Cardiff Council is considering using social impact bonds (SIBs) to fund foster placements for some of the city’s most vulnerable children.

Proposals that Children’s Services work on a feasibility study for the scheme with an external organisation that has relevant experience and is regulated by the Financial Services Authority (FSA) were made in a briefing report presented to a meeting of the authority’s children and young people scrutiny committee this month.

The scheme would target children placed in residential care because of their complex needs. Cardiff has 535 looked after children, including 38 placed in external residential placements out of Cardiff. The total cost of these placements is £6,491,135. Local foster placements are considerably cheaper than residential care inside and outside the city, and better for children, the briefing report states.

Finding foster placements for children with complex needs is considered financial high risk by the council. An SIB would see an investor take on that risk and get a financial return if the scheme is successful, from savings made by the council.

Cllr Richard Cook, cabinet member for Children’s Services said: “I am very pleased that the Council could be considering using Social Impact Bonds to tackle problems in Children’s Services that up until now have been very difficult to resolve. Cardiff has far too many looked after children who are cared for out of county. The council is the corporate parent to these children and they deserve the best future we can provide for them. Social impact bonds could introduce innovative ways of working and bring investment that will be difficult to find in the current climate with the council having to make £55m of savings in the next few years.”

The briefing paper anticipates interest from philanthropy funds, wealthy individuals and trusts and foundations. It says: “Investors who might be interested in funding a SIB will be motivated to make social impact and forge a new model of working. They often won’t want to pay for areas that they think government should be paying for. Therefore many investors are interested in service transformation and sustainable change in the lives of vulnerable groups.”

Developed in the UK by Social Finance, SIBs are, generally speaking, open to grant-making trusts with over £10m in assets, as well as high net worth individuals who meet minimum financial and expertise criteria, such as an annual income over £100,000, and self-certify as ‘sophisticated investors.’ (For more detailed information see the Financial Services Authority website.)

The proposal to Cardiff Council comes soon after Prime Minister David Cameron announced that he wants to see payment by results schemes as “the norm rather than the exception” within schemes that tackle re-offending.

"By the end of 2015, I want to see payment by results spread right across rehabilitation,"he told an event hosted by the Centre for Social Justice think tank last month: "Of course, there will be some high-risk offenders for whom this is not appropriate, but this approach should be the norm rather than the exception."

At present, philanthropists’ opportunities to fund payment by results schemes are limited due to regulation, although government initiatives to boost social investment opportunities for individuals could change that. Alastair Ballantyne, head of communications at Big Society Capital (BSC), told Philanthropy UK: “In principle, investing in payment by results could be great for high net worth individuals, particularly those used to dealing with sophisticated financial products, as well as trusts and foundations. The Treasury has flagged the possibility of tax incentives for social investment, and Nick Hurd has referred to social investment ISAs. These could open up the possibility of investing in payment by results to individuals.”

Ballantyne is clear that investing in payment by results would not, and should not, replace individual giving or grant-making by trusts and foundations. He said: “Obviously, not all models are suitable for social investment and some will need to depend on grant funding. The idea is not to displace what’s already there in the form of philanthropic giving, but rather to see this as the investment of part of an endowment. The investment would also generate returns that could then be used for grants.”

Jake Rigg, a policy expert at Keene Communications, added that tax incentives along the lines of existing breaks for ISAs or venture capital trusts could be "pivotal" for the sector as it was for investment in smaller businesses.