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Transforming public services through collective entrepreneurship and sustainable finance

By Lucy Thompson, on 19 October 2022

In the following blog, IFT PhD researcher Filippo Addarii presents his rationale for engagement with sustainable finance. His story is that of the first Social Outcome Contract (SOC) in Italy for the work inclusion of prisoners. As an illustration of his attempt to put reformist theories into practice, it shows that the business of “changing the world” for good requires us to leverage market forces to serve a purpose that is more than profit.

man carrying a bag walks into the light thrown by a single door. bars and prison clothes lie on the floor behind him. The SOC – also referred to as a Social Impact Bond (SIB) – was conceived by a coalition of policymakers, financiers and charities to drive innovation and efficiency in public services and strengthen government to fulfil its mission. In essence, the SOC is a partnership between public and private sectors in which the former sets the goals – in this case, social outcomes – and the remuneration for having achieved them. The private sector provides risk capital, delivers services and manages the whole process. A third party, often academia, carries out the evaluation of the results that trigger payments. Application of the SOC is justified when straightforward state and market solutions fail or are not possible.

This is the theory – evidence reveals that real-time implementation of a SOC can vary greatly based on context. The first SIB/SOC was piloted in the UK in 2010 and since that time, the SOC model has been implemented across the world, with examples now totalling 251 worldwide. A SOC is the flagship product of impact investing, the international movement to put finance at the service of public value creation. It can be categorised as a form of sustainable finance.

My company, PlusValue, has been involved in the conceptualisation and implementation of the first SOC for the work inclusion of prisoners in the private sector in Italy.

Italian law allows prisoners to work outside a prison while serving their sentence, if they are deemed fit by a judge. There are 60,000 prisoners in Italy, most of them on short term sentences. At least 4000 of these prisoners meet the criteria for employment. There is overwhelming evidence about the effectiveness of employment in reducing re-offending rates and fostering social inclusion. Furthermore, scaling employment of the prison population would not only reduce costs of the prison system (approx. €3bn annually) but would also reduce the need for new prisons.

There is no shortage of projects to employ prisoners, run mainly by local social enterprises. But the obstacles are many. Lack of funding and management capacity prevent scaling, and bureaucracy can prove difficult to navigate. There is also little capacity for innovation in the public administration, and no incentives for officials. Finally, there is a palpable lack of evidence and case studies to show what really works.

Against this landscape, we instigated the initiative to scale the work inclusion programme piloted at MIND – Milan Innovation District. Launched in 2018 as a partnership between the Ministry of Justice and Lendlease, the private developer in charge of MIND and this project’s sponsor, the programme experimented and proved the positive impact of employment in construction. The programme also revealed the limits of corporate social responsibility to deliver at scale – the SOC, it seems, will be the solution to scale and make the programme sustainable.

In December 2021, we presented the conclusions of the feasibility study to the Minister of Justice and the proposal for a first pilot test with a group of 200 prisoners in the Lombardy region. The pilot should last 3 years, and should test:

  1. the financial model for the participation of investors providing risk capital
  2. the management model to recruit the best service providers from all sectors for training and employment inclusion
  3. the plan to develop digital infrastructure for online training and job search, as well as data collection and performance management
  4. the rate card system to define expected targets and payments to investors.

Investors are both public and private such as public funding programmes, banks and philanthropic institutions interested in the social issue or testing the new approach. They advance the capital to finance operations carried out by professional market operators (from training to work placement).

The rate card system is a leaner and cheaper framework compared to traditional SOC models, and facilitates the calculation of amounts re-payable to the investors on the basis of the number of beneficiaries who have achieved predetermined social objectives. These could include, for example, the completion of professional training; being employed for one year; and not reoffending for three years. Targets and payments are itemised, and risk reduced.

If successful, the programme could be extended to 4000 prisoners across Italy, for approx. €50m total value as a payment for results. In theory, the same model could also be applied to other public services. This would be structurally transformational for the nation, and not only because of the estimated €2.1m public budget benefit – €0.9m as operational costs saved in prison administration, and €1.2m as an increase in income tax revenues. It would also represent the fulfilment of the penitentiary system’s mission to support former convicts to re-integrate into society.

This case illustrates the potential of finance to drive innovation and deliver social outcomes when a social purpose is championed at a design level. It also shows that such a financial mechanism triggers and is activated by collective entrepreneurship that strides across sectorial boundaries and disciplines. The ultimate result is a catalytic effect at the system level manifested as market forces steered towards shared value, government’s work transformed from within, and new solutions for the public. We hope that our SOC – due to launch at the end of 2022 – will provide material proof of this.

One Response to “Transforming public services through collective entrepreneurship and sustainable finance”

  • 1
    Biomedis wrote on 30 November 2022:

    sufficient transformation can add to market power in order to achieve sustainable finance goals

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