Britain is turning to a new payment-by-results scheme to provide public services from tackling reoffending or keeping troubled families together.
Three years after they were first conceived, interest in so-called social impact bonds is growing as a way to encourage private investors to take over services from governments battling the aftermath of the financial crisis.
AdvertisementThe idea is simple. Philanthropic or business groups put up money for a social project with defined outcomes, such as helping homeless people off the streets, and if it succeeds, the state pays the bill and investors reap the rewards.
If it fails, the investors lose their money and the taxpayer is unaffected.
Although they were first launched under the previous Labour government, the bonds fit into Prime Minister David Cameron's "Big Society" project, which seeks to transfer government functions to civil society groups.
"In the past a huge amount of money has been wasted, and we're still left with stubborn, difficult social problems," the government minister for civil society, Nick Hurd, told AFP.
"We're determined to do a better job in tackling them even though we've got less money, so we have to be much smarter about how we spend the money and that's why we're changing the culture."
Since the first ground-breaking project in 2010, social impact bonds have spread across Britain and they have also been adopted in the United States.
Cameron intends to use Britain's presidency of the G8 this year to promote the idea, saying earlier this month that developed nations faced a shared challenge of tackling social problems while reducing their debt.
"Making this work requires a new kind of financial investment to help grow a bigger, stronger society. Britain is a global leader in this field," he said.
The first social impact bonds were issued in 2010 in Peterborough, an otherwise unremarkable town in eastern England looking for a solution to high rates of reoffending among short-term prisoners at the local jail.
Charitable trusts and foundations funded a £5 million project to help 3,000 short-term prisoners reintegrate into society following their release from Peterborough prison.
If reoffending rates fall by at least 7.5 percent from what would be expected, investors will see returns of up to 13 percent a year.
Although the first results are not due until 2014, the initiative has been replicated across the country with a dozen other projects now in development, many of them supporting innovative methods that would not normally get funding.
In November 2012, the Greater London Authority approved a three-year outreach programme by two charities to help 800 homeless people off the streets of the British capital.
"What the GLA has done is basically say: we don't care how you do it, all we care about is the results, and that's great because it leaves us the free hands to design solutions," Mike McCall of the St Mungo's charity told AFP.
A week after the London scheme was approved, authorities in nearby Essex awarded a £3.1 million scheme to help 380 teenagers at risk of going into state care to stay with their families.
The success of the five-year plan will be measured by a reduction in the days the youngsters spend in care, as well as their school results and behaviour. If achieved, bond investors might expect returns of up to 12 percent a year.
Among the backers in Essex are private investment firm Bridges Ventures and Big Society Capital, which uses funds from dormant bank accounts, but supporters hope a wider range of investors will step in when the first trials are complete.
"There will be a tipping point I think once some of the results start coming in and people will look differently at it," said Alisa Helbitz of Social Finance, which specialises in arranging funding for social enterprises.
Danyal Sattar, social investment manager at the Esmee Fairbairn Foundation, which worked on the Peterborough and Essex projects, admitted the risks were high and said the yields may need to be raised to attract more backers.
Although his organisation likes the flexibility of the current system, he said: "At the end of it, to do this on a more replicated scale, government is going to have to offer appropriate returns to investors."