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New EU focus on social outcome contracts

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Published: 13 July 2021

It’s a new buzzword in Brussels. Social outcome contracting is seen by the European Commission as a tool for orchestrating social change, with the potential to unlock large amounts of private investment.

Homeless And City Hall In Antwerp Belgium
A homeless eating food if front of the city hall of Antwerp, Belgium. Recently, the European Investment Fund made a co-investment in a platform with BNP Paribas, setting up a social impact bond in Belgium focussing on the reintegration of a group of young adults who are at imminent risk of homelessness. Omersukrugoksu / iStock

“Originally social outcome contracting was seen as just an additional financing tool for social enterprises,” says Georgia Efremova, EU-policy officer for Social Impact Initiatives.

“But gradually we realised that it is much more than that. It is really a new tool for social innovation in the provision of social services, and for framing new forms of collaboration.”

According to the EU policy officer, social impact contracting is at the heart of the EU effort towards an inclusive and just recovery from the Covid-19 pandemic.

In EU jargon, social outcome contracting (SOC) includes a range of tools, such as payment by results schemes, social impact contracts and social impact bonds.

These are slightly different instruments sharing the common feature that a public authority pays for better social outcomes in certain areas and passes on (part of) the savings achieved to investors.

According to Efremova, who currently leads the Commission’s pilot initiatives in the area of social inclusion and empowerment, social innovation, and collaboration with philanthropy, SOCs are “part of a broader orientation of reorienting public and private finance towards outcomes/performance rather than cost and stimulating social impact ecosystems in Europe.”

EU flagship projects

Currently, the EU has only a few flagship projects to show. Five years ago the European Investment Fund (EIF) contributed to the KOTO social impact bond in Finland, which focuses on labour market integration and refugees.

In 2018 EIF invested €10mn in Joining Forces, a social impact bond set up by the Dutch Ministry of Defense. The bond aims to reintegrate some 1,500 disabled servicemen, with the help of philanthropic investment funds and a major health insurer (Aegon).

A more recent investment was made in a co-investment platform with BNP Paribas, which set up a social impact bond in Belgium focussing on the reintegration of a group of young adults who are at imminent risk of homelessness.

The EU’s total commitment so far is €25.9mn, part of a €150mn allocation under the European Funds for Strategic Investments (EFSI – Payment for Results Facility). The funds are implemented by EIF on behalf of the Commission as an equity investment scheme.

Laurina Nieukerke of Inclusif, fund manager for the Dutch social impact bond Joining Forces and the recently launched Brabant Outcomes Fund, praises the EIF’s catalytic role. “They do very thorough research before they act. But if EIF decides to step in, it is with a substantial amount of money. That helps enormously to get other investors involved.”

EU knowledge platform

To underline the new focus the European Social Outcomes Contracting Platform (under the European Investing Advisory Hub) was launched last year to support knowledge exchange and capacity building of public sector participants.

The platform helps member states to mobilise resources managed by EIF as well as private social impact investors. So far, it has supported feasibility studies for the creation of social impact bonds in, amongst others, Lithuania and Slovenia, the city of Madrid and for the Italian Ministry of Justice.

To give an example: the feasibility study in Lithuania is done by Social Finance NL and EY Lithuania, and is focusing on the development of a social finance ecosystem to support social entrepreneurs.

New EU funding and investment cycle

Social outcome contracting is also expected to play a much larger role in the new funding and investment cycle the EU has just started. This includes the ambitious €750bn recovery package, NextGenerationEU, and a new multiannual financial framework.

The same applies to the InvestEU programme (2021-27 target: _blank), which aims to mobilise additional private and philanthropic capital in order to complement public spending on social priorities. The programme will bring together under one roof the European Fund for Strategic Investments and 13 other EU financial instruments currently supporting investment, with the idea of making EU funding more accessible and effective.

Due to Covid, the decision-making process on the new mandate and budget for social outcome contracting has been postponed until the end of the year. It is not yet clear how this will turn out. Efremova is optimistic and says that “the next months will be decisive.”

Nieukerke of Inclusif is a bit more sceptical. “I really do see the ambition in Brussels. But I also notice a lack of enthusiasm in many member states, including the Netherlands. This makes it very difficult to realise large-scale public-private partnerships aimed at social transition. There is still a big gap between ambition and actual realisation.”

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