We all know that in today’s economic climate budgets in every organisation are being squeezed and squeezed again, whilst the demands for services are not decreasing. This is a very real problem for our government, with increased demand on social services coupled with a reduction in available funding. So how have they addressed this problem? One of the initiatives they have launched are financial instruments known as Social Impact Bonds (SIBs).
What are SIBs and do they qualify for Social Investment Tax Relief?
What are SIBs
SIBs are designed to help reform public service delivery, with investors paying for the project at inception and receiving payments based on results. Payment is conditional on results, and results are measured by output, such as a decrease in hospital waiting lists rather than financial results, like a balanced budget or increased profit.
The outcomes are predefined at the contract stage and are measurable. Because payment is based on output rather than on the process, there is greater flexibility for innovation and increased freedom to implement solutions that work.
So how do SIBs work?
• A SIB is a contract with a government body, (i.e local authority), in which it commits to pay for improved social outcomes.
• On the basis of this contract, investment is raised from socially motivated investors to cover the up front costs and the ongoing costs of the programme (the fund).
• A service provider is selected – this could be an expansion of an already existing enterprise or a new service that has been specifically set up to deal with the issue.
• A set of quantifiable metrics are established against which success of the programme will be measured.
• After a fixed period of time an independent assessor determines how effective the programme has been based on the set metrics.
• If social outcomes have improved to the agreed level or measurement, investors will receive payments from the government officer.
• These payments repay the initial investment plus an agreed financial return.
Note that the financial return is dependent on the degree to which outcomes improve. If no social impact is achieved, investors will lose their money.
What can I as an investor do to protect my investment?
As a social investor you will want some influence over the way the project is delivered, given that you are taking much of the risk. This can be achieved in a number of ways:
• If available you can buy a share in the service provider organisation and/or you can take a seat on the board.
• You can attach specific conditions to an investment, such as the right to take control of or terminate the project in the event of sustained under-performance.
• You can appoint an intermediary to manage the service provider’s performance throughout the contract.
• You should use performance management techniques, such as detailed periodic performance reporting, to make sure projects are rigorously managed according to strong social values.
Do SIBs qualify for Social Investment Tax Relief (SITR)?
The good news is yes, SIBs do qualify for SITR as long as they have received SITR accreditation from the Cabinet Office. So not only can you invest in causes that you care about you can also benefit from attractive tax reliefs such as up to 30% income tax relief in the year of investment. if you want to find out more about the tax benefits read our earlier blog /blog/social-investment-is-it-for-me
If you are interested in investing, or attracting investment into your organisation, and would like our help please contact us at Sapphire Capital Partners LLP. We are happy to help.