Peterborough SIB

Anna Shengelia - 2047

Microfinance
10/16/15

Contents
1.

The Peterborough Project ................................................................................................... 2

2.

Defining Social Impact Bonds ............................................................................................. 2

2.1.

The Peterborough SIB ................................................................................................. 3

2.1.1.

Challenges ............................................................................................................ 3

2.1.2.

Advantages ........................................................................................................... 4

2.1.3.

Results.................................................................................................................. 5

2.1.4.

Lessons Learned .................................................................................................. 5

2.2.

Other SIBs ................................................................................................................... 6

2.2.1.
3.

Rikers Island ........................................................................................................ 6

Conclusion .......................................................................................................................... 6

References ..................................................................................................................................

Abbreviations
PBR

Payment-by-Results

SIB

Social Impact Bond

P-SIB

Peterborough SIB

MoJ

Ministry of Justice

IRR

Internal Rate of Return

PoD

Point of Difference

Peterborough SIB | Anna Shengelia - 2047

1. The Peterborough Project

The Peterborough project piloted in May 2010, under the umbrella group One Service. It was
planned as a 6-year programme and funded by private sources. The target of this social venture
were prisoners with a conviction period of less that 12 months. Prisoners with a short conviction
period were not entitled to support or counselling upon release. Therefore their re-conviction
rates were very high. In the project 3000 prisoners of the Her Majestys Prison Peterborough
could voluntarily participate. Their re-conviction rates were compared to a control group, which
did not receive treatment.
Treatment started, while the offender was still in prison. Usually the inmate would be met upon
release to make sure that accommodation and first-day necessities were satisfied without need
of re-offending. They were assigned case-workers and received trainings such as job-trainings
or other initiatives that emerged over the duration of the project. It was funded using social
financing from the Social Impact bond and operated under a cooperation with the St. Gilles
trust. The underlying idea was to reduce re-offending rates and thus to create savings for the
Ministry of Justice and the tax payer (Tomkinson 2014).

2. Defining Social Impact Bonds

The name social impact bond is slightly misleading, as it is not a bond per se. The idea behind
this is, to have a contract with the public sector, which pays for better social outcomes. Part of
the savings to the government are transferred to (private) investors (Investopedia n.d.). In other
words, it is a partnership where social enterprises raise funds for scaling up from private
sources and the government pays a financial return to the investors if a certain result threshold
is met. It is a variation of pay-by-results financing models. Like any PBR it has many
stakeholders. For the public sector it reduces cost burdens and shifts the risk to the private
sector. For the service provider it is beneficial, because they are not paid by outputs and thus
bear no risk they receive the money upfront and can invest it in their social cause. The general
idea is, that private investors might fund more risky social businesses, than the government
would and thus it gives a funding opportunity to enterprises that otherwise would not receive
support. Further, for the investors the advantages of SIBs are that they receive financial returns
for social return a so called blended return. Finally the public sector also benefits from SIBs.
As they fund social businesses, they support the reduction or elimination of a social cause or
problem. In other words they support improvements in society and public life. Last but not least
SIBs have advantages for service users too. Certain groups of service users might not be
attractive for governments, big charities and funds. SIBs offer incentives to social entrepreneurs
to deliver interventions among these groups too (Disley et al. 2011). The SIB will be reviewed
more profoundly at the example of the Peterborough Social Impact Bond in the following
section. It is important to note, that although challenges and advantages are being discussed
based on a specific example, they are valid for other SIBs too, unless stated otherwise.

Peterborough SIB | Anna Shengelia - 2047

2.1.

The Peterborough SIB

The Peterborough SIB was the worlds first SIB. Approximately GBP 5 Million were obtained in
funds from 17 private investors and charities in UK and US to kick off the project by Social
Finance (Disley et al. 2011). The P-SIB tries to address certain struggles that service providers
face. The search for grants or funding is very time consuming, driving away valuable resources.
Moreover for service providers to secure government funding, they have to prove that there is
no other organisation that could provide the service in a better way. It was also problematic, that
the public sector is more focused on outputs (immediate results of activities) rather than
outcomes, not even to talk about impacts. The P-SIB avoided those through the following
contract:
They would tend to 3000 male inmates with prison sentences of less than 12 month (short
sentenced) and commit to reduce their re-offending in the year after release, compared to the
national average. Returns of 2,5% p.a. would be paid to investors if the reoffending dropped to
7,5% in all tree cohorts together. If reoffending dropped even beyond, to 10% in any cohort of
1000 prisoners each an even higher return would have been paid capped at a maximum IRR
of 13% p.a. Preventative work in re-offending would save the taxpayers a lot of money.
According to statistics 60% of the 40,200 adults on short-term sentences reoffend within a year
of release in the UK. The pilot SIB offered intensive support to 3,000 short-term prisoners in Her
Majestys Prison Peterborough over a seven-year period, both inside prison and after release, to
help them resettle into the community (Nicholls and Tomkinson 2013).

2.1.1. Challenges
Of course the project did not run without risks. RAND was able to identify a number of
challenges, based on interviews that were conducted later by Disley et al. (2011):
Ministry of Justice: The ministry of justice was facing complex negotiations on the contract.
Considerable effort had to be put into the analysis of the contract, the metrics and the payment
threshold. In the end the MoJ would pay if either the 7,5% threshold was met in all cohorts or
the 10% threshold in each cohort. However, some in the MoJ perceived the payment rate (7,
5% IIR capped at 13%) to the investors too generous and as such too risky.
Service Providers: The organization itself did not face any particular risks. They were paid in
advance independently of their performance or outcomes however they were under pressure to
deliver the promised outcomes.
Reputation: The P-SIB created a lot of media buzz and attention. It generated not only national
but also international interest. Therefore all involved stakeholders, like the MoJ, Social Finance
and the St Gilles Trust all faced reputational risks in case the project went bad.
Nationwide Rollout: The metrics of the P-SIB lived from comparing to a control group. That is
short-sentenced prisoners elsewhere in UK and Wales who had not received the treatment. If
the project was to be rolled out nationwide it would no longer be possible to carry out such
comparisons and different metrics would be needed (such as before-after-comparisons)
therefore limiting the P-SIB in scalability and growth (Nicholls and Tomkinson 2013).
Metrics: Defining the metrics is one of the biggest challenges of the SIB. They have to measure
the outcomes of an action, not the outputs. The biggest difficulty here is to control external
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factors and to prove that the outputs were achieved as a result of the undertaken actions. For
the metrics to work they need firstly to be directly linked to costs (so that the savings for the
public sector can be calculated). Also the savings have to be higher than the costs of delivering
the service. Secondly they have to be measurable and comparable to data in the control group
(otherwise the progress in the test group cannot be evaluated). Moreover data on the test group
has to be available in abundance. Finally the rewards and outcome metrics need to be
structured, else they would run in danger of incentivizing outputs and short-term gains. Three
points have to be always kept in mind regarding metrics:
1) Agreed upon metrics at start: The Metric is the core of the SIB and has to be
incorporated in the contractual agreement. As such it must be defined and agreed upon before
the launch of the project. All stakeholders must have a clear understanding of the metrics used
and the risks implied.
2) Specific parameters: parameters for the metric, e.g. target population or a different
parameter to be able to set a scope for the social impact of the SIB, to make it measurable.
3) Independence of the evaluator: The measurement should be left to an independent
party to reduce bias to a minimum. The measurement technology, just like the metric should be
made known to all stakeholders before the launch (Deloitte 2015).

2.1.2. Advantages
Despite the risks, the P-SIB did have significant advantages: It was based on private funding. In
other words the money came from private investors, driving away risk from the government.
Payment would occur only, if the measures were a success. Moreover it opened a path to
investors who might be less risk averse than the government. This means that it increased the
access to funding. Set at 6 years, the P-SIB was a much longer funding scheme, than the
average, putting the service providers at ease and allowing them to focus finances and
resources on the actual service. This way the service provider had time and opportunity to
experiment with structures and new ideas without worrying about the immediate outputs of the
project. They could actually focus on outcomes, impacts and scaling rather than the intensive
search for more funding. This also meant it was no longer needed to revise and reformulate
contracts on a annual basis, as had been done before (Disley et al. 2011; Nicholls and
Tomkinson 2013; Deloitte 2015).
Another strength of the Peterborough scheme was its monitoring. The scheme was run by
Social Finance, who also kept investors informed about progress. They used dashboards, which
displayed everything: Starting from how being met at the gates affected reoffending rates, to
monthly comparisons of activities of case workers. The structure of the SIB was very helpful.
Being a contractual mechanism ensured that investors, commissioners and providers agreed on
outcomes and maintained constant communication about progress. The metric was simple,
easy to measure and with a sufficient amount of data already available. On top of this it was a
metric directly linked to cost, so the savings to the government could be easily calculated
(Disley et al. 2011). A payment, that is based on only one outcome means, that while the
measurement of the outcome is fixed, the service provider has the flexibility to adjust the
activities and services provided to experiment with the outcomes and find the most impactful
activities (Nicholls and Tomkinson 2013).
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Peterborough SIB | Anna Shengelia - 2047

Other significant advantages include, that service providers can be grouped and commissioned
as one unit, allowing them to have a bigger impact together, than the sum of their individual
actions. For instance in the case of reduction of re-offending, several measures play a role, like
guidance, employment, training and finding a place to live. Under the SIB contract several
initiatives can be combined. Secondly the SIB contract allows each party to bring their strengths
to the table, making the project more innovative and resilient as a whole. In particular
governments can facilitate and provide frameworks, funders can enable by investing and also
bring expertise and ask challenging questions and finally the service provider has expertise in
delivering services and identifying service gaps (Deloitte 2015).
Moreover in the specific case of the P-SIB it would be beneficial to society to reduce reoffending rates, reduce the burden to tax payers and overall improve the social situation. Finally
it was the pilot of an innovative social financing method with possible future applications and
many potential lessons learned. So overall one can say that the advantages outweighed the
disadvantages.

2.1.3. Results
The P-SIB failed to meet the 10% target, but it did show an 8,3% drop in re-offending (at a 90%
confidence interval) compared to the control group and as such went beyond the 7,5%
threshold. But overall the results were rather disappointing, especially for a pilot with this mass
of media coverage and interest. The reconviction rate of the test group as of July 2012 till March
2014 is 40,4% versus 40,9% on a national level (Bank 2015). Eventually in April 2014 an
announcement was made, that the final cohort of the pilot was to be cancelled. Mostly because
the government closed the social gap by implementing a nation wide rehabilitation programme
Transforming Rehabilitation - for short sentenced offenders too, so the need for the
Peterborough Project was gone. Moreover the participation for the offender would no longer be
voluntary, as under the Peterborough Project, but mandatory. Moreover, as mentioned before,
the P-SIB needs the control group for the metric. By rolling out the nation wide programme the
metric looses validity and therefore the payment scheme of the SIB is no longer possible. One
can however say that the Peterborough Project served as a good testing ground for the big
governmental reform and has now become obsolete (Tomkinson 2014).

2.1.4. Lessons Learned

In conclusions a few valuable lessons can be learned from the P-SIB for future SIBs that will be
implemented:
-

Long Term contracts were a clear advantage and should be kept for future SIB
initiatives. They give stability and flexibility to the service provider and frees recourses
Single outcome metrics are always the most complex and time consuming part of the
contract. Focusing on one metric makes it less complicated, gives a clear goal (e.g.
reducing re-offending, this is not just about finding a house, a job or reconciling with your
family, it encompasses all) but still the goal very clear and simple and again gives
enough flexibility to try out different methods and learn on the go
Collaboration between service providers, government, funders and community is crucial.
Doing new things with many stakeholders involved is time consuming and not easy. The

Peterborough SIB | Anna Shengelia - 2047

P-SIB was a reminder, that solving social issues does not happen over night, it is a
process that needs time and experimenting with a range of activities.
Service innovation - the project underwent constant innovations during the course of its
operation and many initiatives emerged in the process, thanks to the flexibility that was
given to it. This is an important learning, as there is no way to foresee how a social
project will evolve before starting it.

2.2.

Other SIBs

After the P-SIB several other SIB financed social project were launched. Taking the P-SIB as
archetype one can draw comparisons and see differences. Below is a selected SIB from the
United States which had a similar mission to Peterborough:

2.2.1. Rikers Island

The Riker Island SIB was announced in 2012 by Goldman Sachs as the first SIB in the United
States (Olson and Philips n.d.). The project was aiming the reduction of the recidivism rate of
youth detained in Rikers Island, New York City, USA by using behavioural therapy, training and
counselling. Unfortunately it failed and was stopped. Like the P-SIB it was funded through
private investors, however with several differences. The scheme worked as a cooperation
between Goldman Sachs who lent USD 9,6 million to NYC, the intermediary MDRC who was
managing the project, an independent supervising body to review the results, and Bloomberg
Philanthropies who acted as a guarantor for the loan with a USD 7,2 million grant. If the goals
were to be met (8,5% reduction of recidivism) MDRC would receive a payment from the city to
reimburse the initial loan from Goldman. Had the rate dropped by 10% or more, Goldman Sachs
would have received a profit between USD 0,5 Million and USD 2,5 Million. In the case of
failure, the Bloomberg grant would be used to cover USD 7,2 million of the initial loan. This
change effectively reduces the risk to the investors capital loss to Goldman amounted to USD
2,4 million, or 25% of the investment. It is a major change of the P-SIB model, where the whole
risk was shouldered by investors alone (Cohen and Zelinck 2015). However this does not come
without cost. The failure of this SIB and the failure of the P-SIB, both pilot projects with a lot of
media attention, might leave the investment world wary and averse of SIBs. The risk arises, that
philanthropic money that could be put to greater good will be needed to reduce risks for
investors and keep the SIB an attractive investment option. This is not only a violation of the
claim of SIBs, that the risk is borne by the private sector alone, it is also in the long term
damaging to the third sector by diverting funding from other innovative sectors.

3. Conclusion
The SIB is placed at the heart of the overlap of private, public and third sector. It is a novelty
model in which one party carries the risk, one party does the work and one party pays for
results. There is no denying that it had some drawbacks. The failure of both Peterborough and
Rikers Island were given a lot of negative publicity in mass media. Moreover SIBs need highly
complex contracts, with many stakeholders involved. In addition one should not forget the issue
of defining the outcome and finding an appropriate metric to measure it effectively. These are
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serious challenges. But the Peterborough SIB did provide valuable lessons for future projects.
The Social Impact Bond is still young and new and not enough empirical data is available for an
objective judgement. On a subjective note, to be able to evaluate the SIB as a concept one has
to see it separated from the projects that were financed through it. The project can be
considered a failure, as it did not improve re-offending rates. However it successfully introduced
the Social Impact Bond as an investment alternative to the capital markets and successfully
created buzz and curiosity around it. The P-SIB was the first Social Impact Bond, so it was to be
expected that it would not run smoothly. But new SIBs to come can learn from these failures
and improve the model. Therefore this paper will conclude with quote by Antione de SaintExupery:
Perfection is finally attained not when there is no longer anything to add,
but when there is no longer anything to take away.

Similarly will the SIB eventually become a valuable investment alternative, after many more
failures, when all stakeholders have learned which parts of the complex contracts have to be
altered to make room for the more important thing the impact.

Peterborough SIB | Anna Shengelia - 2047

References
Bank, D. (2015), THE PRISON REFORM #FAIL THAT IS SHAKING THE SOCIAL-IMPACT
BOND MARKET <http://impactalpha.com/the-prison-reform-fail-that-shocked-the-socialimpact-bond-market/>, accessed 15 Oct 2015.
Cohen, D., and Zelinck, J. (2015), What We Learned from the Failure of the Rikers Island
Social Impact Bond <http://nonprofitquarterly.org/2015/08/07/what-we-learned-from-thefailure-of-the-rikers-island-social-impact-bond/>, accessed 15 Oct 2015.
Deloitte (2015), paying for outcomes: Solving complex societal issues through
Social Impact Bonds <http://www2.deloitte.com/content/dam/Deloitte/ca/Documents/insightsand-issues/ca-en-insights-issues-paying-for-outcomes.pdf>, accessed 16 Oct 2015.
Disley, E., Rubin, J., and Scraggs, E. (2011), Lessons learned from the planning and early
implementation of the Social Impact Bond at HMP Peterborough
<http://www.rand.org/content/dam/rand/pubs/technical_reports/2011/RAND_TR1166.pdf>,
accessed 14 Oct 2015.
Investopedia (n.d.), Social Impact Bonds - SIB <http://www.investopedia.com/terms/s/socialimpact-bond.asp?header_alt=true>, accessed 15 Oct 2015.
Nicholls, A., and Tomkinson, E. (2013), The Peterborough Pilot Social Impact Bond
<https://emmatomkinson.files.wordpress.com/2013/06/case-study-the-peterborough-pilotsocial-impact-bond-oct-2013.pdf>, accessed 15 Oct 2015.
Olson, J., and Philips, A. (n.d.), Rikers Island: The First Social Impact Bond in the United States
<http://www.frbsf.org/community-development/files/rikers-island-first-social-impact-bondunited-states.pdf>, accessed 15 Oct 2015.
Tomkinson, E. (2014), The Peterborough Social Impact Bond (SIB) conspiracy
<http://emmatomkinson.com/2014/10/27/the-peterborough-social-impact-bond-sibconspiracy/>, accessed 14 Oct 2015.