A Technical Guide to Developing a Social Impact Bond: Criminal Justice

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1 A Technical Guide to ing a Social Impact Bond: Criminal Justice March 2011

2 Introduction This guide aims to set out the steps that are required to assess the feasibility of a Social Impact Bond (SIB) idea. It starts with the identification of a social issue where a SIB might be applicable examines each factor that must be considered if a SIB is to be effective. The guide is written to assist those developing SIBs to reach a stage where it would be possible to establish a contract between a public sector commissioner investors. This guide is one in a series of technical guides. Each document focuses on how a SIB can be to address the root causes of a specific social issue. What is a Social Impact Bond? A Social Impact Bond ( SIB ) is a contract with the public sector in which it commits to pay for improved social. On the basis of this contract, investment is raised from socially-motivated investors. This investment is used to pay for a range of interventions to improve social. If social improve, investors will receive payments from government. These payments repay the initial investment plus a financial return. The financial return is dependent on the degree to which improve. SIB Objectives Social Finance has created SIBs an based funding mechanism to provide new investment to improve social. SIBs fund preventative early intervention programmes which tackle the underlying causes of specific social problems. Incentives are aligned across public sector commissioners, external investors providers, all of whom are acting to achieve improved social as defined in a contract. The main objectives of the SIB are to: 1) Increase the pool of capital available to fund early interventions; 2) Encourage a broad diversity of providers collaboration between providers; 3) Create more market discipline offer predictable revenue streams for providers to enable those that are effective to thrive; 4) Align public sector funding more directly with improved social. The first Social Impact Bond was launched in September 2010 at eterborough rison. It funds rehabilitation s for short-sentence prisoners released from the prison, with the express aim of reducing re-offending. Social Finance is currently exploring a number of potential applications of SIBs in areas such as health, drug rehabilitation Children s Services. SIBs in Criminal Justice risoners on a sentence of less than 12 months receive limited or no statutory support post release. This lack of support combined with often chaotic lifestyles contributes to a high re-offending rate of 60% within a year. 1 There are a number of communitybased programmes that could significantly improve for offenders. For example, St Giles Trust employs ex-offenders to mentor prisoners in prison, meet them at the prison gates support them in the community. Their intensive support to prisoners has been shown to reduce re-offending by as much as 40%. 2 SIBs could fund rehabilitation across criminal justice, from preventing young people entering the system to helping habitual offenders break the cycle of reoffending. If successful, such interventions have the potential to reduce the dem on public s, such as prisons, generate cost savings. The Ministry of Justice could invest these cost savings in further preventative interventions, to create a virtuous cycle of rehabilitation at no additional cost to the taxpayer. 1 Managing offenders on short custodial sentences, National Audit Office, March St Giles Trust s Through the Gates: An analysis of economic impact, ro Bono Economics Frontier Economics, 10 December Technical Guide: Criminal Justice

3 Box 1 Criminal Justice: Identifying areas of need 60,000 adults per year receive sentences of less than 12 months. This makes up nearly 10% of the adult prison population. 3 Many short sentence prisoners are trapped within a re-offending cycle are in out of prison many times a year. Short sentence prisoners make up 65% of all admissions releases. They have, on average, 16 previous convictions. 4 The cost of providing a prison place is over 40,000 per year for men 5 over 50,000 per year for women. 6 The public sector also faces court costs police costs associated with these crimes. For women, custody can add to existing problems such as poor mental physical health, financial hardship substance misuse. 80% of women in prison have a diagnosable mental health problem whilst 70% come into custody requiring clinical detoxification. 7 The majority of women prisoners (55%) are mothers with children under the age of Of these children 12% end up in care 9 costing government around 40,000 per child per year. Children in care are more than twice as likely to go on to be convicted or cautioned later in life % of offenders sentenced to youth custody re-offend within one year, 11 higher than any subset of the adult population. Earlier intervention could prevent young people progressing into a life of crime. There were 101,825 offenders served with community orders in There could be significant financial benefits from preventing these individuals going on to receive custodial sentences in the future. Beginning the process Social Impact Bonds will not apply in all circumstances. In many areas, traditional funding streams will be more appropriate. To determine whether a SIB could fund solutions to a specific social problem, a number of factors must be considered. We set out below the various stages of the feasibility assessment process a series of key questions to be addressed. In Box 1, we highlight areas where additional investment in rehabilitation may be particularly beneficial. Figure 1 summarizes the key components of the feasibility assessment process. 3 NAO: Managing Offenders on Short Custodial Sentences (2010) 4 Ibid. 5 Bromley rison Briefing Factfile (2010) 6 Ministry of Justice: Making the Case (2010) 7 The Corston Report (2007) 8 Ibid. 9 Cabinet Office: Short Study on Women Offenders (2009) 10 The report of the Independent Commission on Youth Crime Antisocial Behaviour (2010) 11 Ministry of Justice: Breaking the Cycle (2010) 12 NOMS (2009) Technical Guide: Criminal Justice 3

4 Figure 1 Feasibility Assessment rocess social Key Questions What is the social issue you are trying to solve? Which population should this target? What sentence length/type? Should interventions occur in prison/community What are the needs of the target population? What are the gaps in provision? What s will meet the needs of the target population to improve the? Activities Consider specific local needs Assess stakeholder engagement in working with target population Assess the feasibility of measurement with each target population Is there an engaged commissioner interested in tackling the social issue? Focus groups with offenders Analyse research reports Consult with public voluntary sector organisations that work with offenders in the region hypothesis on the most appropriate Is there a compelling intervention programme to solve the social issue? Operating budget What are the programmes that could be funded as part of a SIB? Do these programmes have a track record of improving? What do these programmes cost to deliver? How do programmes operate alongside each other? Which metric should be used to evaluate the? What size of population is needed for measurement to be statistically significant? How do we structure a baseline/ against which to measure the impact? of Which departments generate cost savings from an improved? Mapping lscape of potential providers Reviewing quantitative evaluations of programmes that meet young people s needs Reviewing budgets of providers to underst cost of delivery Working with government independent researchers to evaluate the range of alternatives Ensure that the proposed metric is operationally feasible Ensure that the proposed metric will meet investors needs Working with the government s analytical team to estimate the cost saving from an improved Can a robust metric be? financial Can the SIB financial work? What proportion of cost savings will need to be shared with investors? Build a financial run a range of scenarios Does the financial generate savings to Government a return to investors? 4 Technical Guide: Criminal Justice

5 Defining the social issue social financial Social Impact Bonds provide investment to solve social problems. Define the social They issue provide an opportunity to deliver interventions at scale to individuals who are currently underserved. social When intervention defining strategy the social need it is important to consider who would benefit the most from an increase in rehabilitation support. Illustration of a social issue: Women offenders have different needs from male offenders. Many have a range financial of complex problems are caught in a cycle of abuse, victimisation offending. 13 The majority are also mothers. The provision of support in the community may prevent women from entering custody reduce the effect on their children families. than 12 months. If the definition is not focused it may be difficult for interventions to improve the target. However, Define if the social definition issue is too narrow, the target population may be too small to demonstrate a statistically significant effect. The target population should be defined clearly social social intervention objectively. strategyit is difficult to base intervention a SIB strategy on a population definition which is subjective or may change (e.g. participants in O 14 programmes). The social need identified target population should be a priority area for a commissioner, as without a commissioner there is no contract to raise investment against. Having an engaged commissioner will also facilitate the development of financial financial population definitions through access to data analytical teams. For example, in developing the eterborough pilot, the Ministry of Justice (MoJ) was involved from an early stage contributed analytical data expertise in developing a robust metric. The social need is the basis for defining the target population. The target population must be both easily identifiable accessible for intervention for instance, female offenders released from a particular prison having served a sentence of less Is there an engaged commissioner committed to tackling the social issue for a defined target group? 13 Short Study on Women Offenders. Ministry of Justice (May 2009). 14 rolific Other riority Offenders (O). Technical Guide: Criminal Justice 5

6 ment of the social e social financial Criminal justice SIBs look to fund interventions that tackle the Define the root social issue causes of offending behaviour. Most individuals have complex problems underlying their offending social behaviour. It is unlikely that one intervention is suitable in all cases. Consequently the SIB has been structured to bring together a range of tailored interventions that reflect an individual s needs the local circumstances in which the programme operates. It must be financial clear to investors how the proposed interventions will meet offender needs. This may require wide ranging interventions from a number of providers. Illustration of : a high proportion of looked-after children enter the criminal justice system. A SIB working with care leavers would address some of the needs of social this intervention group. strategy Care leavers often lack a supportive relationship, stable housing access to employment or training. An intervention could bring together a supportive housing agency with a specialist mentoring to meet these needs. Another important component in building the business case to investors is evidence that the selected interventions will improve. For example, financial the independent evaluation of St Giles Trust s Through the Gates programme 15 was an important element in the investment proposition for the eterborough pilot. Is there a compelling intervention programme to solve the social issue? Building the business case social financial ing the business case for a Social Impact Bond comprises several parallel work streams which are set out below. ing the social Operating Model & Intervention Costs Given that a SIB is likely to fund a consortia of providers, it is important to underst the total programme delivery costs, including infrastructure overhead costs. financial Illustration of an : Some offenders on community sentences are on a path towards prison. They need support to address the causes of their offending behaviour to break the cycle of re-offending. These include drug addiction, homelessness, unemployment lack of family support. The could be to provide drug treatment s, employment support housing. The will list the organisations that can provide this support explain how they will interface with other social s. A budget incorporating all s is necessary to determine how much money is needed from investors. The amount of investment required may be less than the total delivery costs if early payments are reinvested to fund delivery. An illustrative budgeting process is set out in Figure 2. The calculation should also take into account inflation other factors that could influence the delivery cost over the term of the contract. 15 St Giles Trust s Through The Gates: An Analysis of Economic Impact, ro Bono Economics & Frontier Economics, 10 December Technical Guide: Criminal Justice

7 Figure 2: Illustrative SIB Budget Guide Budget Size of population receiving community sentences (p.a.) (a) 2,000 articipation rate in mentoring support (%) (b) 50% Cost of mentoring support per participant ( ) (c) 500 Cost of mentoring support (, p.a.) (d) = (a x b x c) 500,000 articipation rate in employment support (%) (e) 25% Cost of employment support per participant ( ) (f) 1200 Cost of employment support (, p.a.) (g) = (a x e x f) 600,000 articipation rate in employment support (%) (h) 30% Cost of housing support per participant ( ) (i) 800 Cost of employment support (, p.a.) (j) = (a x h x i) 480,000 Variable Costs ( ) (k) = (d + g + j) 1,580,000 Overhead costs - including infrastructure ( ) (l) 500,000 Total Costs per annum ( ) (m) = (k + l) 2,080,000 Number of years of delivery (n) 4 Total delivery costs ( ) = (m x n) 8,320,000 Determining the Outcome Metric & Control Group The form the foundation of the SIB contract between the public sector investors. All stakeholders need to trust that there is an objective mechanism for assessing agreeing the degree to which social have been achieved. Such a metric needs also to be linked to cashable savings on the part of the public sector commissioner. Whether or not suitable can be identified is a key determinant of whether or not a SIB is the appropriate instrument for addressing the identified social issue. Care should be taken that the selected metric avoids perverse incentives. In order to measure the direct impact of the SIB-funded interventions on, a baseline or group is required. Whether a historical baseline can be used or a comparison group is required depends on the stability of historical data the availability of a suitable comparable population. The metric should be structured to minimise perverse incentives. For example, in the eterborough pilot the metric is based on reconviction events which captures the frequency of re-offending. This incentivises providers to work with a broad range of offenders, rather than cherry picking those who are most likely to succeed. Moreover, a frequency metric ensures providers persist with difficult offenders, whereas a binary metric would create a perverse incentive to give up should they re-offend once. Technical Guide: Criminal Justice 7

8 Outcome Valuation In the present environment the evaluation is likely to be the projected public sector cost saving generated by an improved. It does not seek to incorporate broader social benefits such as safer communities fewer victims. This may change over time. These wider benefits, whilst providing the social motivation behind the, are excluded from the valuation as they do not release cash from public sector budgets that can be used to make payments to investors. Illustration of an valuation: In Figure 3 we have outlined a methodology for estimating the cost of reconviction for an individual leaving prison. The valuation is a probability-weighted cost of a negative. The numbers in this calculation are hypothetical. The valuation in Figure 3 only captures public sector savings in the year post release. However, improvements in social will often generate public sector savings over multiple years. Individuals leaving prison often continue to offend over several years following their release. Therefore the valuation should include an estimate of the savings delivered over a longer time horizon, for example the next 3 to 5 years. When choosing a time period over which to measure it is important to balance the desire to capture the true value delivered by Social Impact Bond interventions the uncertainty of attributing longer term impact to interventions. The public sector savings from improved will be lower than those estimated in Figure 3. There are two potential reasons for this: 1) There is a high level of fixed costs in delivering public s. For example, a 5% reduction in re-offending will not directly translate to a 5% reduction in prison spend; 2) There is a risk that if interventions reduce reoffending, it may merely reduce overcrowding, rather than facilitate closure of prison wings. These issues complicate the valuation need to be considered when exploring the feasibility of Social Impact Bonds. Figure 3: Hypothetical Outcome Valuation cost of reconviction one year post release Guide robability / Cost The public sector cost of a reconviction within 1 year (in terms of police work, court costs, etc.) 13,000 Reconviction cost (a) 13,000 The likelihood of a reconviction leading to a further prison sentence (b) 40% The costs associated with that further prison sentence (c) 37,000 Average prison cost (d) = (b x c) 14,800 The likelihood of a reconviction leading to a community sentence (e) 60% The costs associated with that community sentence (f) 6,000 Average community sentence cost (g) = (e x f) 3,600 Hypothetical cost of a reconviction event with 1 year =(a + d + g) 31,400 Can a robust metric comparison group be? 8 Technical Guide: Criminal Justice

9 ing the Financial Model social financial The financial aims to reflect the economics of the SIB. It estimates the costs of interventions, overheads other fixed costs which together determine the level of investment required over the period of the SIB. Set against this will be the share of the cost savings agreed by the commissioner to be distributed to investors should a sufficient improvement in be achieved. The financial requires consideration of three factors: Intervention costs Outcome values Time horizon to realise investment returns SIBs work when the costs of achieving the target (intervention costs plus overheads fixed costs) are substantially lower than the level of the resulting public sector savings ( value). This is essential to developing a financially viable investment proposition on which to raise capital. The focus on reducing the re-offending of individuals already in the criminal justice system provides a relatively short time frame in terms of measuring success. For example, a widely accepted measure of recidivism is the 12 month re-offending rate, which provides a timely measure of intervention success. Does the financial generate savings to MoJ a reasonable return to investors? Next Steps We hope the process outlined above is helpful in developing a feasible SIB. Social Finance would be delighted to engage with you in order to support progress towards implementation. As a first step we would ask you to submit your responses to the key questions set out in the appendix. For more information please review our publications: We invite you to join the Social Impact Bond forum to connect with other interested stakeholders, or participate in our ongoing series of webinars. We wish you all the best with your SIB development look forward to working together. Towards a New Social Economy Blended value creation through Social Impact Bonds (March 2010). Social Impact Bonds Unlocking Investment in Rehabilitation (September 2010). Technical Guide: Criminal Justice 9

10 Appendix: Key SIB questions 1. Social issue These questions aim to underst the social issue being targeted whether there are programmes that have been shown to address this issue. It is important that the interventions have a track record of success in order to develop a robust investment proposition. What is the social issue you are trying to solve? e.g. Break the cycle of re-offending What are the systemic causes of this issue? Are there interventions that have been shown to improve this issue? 2. Outcomes These questions focus on the metric which would form the basis of the SIB payment. There must be an objective metric to give government investors confidence that payments will be made if, but only if, are truly achieved. What would the desired of the social impact bond be? How would the improvement in the social be measured? Are there existing objective measures of the? What is the current for the target population? e.g. Reduced re-offending e.g. Using government re-offending e.g. Government data e.g. Re-offending rate is 60% 3. Target population These questions focus on the ability to define the population that the SIB-funded programmes would target. An objective definition of the target population is another key element of the SIB agreement with government - to remove the risk of cherry picking those most likely to succeed. How would you define the target population who would receive s funded by a SIB? e.g. All prisoners serving a sentence of under 12 months leaving a specific prison Can you define the target population objectively? What criteria would you use to define the target population objectively? How do we identify people who are in the target population? e.g. male, over 21, released from a particular prison e.g. In prison How many people are in the target population? What are their needs? e.g. Housing, substance abuse counselling, employment, training How does the support need vary across the target population? 10 Technical Guide: Criminal Justice

11 4. Interventions This section seeks more detail on the interventions that would be funded by a SIB how robust the evidence base is for their effectiveness. It also requests some information on the cost of the intervention the probability of its success. What are the proposed interventions to be funded by a SIB? What are the proposed organisations to be funded through a SIB? Is there evidence that these interventions are effective at achieving the desired social? Is there a quantitative (statistically significant) evidence base? Has an independent evaluation of the intervention been undertaken? How have these interventions improved the e.g. They have reduced the re-offending rate by 12% How much do these interventions cost to deliver per person who receives them? e.g. 100 per prisoner 5. of the This section assesses the value of the to government. The value should not include broader social benefits that do not provide a cost saving to the government department(s) that are commissioning the SIB. Which government department(s) will financially benefit if the social is achieved? How will these cost savings be achieved? How much will the government save if the is achieved? Are these cost savings cashable? e.g. The Ministry of Justice e.g. Reduced prison spend reduced court costs e.g. The cost of re-offending is 50,000 i.e. Can the savings be realised (e.g. Closure of a prison wing) Technical Guide: Criminal Justice 11

12 About the authors Emily Bolton Emily is a Director at Social Finance having joined the team in She heads Social Finance s work to develop Social Impact Bonds to reduce crime offending. She led the development of the first Social Impact Bond in eterborough. rior to joining Social Finance Emily worked for REDF, a venture philanthropy fund in San Francisco. She also worked as a strategy consultant in the US the UK. Emily has a BA from Cambridge University an MBA from Berkeley where she was a Haas Merit Scholar. Jenna alumbo Jenna joined Social Finance in August 2010 having recently moved to the UK from Australia. She spent the previous five years working in corporate finance advisory, specialising in mergers & acquisitions capital raising. Jenna completed undergraduate degrees in Finance sychology a postgraduate in Applied Finance Investment. Jenna worked with several non-profit organisations on consulting strategy assignments was responsible for launching the non-profit organisation Goodcompany in Western Australia. Disclaimer Terms of Use This report is not an offering of any Notes for Sale is provided by Social Finance solely for information purposes. Neither Social Finance nor any of their respective affiliates, directors, officers, employees or agents makes any express or implied representation, warranty or undertaking with respect to this Document, none of them accepts any responsibility or liability as to its accuracy or completeness. Social Finance has not assumed any responsibility for independent verification of the information contained herein or otherwise made available in connection to the Document. The text in this Document may be reproduced free of charge providing that it is reproduced accurately not used in a misleading context. The material must be acknowledged as Social Finance copyright the title of the document be specified.

13 Social Finance is building a pioneering organisation to develop financial products that marry the ambitions of investors the social sector. We support social organisations to raise deploy capital; we work with government to deliver social change; we develop social investment markets opportunities. Many charities social enterprises face serious financial challenges that stop them from carrying out their work effectively. We believe that, if social problems are to be tackled successfully, organisations seeking to solve them need sustainable revenues investment to innovate grow. Our role is to devise the financial structures raise the capital to enable this to happen. Social Finance injects market principles into funding in a way that sts or falls on results both social financial. Our financial products forge essential links between the market, government society. In these times more than ever, there is a pressing need to harness social investment to make a long term difference to society. This is our ambition. Social Finance Ltd Great Titchfield Street London, W1W 5BB t: +44 (0) e: Social Finance 2011 Social Finance is Authorised Regulated by the Financial Services Authority FSA No:

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