By Shardul Oza

This blog post provides a description and an analysis of the social impact bond that is currently being designed in Essex County, UK.

Overview

The Essex County Council , a local authority in the United Kingdom, recently launched a £3.1 million social impact bond (SIB) aimed at decreasing the county’s adolescent residential care population (see the official announcement here, coverage by the Guardian’s here, and Instiglio co-founder Michael Belinsky’s initial discussion of the bond here). The launch of the Essex SIB affirms the UK’s position as a leader in innovative social financing. Over a dozen SIBs have been commissioned in the UK since the Peterborough SIB in 2010.

Target population

Through this program, private investors will finance an intensive therapy program for 380 vulnerable adolescents ages 11-16 with the goal of keeping them out of the state’s residential care program. lf the therapy program achieves predetermined objectives, such as diverting 100 adolescents from the system or decreasing the aggregate time youths spend in care, the county council will pay a return to investors. The target population will be comprised of at-risk youths who have been referred to the local authority.

As of March 2012, Essex County had 1535 children, participating in its residential care program (Source). These publicly-financed care programs are expensive. Social Finance estimates that placing an adolescent in residential care for one year can cost between £25,000 and £180,000 (Source). Youths who receive care also comprise a disproportionately large percentage of the prison population (25% of prison population, compared to 2% of general population) (Source) and a third are unemployed and/or not in school or training (NEET) by age 19 (UK Department for Education).

Structure

The Essex Council developed the SIB in partnership with Social Finance, a UK-based nonprofit which helps design, launch and manage social impact bonds. Social Finance is a leader in the social impact bond space, having pioneered the approach with the Peterborough SIB in 2010 (in association with the Ministry of Justice, UK).

Six institutional investors, most of whom have previous experience with SIBs, jointly contributed £3.1 million to fund the therapy program. Investors will receive a return of between 8 to 12% per annum if the program achieves its target. The entire investment is at risk: The authority will pay investors nothing unless the program is successful.

The bond allows for intermediate payouts, which will begin three months after the first cohort (20 adolescents) finishes the program.

Services

Multi-systemic Therapy (MST) is a community and family-based counseling program aimed at addressing the problems of juvenile offenders and at-risk youth. In this program, trained therapists work with the youth and his or her family to address the causes of delinquency. Services are delivered in the youth’s home, school, and community settings, with a strong focus on treatment adherence and program fidelity. Service duration averages 60 hours of contact over four months.

Action for Children UK, a non-profit organization specializing in youth outreach and family services, will be the sole service provider in this SIB. Action for Children is an experienced social services provider and currently works with over 50,000 at-risk and vulnerable children throughout the country.

The average cost of service delivery in this SIB is £10,000 per adolescent treated, and the average savings in this SIB is £40,000 per averted placement of an adolescent in residential care. Therefore, Action for Children will have to obtain an efficiency rate of 4-to-1, or selectively target adolescents – or both.

Investors

Big Society Capital, the UK’s first social investment bank, contributed £825,000, or 27% of the total investment.

Bridge Ventures, a private investment firm focused on social impact, contributed £825,000, or 27% of the total investment.

Barrow Cadbury Trust, a charity that works on poverty and social justice issues in the UK, invested an undisclosed amount. The Trust also invested an undisclosed amount in the Peterborough SIB.

Tudor Trust, a UK-based trust and grant-making organization which supports volunteer and community-based organizations, invested in both the Essex SIB and the Peterborough SIB.

Esmee Fairbairn Foundation, UK-based grant-making foundation which funds a diverse range of needs in the UK’s social sector, invested in the Essex SIB and was the lead investor in the Peterborough SIB.

King Baudouin Foundation, a Brussels-based foundation that supports development and social service initiatives in Africa and Europe, invested in the Essex SIB as its first-ever SIB investment.

David Burnett, a high-net-worth individual, invested in the Essex SIB as his first-ever SIB investment.

Charities Aid Foundation, a U.K.-based charity which works with companies and individuals to improve giving efforts, invested in the Essex SIB as its first-ever SIB investment.

Social Ventures Fund, a German company specializing in social enterprise investments, invested £250,000, 8% of total investment, as its first-ever SIB investment.

Measuring Success

The SIB evaluator will assess program success along a set of metrics, including the number of days spent in residential care, school performance, offending rate, and emotional well-being. The primary indicator used to measure program effectiveness will be the total number of days adolescents from a treated cohort spend in residential care, measured over 30-day time periods. Social Finance presents an in-depth discussion of how it selected performance indicators for the Essex Bond in their technical guide to designing SIBs (available here). In their analysis, the authors make an important point regarding their choice of success indicators: one does not want to incentivize program administrators or managers to keep those who need care out of the system by tying SIB payouts exclusively to the number of adolescents who use care (or the frequency with which they use it). By tying the program’s success to other indicators of the adolescents’ well-being (i.e., education outcomes), the program is designed to help the service provider reduce unnecessary use of the residential care system.

Another central question facing the SIB designers was whether to use a similar untreated cohort of at-risk adolescents as a control group or whether to use historical data on care usage and other outcomes to measure the program’s success. Social Finance and Essex County have decided to use the latter technique to benchmark program performance.

Several important questions regarding the structure of the program remain. We do not yet know how the payout will factor in other indicators such as emotional well-being, educational performance, or youth offending. For example, what happens if there is a decrease in the aggregate number of days that treated adolescents stay in care (relative to benchmark) but a slight increase in the treated group’s criminal offense rate? The sensible way to ensure that the service provider does not see an incentive to just reduce time spent in care to the detriment of the target population would be to have threshold metrics for other indicators, beyond which bond payments would decrease or stop. Deciding on how to weigh non-care outcomes and designating the threshold point for these indicators is a challenging task.

Second, the cost savings associated with a reduction in residential care is clear, but does the bond calculate the cost savings associated with an improvement in other outcomes such as a reduction in juvenile offending rate?

 

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