Social impact bonds report card: learning lessons in NSW

By Stephen Easton

January 6, 2016

Australia’s first two social impact bonds in New South Wales appear successful so far. But less is known about why a third never made it off the drawing board.

Encouraging results were first reported from the bond funding UnitingCare Burnside’s Newpin program, which aims to return foster children to their parents or prevent others going into out-of-home care. In doing so, it saves the government money and provides returns to the investors that fund the program.

The second SIB, funding the Benevolent Society’s Resilient Families program, had a similar aim to keep families together and reduce spending on out-of-home care at the same time, but took longer to get going. In December, figures came out demonstrating it too was working as intended, with 27% less children going into foster care than a control group and 88% of the families referred to the program staying together.

“We have all learned a lot from the experience …”

The NSW government claims an annual saving of $66,000 per child not in foster care and the Benevolent Society reports two slightly different bond classes were on track to return about 5% and 8% to investors after their five-year term. A mid-term evaluation report on the first 14 months, published in September, made a few criticisms and suggestions for improvement but found the program generally being implemented as intended. The final evaluation report is due in March.

But the third NSW social benefit bond — intended to fund a program to reduce recidivism, with the obvious savings of having less people behind bars — never got past the “joint development phase” with Mission Australia and Social Ventures Australia. Nevertheless, it was a great learning experience, according to those involved, although they are unwilling to discuss it publicly. The NSW Department of Premier and Cabinet will say no more than:

“The decision not to proceed was based on the aggregate challenges and risks of the proposed model, including the evolving nature of the justice and corrective services policy environment. … We have all learned a lot from the experience and these lessons will inform future social impact investment activities.”

Mission Australia’s spokesperson repeated that it was “a really positive, valuable shared learning experience” but stopped short of sharing anything that was learned with The Mandarin.

Clare Wesley
Clare Wesley

Public policy consultant Clare Wesley has a different idea. She suggests federalism — where the savings to taxpayers from successful social impact investments are often split between the levels of government — might have something to do with it.

In a November article, Wesley reported that “many in the impact investing community” assume the problem was that “the avoided costs of addressing recidivism flow to the Commonwealth, but the direct costs to the NSW government were too great to take on without assistance from the federal government”. She added:

“In the face of this challenge, there is real concern that unless the Commonwealth financially acknowledges the benefits of state and territory-led SIBs for the federal budget, innumerable proposed SIBs could be rendered economically untenable.”

Wesley sees two key barriers to making SIBs work in Australia as they have in the United Kingdom:

“Apportioning the returns of SIBs and incentivising multi-jurisdictional co-operation is far from a clear-cut process. If SIBs are to reach their full social and financial potential, governments will need to find innovative ways to overcome these structural hurdles.

“Another challenge is fiscally quantifying both the problem being addressed and the benefits of resolution. Governments typically do not seek to scope the opportunity costs associated with social problems, but SIBs require clear performance metrics to work.”

She argues that to realise the full potential of SIBs, collaboration between the tiers of government is a necessary first step:

“In the area of health, for example, the Commonwealth bears primary responsibility for service funding and administration, while the states and territories are charged with service delivery and management.

“The implication of this division of responsibilities is that it makes the delineation of impacts produced by SIBs difficult. This raises the question of how governments apportion the responsibility for investing in these initiatives and rationalising the potential rewards.”

Other kinds of social impact investment

An enquiry to the Premier’s Department about what exactly was learned from the defunct Mission Australia bond and why it did not go ahead only elicited the same words found on the agency’s website, with the hopeful addition that the government:

“… still considers there are opportunities for different mechanisms that will help address this issue and contribute to keeping the community safe, such as a payment-by-results contract where the government pays a provider to deliver a service based on the results achieved.”

Caralee McLiesh
Caralee McLiesh

The government’s social impact investment policy is not solely focused on social benefit bonds, as Caralee McLeish, a NSW Treasury deputy secretary who chairs the cross-government Social Impact Investment Steering Committee, explained in September.

“We’ve learnt from the pilots that they are incredibly complex and time consuming, and they’re simply not [always] appropriate,” McLeish said at a seminar in Canberra (reported by The Mandarin).

The policy calls for two new social impact investment transactions every year which are solicited regularly through requests for proposals. An RFP that closed last July preferred programs “to reduce re-offending and re-incarceration” and the current round is focused on mental health and chronic disease.

The policy encourages “a spectrum of products associated with social impact investment — from outcomes-focused grants and payment-by-results contracts, to equity and debt instruments, social impact bonds and more” and revolves around five principles developed by NSW bureaucrats.

“The fact that under social impact investment we’re paying on the basis of outcomes really sharpens the focus on measurement, on what we’re trying to achieve. There’s a lot more transparency on what’s working and what isn’t, and more accountability for the funding,” McLeish explained. “But also, the focus on outcomes and measurement can help to facilitate innovation.”

The kind of innovation she means is not “ground-breaking light-bulb moments and disruptive technologies” but “smaller-scale innovations in the practises and behaviours” of not-for-profit social service providers and government agencies, like adapting programs based on evidence to make sure the right groups are being targeted, and sharing more useful information about clients. This results from closer scrutiny and collaboration, a focus on outcomes and robust evaluation, none of which are exclusive to SIBs.

McLeish says the embrace of social impact investment in NSW grew from a “recognition that governments don’t have all the answers” and the belief that social service organisations could provide more intimate knowledge of disadvantaged groups while investors could “bring more commercial discipline and risk management and governance” to the table.

A call for pragmatism

NSW Council of Social Services CEO Tracy Howe believes even though SIBs are only applicable in some circumstances, the growth of social impact investing represents a broader opportunity for her constituents. For that reason she sits on the NSW Social Impact Investment Expert Advisory Group along with McLeish.

“I think that [social impact investment] thinking can be applied in less complex ways,” Howe told The Mandarin.

“You’ve got to remember the bonds are massively complicated instruments. The thing that they lend themselves to is your bigger players … who want to meet halfway with the investor and say, ‘we really back our own product’, but it doesn’t lend itself to a small to medium [organisation] at all.”

Tracy Howe
Tracy Howe

Howe says it’s important for the advocates in her sector and academics to be vigilant and make sure the hype around social impact investing doesn’t overtake its usefulness, but sees no reason to reject investors putting their money into social work.

“There is an appetite out there with investors who want to have some corporate social responsibility, or who want to have those kind of investments, to play in this market. I think that if you have not-for-profits who want to participate along with them then we should encourage that,” she said.

She says the social services sector should continue to hold governments to their “baseline obligation” to fight disadvantage and advocate for policies to reduce socioeconomic inequality, seeing social impact investment as complementary to that core responsibility.

“We know that with what the government funds presently, we’re not breaking the back of disadvantage or poverty, so if there are other ways that you can complement the obligations of government then that is fine, however they’re not to take the place of them,” Howe said.

“I think it is too simplistic when we talk in absolutes or we polarise the discussion.”

“So your advocates and your academics have to be the reality check to say: ‘don’t think that new shiny thing is the replacement’. However it is an important annexure.”

Howe favours a pragmatic approach over the ideological distaste for profits becoming entwined with social work that is common in the sector, and says NCOSS is comfortable being inside the tent on a bipartisan policy begun under Labor and continued by the Coalition. Governments cannot be allowed to outsource their responsibilities to the needy, she reiterates, but neither should that obligation stand in the way of trying new things.

“I think it is too simplistic when we talk in absolutes or we polarise the discussion. I think there is a nuanced, pragmatic discussion to be had whilst all the time saying there is a baseline obligation on government to provide for those who experience disadvantage,” she said.

“I really worry about blocking out the discussion.”

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