction costs due to the small and undeveloped nature of the market.

It also says that few voluntary and community sector organisations have the capability to absorb and deploy large amounts of investment effectively.

The SMF concludes that, along with other interventions in the market, significant subsidy will still be needed from philanthropists or government if mainstream investors are to enter the market.

Commenting on the analysis, SMF deputy director Nigel Keohane said:

"There is a yawning gulf between what commercial investors and public sector commissioners want to get out of social impact bonds. They generally exist on a small scale but this makes it hard to isolate whether interventions have worked. Uncertainty raises the risks for government that it will pay for duff interventions; but also for investors, who fear they’ll not be paid for a job well done. Into this uncertainty one party has to be willing to take a leap of faith.

“Unless the government or philanthropists are ready to step make this leap of faith, the market is unlikely to be attractive to investors seeking market rates of return.”

The SMF analysis  also highlights that social impact bonds could nonetheless be important tools to drive innovation in public services.