Dragons’ Den in Welfare to Work

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For many years the government has, with the best of intentions, funded programmes that for one reason or another failed to deliver the anticipated results. So long as the provider has undertaken the specified services it is paid its money and the government is left with the frustration of having spent considerable sums without achieving the desired outcome. When existing solutions fail to solve social challenges there is a need to try new things. Meanwhile it must be exasperating for government ministers to recognise that all the risk of failure rests with them. Payment by results is very attractive to government however very few providers have the resources to fund service provision up front and accept outcome risk.

One can argue that it is the role of government to take these financial risks but given the public’s reaction to failed projects it is easy to understand why ministers and civil servants become risk averse. In addition, the nature of procurement means that the provided service has to be clearly specified as an open cheque would be an invitation to actual and suggested fraud. However a clearly specified service cannot react flexibly to changing circumstances. Far too often major projects proceed with all participants knowing that failure is inevitable but without an obvious mechanism to solve the problem or end the programme.

A possible solution is Social Impact Bonds. The government pays for results and investors make available the project funding. The provider can focus on effective delivery without needing deep pockets and meanwhile there is a funder that can be pragmatic whilst also taking a very close interest in project outcomes and not losing its money. The objective is that spending decisions are made as though it is one’s own money because for the investor it is. In the same way that venture capitalists can take informed risks and achieve more successes than failures, Social Impact Bond investors will ensure that projects they fund are effectively managed and failures are swiftly halted.

Providing a financial return to investors means that successful projects will cost more. But if there are fewer failures along the way the overall costs should be lower and meanwhile society benefits from better delivery. I think this method of funding could be positive for all, however there are a few pitfalls that I hope are avoided.

The more risk the investor is required to take the greater the return that will be demanded. Think Dragons’ Den and the challenges of asking for money to support an idea! Welfare programmes, especially the more innovative ones, will simply become unaffordable.

However if used smartly I think this finance method can work extremely well. In my view the following are key:

  • The government should only use this funding model where providers can specify a measurable outcome that will be the payment trigger.
  • The investors’ risk should be their profit margin and at most only a small part of their capital. This will encourage them to work for the upside without charging a huge premium for downside risk.
  • The government should be wary of philanthropic investors. The key to success is an investor breathing down the neck of the provider, focused on achieving the outcome targets and thus the investment return. A philanthropic investor may not attach the same importance as a traditional investor to attainment of the outcome targets and consequent payment of the success fee.

My company, MyWorkSearch, has submitted a bid as part of a consortium where the funding will be via Social Impact Bonds. At this stage I don’t know whether we have been successful however the bidding process has been an interesting process for all the consortium members. My experience so far is that both the government department procuring the service and the providers are feeling their way, not totally sure what model is best and where exactly to pitch risk and return. This is a topic I will return to as I learn more over the coming months.

6 comments on “Dragons’ Den in Welfare to Work

  1. julianladd says:

    nicely put Richard; are you referring to the DWP Innovation Fund in the last para?

  2. SIB’s…are they the new PFI? The idea seems to make sense but the metrics employed to measure Outcomes will be open to abuse. The Investors will be focused on ensuring their targets are opaque and open to intepretation…..

    ….But, I agree Richard….new models for funding social improvements are needed….but “Investors” are usually rather greedy and have a greater understanding of the Law, Trickery and Obfuscation……

    My concern is they will only back “Sure Things”…and overcharge for success….plus ca change.

  3. Elaine Anderson says:

    Is this Bond a Form of Indemnity against loss and expense, for the investor? The application is quite similar to Prince 2 Theory, where a project needn’t be fulfilled if the parameters are incorrect, but there nothing wrong with the government providing the impetus, as it has access to worldwide expertise, and years of experience, whereas independent entrepreneurs are operating on a very different basis. Sometimes, like in the Dragon’s Den, they support a p

    • Hi Elaine, the bond is not an indemnity. In fact it is the opposite. The bond is funded by investors and pays the provider to deliver the project. If the project is successful the government pays a sum which covers both the amount paid to the provider and a profit to the investor. If the project is not successful the investors don’t get all or some of their money back.

  4. Hmm the above is pretty scary due to our present economy and if the government decided not to pay providers for reaching SLA rather than per individual than i think we would be seeing alot more businesses losing money and lets face it who can lose money these days, redundancies which is pretty scary would be on the cards again for all these good people whom try and change peoples lives. i believe our society, our communities will be at risk of not being able to get support and offer advice which our society deserves and requires at this present time. We are all tax payers and everyone deserves a helping hand to help them find and secure employment. Who ever can pilot and back these programmes should be given a chance because if they only help small numbers this impact on society can and will be a massive impact on communities

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