This article continues the series on the St Mungo’s social impact bond (SIB), created to fund a homelessness services program in the UK. In previous installments, we learned about the individual outcome metrics that would drive the payments to St Mungo’s, and about the value for money calculation that justified the whole project on the basis of hoped-for cost savings. Now we can look at how the cash flowed from the government through the various parties to the agreement, and how St Mungo’s had to reconfigure itself in order to adapt to the funding model.
With the decision having been made to proceed with the SIB, funding was approved by the government to the tune of £5 million.
As mentioned before, half of this would go to St Mungo’s and the other half to the competing organization, Thames Reach. And as also mentioned repeatedly, a considerable portion of this funding was contingent on the organizations meeting certain targets on their performance metrics.
With the funding approved, the financial intermediaries found the investors, and the money began to flow. The cash flows and other relationships are shown in the following diagram.
The diagram focuses on Street Impact Ltd, a wholly-owned subsidiary of St Mungo’s. This company was set up by St Mungo's to receive the funding and deliver the services. The idea of a charity setting up a limited liability company in order to do what the charity does tells us something about the level of financial risk involved. By creating this special purpose entity, St Mungo's as a whole would be protected from losses if the SIB arrangements failed.
The actual services funded by the SIB would be performed by individual social workers, referred to as navigators. These workers were contracted to Street Impact to do the work. As with any initiative to privatize or otherwise restructure government services, a good deal of the financial attractiveness is generated by making labour more contingent and precarious. Overall costs can be reduced by rehiring employees at lower wages, converting permanent jobs to term-limited contracts, reallocating work from full-time positions to part-time positions, and cutting employee benefits.
In the case of Street Impact, it appears that term-limited contracts were used, because Street Impact itself would have no reason to exist if the funding agreement were to expire without St Mungo's securing a continuation of the contract. And that is precisely what will happen if the social workers fail to meet their targets. When finance consultants talk about investors "taking on financial risk," they always fail to mention the financial risks borne by the employees.
The navigators would provide services to the 415 homeless people allocated to St Mungo’s out of the 830 identified in the CHAIN database, the remainder being allocated to Thames Reach. This was up from the number of Inbetweeners in the CHAIN database when the initial business case was put together.
The Cash Flows
St Mungo’s invested £237,000 in share capital to set up Street Impact. This was not actually the first cash flow in the overall project, however, because the consulting company, Social Finance, had been paid a £90,000 fee at the outset to develop the project. Social Finance recruited Triodos Bank to set up the bond, find willing investors, and work with St Mungo’s to close the deal.
The investors put up £650,000 to purchase the bonds. This money went to Street Impact to get the project off the ground. It is not clear from our data how much of this money went to Triodos as a commission. While there is suggestion whatsoever that the commission was excessive, we are inclined to assume that Triodos, no matter how good its intentions, did not work for free.
Not all of the investors’ money was advanced at once. Part way through the project, we were told that Street Impact had drawn only £400,000 of the investors’ money. This suggests that the investment was made available to St Mungo’s in tranches. We were not able to obtain a copy of the investor agreement.
For the use of their money, the investors receive 6.5% interest. There is no indication in our data that this return is contingent on performance, which was the original point of a social impact bond. It appears both from our archival data and our interviews that the investors received their return through a standard interest calculation.
The cash flows that were contingent on performance were the money paid by the government to Street Impact for delivering the program. A portion of this funding was unconditional, but the rest was dependent on the navigators achieving the targets set out when the performance metrics were negotiated. Thus, it is St Mungo's and its employees who bear financial risk, not simply the investors. Arguably, the investors are the least exposed.
All in all, as much as £2.4 million in government money (half of the £5 million in overall funding, with the rest going to Thames Reach) could be paid to Street Impact over the life of the contract. This would only happen if the navigators achieved all their targets. If they did, the total amount received by Street Impact would be enough to pay for the services, pay the promised interest to the investors, and leave St Mungo’s, as the shareholders of Street Impact Ltd, with a £300,000 profit. Of course, that’s only if everything were to go perfectly.
In the next and final installment in this series, we’ll try to pull together all the things we’ve learned about the St Mungo’s SIB and try to make sense of it as an exercise in financial biopolitics.
Photos taken on a precarious hike around Lake O'Hara in Yoho National Park in 2002.