FIM launched its first social impact bond (SIB) targeting refugees and immigrants in 2016. Of the 2,000 jobseekers involved in the five-year programme, roughly half have found sustainable employment.
A SIB is an innovative payment-by-results mechanism to fund public services; a new way of tackling social challenges such as mental health issues, homelessness and diabetes. Tackling social problems – which amount to high costs to society – while creating investment opportunities was the idea behind the launch of the SIB.
The concept pioneered in the UK in 2010 and has since captured widespread interest across the globe.
Tackling long-term unemployment. Building on the success of its first bond, FIM launched a €10mn SIB commissioned by the Finnish Ministry of Economic Affairs and Employment last year.
The SIB contracts run in the Finnish regions of Uusimaa, Häme and Pohjois-Pohjanmaa for six years, with an estimated return of investment target of 5 to 10%.
The bond aims to finance job-seeking programmes for the long-term unemployed in several municipalities across the country. The target audience is citizens who have been out of work for a long time and are struggling to get back on the job market.
Investing in prevention
“Investing in service suppliers who actively work to get jobless citizens into the labour market is the most efficient way to reduce unemployment rates,” Jussi Nykänen, managing director at FIM Impact Investment told Impact Investor.
The Finnish government had realized its traditional practices and tools for reducing unemployment do not work. “There are lots of social issues that cannot be solved by public money,” Nykänen said.
“Public institutions often deal with the problem, whereas we want to be proactive and put in preventative measures.”
The investor, who has more than twenty years of experience in public-private partnerships and managing impact investment funds, said that “the key challenge is to get municipalities on board and make them understand the concept of measuring impact.”
SIBs are regarded a high-risk investment as financial success is linked to the delivery of measured social outcomes. Only if the social outcome improves, investors are repaid for their initial investment.
In the case of FIM’s impact fund targeting long term unemployment, success is measured by the number of participants who have secured a job. “Several hundred people have already been employed. Our aim is to get 4,000 people into the programme,” Nykänen said.
The fund invests in several service providers – mainly local companies that provide language training, computer workshops and one-to-one sessions for job seekers – who are then contracted to carry out the work with the aim of getting people into employment.
The return on investment is based on the amount of tax revenue gained from the people in the programme, Nykänen explained.
“If the municipality gets more tax income from the target group compared to the reference group, the investors receive half of that amount. Results are also measured in the reduced cost of unemployment benefits,” he said.
Incentivising service providers
Tatu Lintukangas is the CEO of Entry Education, one of the service suppliers contracted by FIM’s impact investment fund. The company, which provides training for job seekers, has funnelled about 700 clients into the job market since the launch of the SIB targeting immigrants.
For every client, Entry Education receives a monthly fee for a maximum period of three years. “We want our clients to stay in the workforce for several years,” Lintukangas said.
“The monthly fee is an incentive to keep in touch with our clients and solve possible problems at the workplace before it becomes a disciplinary matter.”
He believes the private investment approach to tackle social problems forces service providers to step up their game. “In general, I think the SIB approach shakes up the system and gives service providers the opportunity to work more efficiently,” Lintukangas said.
“From our point of view, it does not really matter whether the money comes directly from the local authorities or investors. For us, the biggest change is that we have become more results-oriented,” he said.
Entry Education had a success rate of about 60% in the unemployment programme for refugees and immigrants. The current programme, however, has been hampered by the COVID-19 pandemic.
“We are lucky to have had good results. If we had not had the positive results, I think we would have been kicked out of the contract. But unfortunately, the figures are much lower this year,” Lintukangas said.
“Most of our jobs are entry-level opportunities in the restaurant industry and this has been hard hit by the pandemic.”
Nykänen points to flexibility as one of the key strengths of tackling unemployment or other social problems with a private-public partnership approach.
“We create an ecosystem of service providers and have a hands-on approach. If the results are not good, we change something to protect the investors’ interests as well as make a positive impact.”
Growing SIB portfolio
FIM Impact Investment is currently running five SIBs, with the aim of preventing sick leave, unemployment, and social exclusion of children.
The European Investment Fund and the Orthodox Church of Finland are among the main investors, as well as insurance companies and SCR organisations. “Some municipalities take a double role as investor and beneficiary,” Nykänen said.
There are currently more than 210 SIBs in 35 countries, mobilising more than €350mn of investment into tackling complex social issues such as refugee employment support, diabetes prevention and rehousing homeless youth, according to the non-profit think tank Brookings Institution that monitors the market.
The Brookings Institute has a blog series showcasing expert opinions surrounding the development and use of social impact bonds, in response to the Brookings paper [PDF] ‘The potential and limitations of impact bonds: Lessons from the first five years of experience worldwide.’