Prisons Minister Crispin Blunt visited Peterborough Prison to launch a new scheme designed to reduce reoffending.
The Social Impact Bond pilot, run by social investment organisation Social Finance, is the first scheme in the world that has used new funding from investors outside government to help reduce reoffending. Investors will only receive returns on their investment from the Ministry of Justice if they reduce reoffending by a set amount.
Crispin Blunt said: 'Our priorities are to punish offenders, protect the public and provide access to justice. But we want to initiate a more constructive approach to rehabilitation and sentencing, and re-think whether putting more and more people into custody really does make people safer.
'This payment by results pilot is both innovative and imaginative. I am delighted to be launching it.'
At a time of tight public finances, payment by results models, such as the Social Impact Bond, can tap into new sources of funding to reduce reoffending and provide value for money for the tax payer.
The six-year pilot scheme at Peterborough Prison will prepare around 3,000 short term prisoners for their lives post-release and will work with them to prevent a return to a life of crime.
If these services are successful and re-offending drops by more than 7.5 per cent within six years, investors receive a payment representing a proportion of the cost of re-offending. The payment will increase based on the reduction in re-offending with the total cost of the project capped at £8m.
Secretary of State for Justice Kenneth Clarke said: 'As part of our radical approach to rehabilitation we are considering a range of payment by results schemes like the Social Impact Bond.
'The voluntary and private sectors will be crucial to our success and we want to make far better use of their enthusiasm and expertise to get offenders away from the revolving door of crime and prison.'
David Hutchison, Chief Executive of Social Finance said: 'The Social Impact Bond aligns the interests of government, charities, social enterprises and socially motivated investors around a common goal. We are delighted to be launching the first such structure in the world here at Peterborough.
'Developing the Social Impact Bond market will take years, but we believe that with care it can enable future investment of hundreds of millions of pounds a year in these crucial areas.'
Social Finance has raised capital from social investors that will be used to pay for the services in the prison and outside in the community. It is expected to close the £5 million fund by the end of the year.
The services will be delivered through third sector providers with a proven track record of working with offenders, such as Ormiston Trust, St Giles Trust and the YMCA.
Initial investors include the Esmée Fairbairn Foundation, the Monument Trust and committed individuals.