Social Finance, the London-based social investment organisation, today launched with the Ministry of Justice the first Social Impact Bond (SiB).

This is designed by Social Finance to raise capital for investment in the social sector. Financial returns to investors will be based on improved social outcomes.

This first issue will fund social organisations working to reduce re-offending rates of short sentence male prisoners leaving Peterborough Prison.

The Ministry of Justice has agreed to make payments to investors in the event that re-offending is reduced below an agreed threshold.

During the Peterborough Prison pilot, social sector organisations, such as St Giles Trust, will provide intensive support to 3,000 short-term prisoners over a six year period, both inside prison and after release, to help them resettle into the community.

If this initiative reduces re-offending by 7.5%, or more, investors will receive from Government a share of the long term savings.

If the SiB delivers a drop in re-offending beyond the threshold, investors will receive an increasing return the greater the success at achieving the social outcome, up to a maximum of 13%.

Social Finance will raise up to £5 million to fund the Peterborough Prison pilot.

The SiB is designed to fund preventative approaches to social issues.

Re-offending is an area where preventative work could lead to a better society and save the taxpayer money.

Of the 40,200 adults on short term sentences, an estimated 60% will go on to reoffend within a year of release, at a significant cost to the taxpayer and society.

If successful, Social Impact Bonds could develop into a new asset class that aligns social and financial returns and brings in new capital to address social problems.

David Hutchison, chief Executive of Social Finance, commented: "The Social Impact Bond has the potential to unlock an unprecedented flow of finance for social sector organisations. By focusing returns on outcomes, these organisations will be incentivised to develop innovative interventions to tackle ingrained social problems which weigh heavily on our society and our national purse.

"In partnership with the Ministry of Justice, we will use this new form of funding to enable foundations, social sector and governmental organisations to form a new partnership in which everyone benefits.

"The greater the social impact in terms of reduced re-offending, the higher the financial returns for investors and taxpayers. We see this pilot as an important first step in rolling out the Social Impact Bond more widely in the future.

"There is scarcely an area of social or health care policy where prevention or early intervention isn't both cost effective and socially desirable. We envisage that future applications of the SiB might cover such disparate programmes as enhanced support for foster carers, home care services for older people or nursing in the home for the chronically sick".

Jack Straw, secretary of state for justice, Ministry of Justice, added: "Reducing reoffending is one of the Government's highest priorities. Between 2000 and 2008, the frequency of adult reoffending fell by 15.9 per cent. But we are always looking at new ways of further reducing reoffending that provides value to the taxpayer.

"We have always said that short term prison sentences are not always as effective as community sentences in reducing re-offending, but when the courts decide that the sentence is a necessary punishment we need to have in place robust services to stop these prisoners offending again."

Rob Owen, chief executive, St Giles Trust, added: ''The Social Impact Bond represents the start of a funding revolution for organisations that specialise in preventative work."

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