Item 2 is the fourth and final round-table discussion on the theme of fiscal sustainability. The discussion will focus on additional funding methods. I welcome to the meeting Mr Jonathan Flory of Social Finance Ltd; Mr Andrew Muirhead of Inspiring Scotland; Mr Mark Graham of PricewaterhouseCoopers; Mr Duncan Thorp of Social Enterprise Scotland; Dr Emma Disley of RAND Europe; and last but not least Mr Michael McCarron of Apex Scotland and Addaction.
Thank you for the opportunity to be here this morning. Payment by results is very much a feature of the landscape that we all live in at the moment. To a degree, that is the backcloth of the benefits that we think social investment may be able to bring to helping social needs. The social impact bond or social investment is helpful for preventative spending because it brings finance into an area that may be unproven, with methods that may be innovative. The finance is linked specifically to positive social impacts and social outcomes, and it is rewarded only if those social outcomes are achieved.
If such models are not introduced, will certain individuals be likely to miss out completely on state assistance?
In any budgetary process, there is a wish list for where we would like to spend money and we must prioritise. In some cases—particularly in preventative areas—Government would like to be able to spend but simply is not capable of doing so. In such a context, social investment is a useful tool, because it enables Government to transfer the cost of the programme and ensure that it pays for it only if there are visible, previously identified and previously valued social outcomes.
I am fascinated by the area and I thank all the witnesses for coming to give us evidence. A couple of things occurred to me when I was reading your submissions. On page 4 of the report on the Peterborough prison pilot, it is suggested that, with the benefit of hindsight, the project was perhaps too small to be commercially attractive. PWC talked about the issue of what the conditions for success might be, and Inspiring Scotland noted that there are barriers and potential problems to do with the tax treatment of payment by results.
You suggested that we said in our report that the Peterborough pilot was too small. The point that we were making was that the United Kingdom Ministry of Justice does not expect the Peterborough pilot on its own to deliver cashable savings—we are not going to close Peterborough prison. I think that the Ministry of Justice was pretty clear that the project was intended to test the concept and ascertain whether it is possible to raise money from private investors, use it to deliver interventions to offenders and then track outcomes and make decisions about outcome payments. Whether the project was too small to be a viable commercial option is a slightly different question.
How do we gauge the success of programmes, compared with what is already being done? When we pay for performance, how do we know that a project has delivered something that would not otherwise have been delivered?
The approach is perhaps different for each project. In the Peterborough prison pilot, the test is relative performance. That is, we look at the reduction in reconviction events from the pilot compared with the results for a simultaneous matched control group from similar prisons nationally. That is one method. The other method, which we can see in the Department for Work and Pensions innovation fund and the work programme, is that the Government’s economists pre-value the benefit to the Government in terms of the cashable savings of a particular outcome, and the Government offers bidders the opportunity to bid up to that value in order to win the contract. Those are the two models that we have at present.
The Peterborough pilot involved offenders who were sentenced to less than 12 months. Currently, that group receives no statutory supervision. There will be ad hoc interventions and provision on a prison-by-prison basis but, in general, we can compare the Peterborough group with other short sentence offenders and make a fairly safe assumption that that group is currently getting nothing, so it is a nice model to use in testing the effect of the intervention.
I am keen to explore the general concept, which is interesting. Under the model, the private sector pays for services up front and is repaid by the public sector over a period of time, so in a sense it is almost like a public-private partnership for the procurement of services. I do not say that as a value judgment; I just note that the principle is similar.
Before I comment on that, I want to return to the earlier point about tax. As we look at different types of investment, we need to consider their tax treatment. At present, the vehicle sits between two regimes—investment and taxable. That issue needs to be resolved. In some ways, it could be resolved in the construct of the way in which performance-related payments are operated, but if we are to have such vehicles, it would obviously be attractive and give them legitimacy for them to have an appropriate tax treatment.
I will pick up on the issue of viability and size. In the context of public expenditure, the current use of the methods is minimal—the approach is being tested. If payment by results is to develop, at least four things will probably have to be considered or put in place. One is measurement and procurement guidelines. Because this way of commissioning is absolutely new to the public sector, we need data to support the consideration of potential impacts. Secondly, with early intervention measures, the benefits to the public sector will be across a range of services. The issue is how to capture those benefits across the parties and get them to agree that they will pay on the basis of results.
I have an observation more than a question. In the documents and the comments so far, we have heard about issues such as whether the projects are viable, whether they require to be on a certain scale to work and whether they should involve private finance. However, the issue comes down to what hue of Government will want to promote such an approach. Is there an ideological barrier to the approach ever being tested in this country, given that most of the debate seems to come down to arguments such as, “We’re more opposed to private involvement in the public sector than you are”? The approach might be tested elsewhere, but in Scotland it will only ever be used as a model to create a debate that is based on the argument, “We oppose this more than you do because we hate private finance more than you do.”
That is a fair point, but most politicians tend to be pragmatic at the end of the day. In the United States, the Republican Party and the Democratic Party have gone down this road for many years.
The paradox is that, as Jonathan Flory said in his opening statement, we are talking about innovative and untested approaches, so if it is demonstrated that they have significant social benefit to individuals, you as politicians will probably wish to pay for them anyway. There is an element of innovation and testing new approaches to social issues. If those approaches work, Government can pay for the outcomes. You do not have to go to the private sector to get finance for working capital.
I want to follow on from some of the points that have been made so far. The words that jumped out at me in the quote that the convener read out were “transferring the risk”. That reminds me of the private finance initiative and its broadly accepted failure to transfer the risk. I immediately wondered whether we really have evidence that real risk is being transferred. I presume that real risk means that the person or group that carries out whatever the work is has the risk of making a loss on the project. That did not really happen under PFI. It is hugely important that we measure outcomes or outputs, or both.
As no one appears to be keen to jump in on that, I will move on.
I agree with that. You will find a range of views no matter where you go—whether to private philanthropists or grant-making foundations—and it is clear that ideologies sit in more places than here, but, for me, the explanation for these things is driven by the point that you have made, convener. We have a very short-term and fragmented approach to funding some of the most challenging social issues that we face in Scotland. Part of the reason for creating Inspiring Scotland was to try to address that. Creating mechanisms that more accurately direct resources of whatever type to evidenced outcomes and make a real social impact is what drives a lot of the conversation around this, as well as the shift to prevention. I entirely agree that we are not currently getting things right. This may not be the right approach for Scotland, but what can we take from it that addresses the issues inherent in bringing social solutions to the most deprived and challenged communities in Scotland?
In section 7.3, the Peterborough report says:
Our job at RAND Europe is to provide the Ministry of Justice with objective assessments of what is happening, so we do not have a particular position either for or against SIBs. However, I am not sure what your exact question was. Did you ask about the cost of legal advice to the provider?
No. Your report says:
I will just refer to the report, if that is all right.
Sure.
We were able to speak to representatives of organisations that had invested about their capacity to seek legal advice to draw up a contract between Social Finance and the investors. Those contracts were complex and quite new. We simply commented that the smaller investors in the SIB piggybacked on the legal advice of the larger foundations. One of them said:
John Mason rightly mentioned the value of risk transfer, which is vital to the whole debate. On the one hand, the structure is clear in the sense that the investors take the risk; on the other hand, there would be merit in a careful feasibility study on the evidence base of the proposed intervention, the likely outcomes and the value of those outcomes. That work will take weeks and months; it cannot be done within the context of a three-week procurement process. Nevertheless, it would be worth investing time and effort into identifying the right area in which to make those interventions and into scoping and shaping them so that, when the rules—the metrics—are set, we can price risk transfer and have the greatest possible confidence that we will get good value from the results as well as the social impact.
That touches on the area that I want to address. On page 4 of your written submission, one of the bullet points for the benefits to the state is:
Absolutely. We support the exploration of social impact bonds as a model and we are aware that Scottish Government officials are actively considering social impact bonds at the moment.
As you say, there are already a number of social investment models in Scotland that support social enterprises and so on. I thought that part of the reason behind such activities was to try to bring into the sector money that might not otherwise come in by attracting private investment people. Under the model, the risk will be taken by the investor in the first instance, because they will pay up front whereas the public sector will pay later on, and if the investment does not deliver in the longer term, the savings that we want might not be made. The issue is how we price the value to the public sector and ensure that benefit is brought back to it. There is also the problem of how to get different bits of the public sector to pay for their share of the savings if they are made across several different services. This sort of project should be centrally driven and managed by central Government—the Treasury and the Scottish Government finance directorates. We should not expect the public sector to apportion the money.
Fragmentation of delivery is a real issue.
I have some comments to add about our work on whether the Peterborough model will improve funding to small providers that are at risk. The Ministry of Justice has asked us to explore over the next eight years whether the social impact bond model can stimulate innovation and encourage unusual service providers to come into the space. For us, that raises several interesting questions. We do not yet know which providers are commissioned to provide SIB-funded services in Peterborough and which are not, or the reasons for that.
I take on board the points about the benefits that can be delivered, but there is another risk for the public sector. The downside from its perspective is that, although it can refuse to pay if outcomes are not delivered, any worsening of service in the outcomes will fall to it, because it has decided to take a payment-by-results approach. Even if it is does not pay because the outcomes are worse, there is a reputational risk in taking the payment-by-results approach.
On the readiness in Scotland for the approach, I speak on behalf of two organisations that deliver services to prepare offenders better for employment and services that deal with alcohol and drug problems, and I believe that they and others are ready to engage in the approach, despite the complexities around it. In two reports that Audit Scotland produced recently—one on expenditure on alcohol and drugs issues, and an overview of the criminal justice system—it made the point that systems for gathering data on outcomes are weak. Our two organisations have invested to bring us up to being able to deliver in that respect. There is now, therefore, quite a lot of confidence about our ability to deliver on outcomes and know which ones are important.
I have a question that is primarily for Dr Disley and Mark Graham. In a previous evidence session, I raised the issue of the Treasury green book and whether, as we develop a more sophisticated understanding of prevention and how it impacts on outcomes, we need to reflect on the green book and perhaps provide updated guidance to the public sector. Mark Graham said that the public sector needs to understand that payment by results represents a risk in that additional costs might be generated for particular services. I hope that that will not happen, but the public sector needs to be aware of that risk. From your professional point of view, is the Treasury guidance on the appraisal of public sector projects sufficiently sophisticated to pick up on the new model?
I want to return to one or two of Mike McCarron’s points. He expressed confidence about measuring outcomes and so on. Would there still be a gap, though, between what could be provided in his sector—with particular offenders not reoffending, for example—and our desire to have fewer prisoners in prison? Would his sector be prepared to say, “We will guarantee that there will be fewer prisoners in prison—pay us on that result”, or would that be going too far?
Paying for a certain outcome might be part of the discussion that one would have but, as Emma Disley said, an individual project is not likely to close a prison. There must be a national aggregation of different outcomes and a system that allows them to be planned in such a way that we are able to close a prison.
Are there particular services that would be more appropriate to the model or easier to evaluate under it? For example, we have a fair amount of evidence that intervening at certain points in vulnerable children’s lives makes a significant difference to their performance and life chances thereafter.
That is a relevant point. The answer will vary depending on the nature of the client who receives the service. If people have complex needs, we need to recognise that. There are a range of hard and soft outcomes that are signs of positive change, but change might take much longer in such cases.
Do the witnesses have any views on how to get the size of projects right? We have heard that, the more we scale up a project, the more likely it is that we will save money for the public purse, but the greater the danger will be that the solution will become less localised. Effective delivery is sometimes down to great, specialised local knowledge and people simply knowing how to get results in a specific area. How do we get the size of projects right so that they are effective and, at the same time, they make genuine savings for the public purse?
I will pick up on Paul Wheelhouse’s point about HM Treasury’s green book before I comment on scale. As I am an economist, the green book is my bible, so I will not say anything negative about it. I understand that HM Treasury is working with other departments to develop some guidance on the measurement of social impacts. The question becomes how we translate those social impacts into public exchequer benefits.
I will restrict what I say to the important issue of scale, and I will probably draw on what Inspiring Scotland already does by way of scaling.
I will come back on three issues, the first of which relates to the discussion that Emma Disley started on programme design. When the first programme is designed, it is helpful to have one or more delivery partners who have done something similar to help with the design. That is partly why having an organisation such as the St Giles Trust in the programme is a helpful way to start.
On the point about how to replicate outcomes in different areas, we have been considering a model in which, if we had a SIB of £5 million, for example, we would provide three to five different services at different prisons throughout Scotland rather than at just one prison. We would then be able to see whether we were delivering the same outcomes in each area, which we would aim to do.
I have a question about the evaluation process. Is that built in at the start? Who decides or determines whether the outcome has been achieved? Is it the commissioner, or the body that has done the work? Is it built into the project cost? How is that taken into consideration?
I will add something along those lines, and then I will let Emma Disley in. Our budget adviser, Professor Bell, says that the process can be extremely complex, as demonstrated by the Peterborough SIB. With regard to the process for establishing the social impact bond in Peterborough, table 2 from Professor Bell’s report shows four contextual aspects, nine inputs, nine activities, seven outputs, seven anticipated impacts and seven anticipated outcomes. Although the results have been very good, there seems to be an element of extreme complexity that might act as a disincentive to organisations to get involved in developing such projects. What is your view on that?
For the Peterborough SIB, the evaluation was built in from the start. The Ministry of Justice commissioned RAND Europe to conduct a process evaluation—to ask the how questions—and consider how it was implemented, which services were developed and whether it encouraged innovation.
Yes. I think that James Dornan wanted to come in.
No, I did not, but thank you for your offer.
You were waving at me, but you were just being affectionate.
I was just making eyes at you.
Okay. Andrew Muirhead can go next.
The measurement must be robust and built in at the outset, and it must be carried out by a third party. In Peterborough, the investors are very much social investors. As the scheme is widened out and moves to a larger scale, the attention and scrutiny will intensify. In all senses—whether it is philanthropists seeking to extend greater philanthropy or grant-making trusts seeking to use endowments rather than income on endowments, or investors more widely—everyone comes at it from the social impact end. Everyone is coming from the perspective of trying to do something that is as much about social returns as it is about investment returns. It is about extending that market, I hope in a positive and supportive way.
Yes. There are people who want to contribute to the community and not just make money from it.
We talked about the complexity of the approach, and Jonathan Flory talked about the possibility of larger organisations taking business away from smaller social enterprises. How do we guarantee that we do not end up in the situation that we are in with some welfare issues, in which companies appear to be getting involved to make money rather than to benefit the community? Community benefit is clearly the outcome that the witnesses are aiming for.
The situation that you described is a concern in the social enterprise community. We are not anti-profit; social enterprises like making profit. However, there is a tension between the social and environmental aims of social enterprise and the needs of private investors to make money. In England, perhaps more than in Scotland, there is a trend of people trying to use the social enterprise brand as a public relations exercise, when they are not an authentic social enterprise. There is concern in the movement about that. It is important to note that there is no legal definition of “social enterprise”, so anyone can call themselves a social enterprise.
We have talked about complexities to do with measurement, the need for evaluation and scalability. We have also talked about the availability of skills and expertise and the circumstances in which we need external funding to supplement declining funding from elsewhere.
There seem to be areas that naturally lend themselves to preventative approaches, such as the early years, reoffending and older people. The Scottish Government’s change funds are focusing on the preventative approach.
If it is about reducing costs to the exchequer, we must focus on the individuals, families and communities that are generating significant costs. The Cabinet Office in England is looking at the feasibility of intervening with families that have multiple problems. Its initial analysis suggested that such families cost the public sector up to £100,000 per annum—and it identified 120,000 families. When we do the maths, we can see that the cost is quite extensive. If the cost could be reduced through early intervention, there would be significant benefits.
Yes, the figure is £12 billion—that is a ballpark figure, so the actual cost could be higher or lower.
Duncan Thorp mentioned services for older people. It might be possible to get information about savings in that regard. I can think of a social enterprise in my constituency that provides services to older people. It is funded in a conventional way by the Scottish Government through the local council, but there must be some data there. If we looked at the people to whom it has provided a service as opposed to the general population, we could get some idea of the level of savings to the public purse. I would not want to categorise older people as causing a problem by requiring services, but services for older people are an area in which the type of intervention that we are discussing could help, and not just save money but improve the quality of people’s lives, which is probably just as important.
Again, it is an interesting area. There is a simple statistic that leads us down that route. If I understand it correctly—forgive me; I am getting old, although we will not go into the definition of “old”—some 80 per cent of hospital admissions of old people are due to falls, which can be due to design issues in housing. That is a simple example, but if we were to address those issues and support engagement in sport and other activities, it would have a significant implication for the health sector. The model is not just about early intervention with children; it can be applied across the board.
Service providers in every client area can identify good areas in which to invest. In my area, if we invest in the early years, we can resolve major problems for adults, too.
I want to respond to the earlier question about subject matter. I concur with the views that have been expressed about the early years and our ageing population, but I add a couple of other areas. An obvious one is youth unemployment, and there are already some payment-for-results mechanisms in that area. To that I would add drug and alcohol services and support for recovery methodologies rather than maintenance.
We have focused on the Peterborough project, but does anyone have good examples of projects, social impact bonds or anything similar outside the UK? Have you come across or studied any such examples while waiting for the results of the Peterborough project? Are there any proven examples that you want to share with the committee?
I have to say that I wrote down that question about 30 seconds ago.
I did not see it.
Great minds think alike.
Gavin Brown made a point about local accountability. Many of our social enterprises are local, community-based enterprises. There are a lot of big social enterprises as well, but many of them are community based. On replicating and upscaling, I think that Andrew Muirhead made the point that we must get social enterprises from different parts of Scotland to come together and do stuff together, rather than creating mega social enterprises.
To respond to the question about other countries, as far as I know, the SIB that was launched in Peterborough was the first one anywhere in the world. Since then, there has been interest in other countries and definitely in America. I think that an SIB was launched there last week or at least there was a development. There has also been interest in New South Wales and in Canada. We have had informal meetings with a delegation from a Canadian ministry that is interested in developing SIBs. It is looking to us for examples of good practice. Once SIBs are rolled out in other countries, even if it is too early for them to give us results, that will provide us with alternative models for roll-out and for developing outcome metrics.
The danger of putting up your hand to speak is that someone might give an answer that is pretty much the same as the one that you would have given. I was going to spare Jonathan Flory’s blushes by pointing out that people in different parts of the world are looking to the UK and the pilot in Peterborough. I, too, have had contact from places such as Australia and Canada, where there are similar fledgling ideas. The question is a good one, because it is important that we do not work in isolation. Jonathan Flory mentioned that part of Social Finance’s strategy is about how to build a wider world network of ideas and thoughts that can improve the approach and bring ideas into the thinking here. It is right to look at other places to see what we can learn.
To complement that, the US is catching up fast and is considering what is happening here. Interestingly, it is considering state-level commissioning, which to a degree cuts across the interdepartmental issue. That is helpful, because the allocation of benefits can be done at state budget level. I suspect that the projects in the US will be bigger than the smaller-scale pilots in the United Kingdom.
We have been having our discussion for more than an hour, so I am keen to start to draw it to a close. [Interruption.] The clerk has pointed out that Emma Disley wants to speak—I knew that, and I will let her comment in a moment, but first I want our guests to think about where we go from here in the Scottish context. We have had a good discussion about ideas and experiences, but what would our guests like the Scottish Government to do? We do not have all the necessary powers to implement the approach fully, but I am sure that we have some of them. I am keen to know what our guests have to say on that, but first we will hear from Emma Disley.
I will add something to the discussion on procurement. I just want to clarify that, for the Peterborough social impact bond, the Ministry of Justice procured Social Finance, which then commissioned service providers. As it was the first ever such project, Social Finance’s services for the ministry were not procured through the usual competitive process. In future, with other social impact bonds, the Government could run a competition for financial intermediaries to come in with a bundle of investors and ideas about the pilot area and the metrics. Some of our interviewees from the Ministry of Justice suggested that, if there were a competition for intermediaries in the future, it would be possible to drive a better deal and pay less for each reduced reconviction event, thereby pushing up value for money.
Any takers on the question of the way forward?
We would be looking for a willingness in Scotland to engage. If, for example, an organisation that I am involved in were to come forward and say that it has found a social investor, would the wider environment that I have talked about engage in that? We are looking at a number of services across Scotland and are interested in issues such as standard contracts, similarity of tariff and so on. We are looking for ways of discussing the undoubted complexities with the appropriate partners, should a practical option come forward, as we hope that it will.
I understand that Government officials have been in discussions with regard to this issue, so it is really about taking that forward.
The most important thing for me is that we stay in exploratory mode and do not move into polarised positions too soon. There are certain steps and stages that we need to follow. If we are going to get some substance around this issue, it is vital that we have some guidance about the social issues that the Scottish Government might want to be tackled in a different way. Once we have that, we can have a richer discussion around some of the complexities. There is possibly a starting-gate role for furthering discussion and enabling greater exploration of the issues.
All credit to Social Finance for leading the way with social impact bonds. It is doing some great work. The key for social enterprises and other third sector organisations is for them to have a portfolio of mechanisms to use in a strong social investment market. Social impact bonds are part of that market, but we should not focus on that model or variations of it at the expense of mechanisms in the wider market.
I concur that the starting point would be a consideration of the social needs that are not being met and could be addressed.
Jonathan Flory kicked off today’s debate, so I invite him to finish it off.
I share all the sentiments that have been expressed. The time spent in carefully considering the right programmes, testing the evidence base, ensuring that you are comfortable with the way in which the outcomes have been framed and testing the value that has been delivered is time well spent. I would like to think that, if you do that bit, investment will follow, as there is a willingness to play a part in this area.
I thank all our witnesses for coming today and involving themselves in a thoroughly interesting discussion.