The tools of economic impact

By Ian Marr, chief executive of The Growth Partnership

"Only a crisis – real or imagined – creates real change. The nature of the change depends on the tools that are lying around,” said American economist Milton Friedman.

There is nothing imagined about the crisis we have experienced over the past two years, it has been all too real in public health and in economic terms. As challenging and tragic as it has been though it also offers us an opportunity for real change.

We’ve heard a lot about building back better. Many of the tools to achieve that lie in the hands of third sector organisations who have been central to so many of the services that have carried us through the crisis phase of the pandemic.

Some of the tools the third sector will use to create change will be familiar, but to think that we can achieve the depth and breadth of change we need with existing tools is akin to suggesting that we can maintain our future fleets of electric and hydrogen vehicles with the toolbox we’ve used on the internal combustion engine.

We need to work together to create value in our economy. We need to work across the public, private and third sectors, bringing together the skills, expertise and commitment of all for the common good. All three sectors are critical to economic stability, resilience and growth.

One of the new tools which has emerged in recent years and brings together the public, private and social sectors is Social Impact Investment. It acknowledges the skills, experience and limitations of all three sectors and allows them to work together for the common good.

Social Impact Investment is used in some 225 services globally serving nearly a million citizens in addressing issues of poverty, unemployment, health, homelessness, criminal justice and much more. It was also used to successfully support young people into employment in Scotland through the YMCA Perth's Living Balance service.

Social Impact Investment is a partnership across the public, private and third sectors to enable funding for the third sector while reducing risk for the public sector. It is broken down into:

• a delivery partner in the third sector, who designs and delivers a service to address an identified social issue such as youth employment, homelessness or mental health.
• investment partners in the private sector, who provide the capital to cover the cost of the service until agreed outcomes have been achieved.

• an outcome partner in the public sector. They agree a set of mutually desirable outcomes with the delivery partner, and pay for them once they have been achieved. These funds are then used to repay the investors with interest.

The Living Balance Service in Perth supported unemployed young people to progress to employment, further education or training. There were 13 investment partners in this service, and 11 lived in the local community and invested between £5,000 and £50,000. These investors became involved in the service providing work experience, simulated job interviews and – in some cases – full-time employment for the young people. The tangible social capital created by Living Balance created deeper, broader economic impact than just the job creation alone – the investors gained a deeper understanding of how to support young people which they shared with their peers across the local economy.

The economic impact of Living Balance could be measured in concrete terms by the direct financial impact of a young person being employed who then pays direct and indirect taxes, avoids the wage scarring which results from prolonged period of unemployment and contributes positively to the productivity where he/she works.

If an unemployed young person aged 18 to 24 secures and sustains employment over a ten year period they will create additional value through the payment of direct and indirect taxes of £67,000. If we use the marginal revenue product of labour then we can show that they will add value to the overall economy of approximately £80,000 through improved productivity. None of this adequately captures the immense value for the individual of the additional self-esteem and the wider impact of that for their family and community.

Social Impact Investment offers an innovative and powerful tool to develop the economic impact of the third sector. But it will work if, and only if, everyone involved is prepared to think and act a little differently than they normally would.

If the pandemic has taught us anything, it is that we can think and act differently. More than that, it’s taught us that we can achieve real and positive change when we think and act differently in partnership with others in pursuit of the common good.

Social Impact Investment can provide sustainable financing to third sector organisations at the front line of vital service delivery allowing them to maintain and build on their economic impact. It also offers the public sector a guaranteed impact for their spend – if it doesn’t achieve the agreed outcome the public sector doesn’t pay. This financial structure also offers the public sector a bridge to sustainable preventative spending which will be vital as we move from the crisis phase of the pandemic towards recovery and transformation in our economy.

Value is created when we invest to create impact and tangible, positive outcomes. Too often we think of investment as buying shares when the price is low and selling them when the price is high. That is a process of extracting value from the organisation where the investment is placed. Real investment is used to create value, such as creating jobs or new products that enhance the quality of life.

Investment in the third sector is the kind of investment which creates value.

The third sector has never been more needed than it is at present and Social Impact Investment is one of the tools that is lying around, which we can use to build back better together.