Partnerships for public good: social benefit bonds in NSW

By David Donaldson

Tuesday July 15, 2014

Social benefit bonds — public-private partnerships that incentivise community improvement — are coming. But they will need to become cheaper and easier to develop to catch on.

SBBs, also known as social investment bonds, are a relatively new form of “government pays” PPP first trialled in the United Kingdom. Private investors provide funds to service providers to deliver improved social outcomes. If certain outcomes are reached — for example, reduced recidivism or fewer children going into out-of-home care — the government pays back the amount invested, plus a return.

Though SBBs have attracted much media attention, one of the architects of the first SBBs in New South Wales warns they are not a cure-all but a “tool” to address specific problems. Social impact analyst Emma Tomkinson says they are useful “anywhere where there is a clear problem and an additional preventative program could address that program and the problem is expensive. That’s probably where a social impact bond could be effective.

“Perhaps a program where you want to encourage innovation. It’s easiest if you’re already paying on a demand basis for that problem, such as per person or per night.” When demand is reduced, so is spending. Improving outcomes on expensive “wicked” problems, it’s hoped, will save large amounts of money over the long term.

NSW has led the way on developing SBBs in Australia, with two SBB-funded programs entering a second year. The release of the first-year independent evaluation into the programs, run by UnitingCare and The Benevolent Society, is still a few months away, but early signs at The Benevolent Society’s Resilient Families program are reportedly good. South Australia, Western Australia and Victoria are believed to be exploring setting up their own SBBs.

Because there were no Australian precedents, and with so many parties involved, the development phase of the NSW pilot programs took much longer than initially expected — 12 months rather than six. One of the main reasons for this, says Les Hems, who was involved in writing a 2012 Centre for Social Impact report into SBBs, was wrangling over the amount of risk to be assumed by investors. The government eventually agreed to guarantee a minimum of 75% of capital invested — a shared risk model since adopted in the UK and the United States.

Hems argues negotiations were “excessively bureaucratic” for what was ostensibly the trialling of an innovative funding mechanism. It’s causing a significant delay in the wider uptake of SBBs as other states “sit on their hands” waiting for initial results before expending the type of money and labour required by the NSW process. A KPMG evaluation report released in January argued that:

“… the development of the Social Benefit Bonds was very labour intensive for all the stakeholders involved. Overall the number of hours equates to six FTEs [full-time equivalents] working solely on the development of one social benefit bond over an intensive 12 month period.”

Claerwen Little, director of UnitingCare’s Children, Young People and Families program, believes SBBs will need to “maintain rigour but simplify” if they are to find wider application.

This makes SBBs expensive, meaning their applicability tends to be limited to addressing expensive, intractable policy problems. But labour costs are expected to decrease as government, civil society and the private sector develop capacity and precedents. Hems argues SBB design should be outsourced, to “create an innovative program first, see if it would be feasible, and then take it to financial institutions” to reduce costs and time.

“If we continue to do it the same way as in NSW, there won’t be very many contracts signed and those that are will be drawn out,” she told The Mandarin. “Outsourcing bond design is already standard practice in the UK, and has helped facilitate the more than 20 SBB contracts there.”

Improved data collection will help, too. One of the main issues with SBBs is how to measure performance accurately, as outcome evaluation tends to rely on counterfactuals. Because payment is reliant on reaching defined outcomes, accurate measurements are central to the SBB structure.

Little said: “You need data sets that enable you to assess the level of need in the population as well as the outcomes. What were the odds of a successful outcome for family A, B or C? It becomes very hard to work out who are the apples and who are the oranges, and most administrative data sets are not well positioned to do this.”

Tomkinson says that “one of the best discussions to have across government is to ask ‘what are we trying to do here?’ Setting clear goals and objectives is hard, most of us don’t do it, or don’t do it well. For example, when we started working with the Department of Corrective Services, they didn’t mention the word ‘rehabilitation’ in their goals. The focus on outcomes is really interesting.”

Collaboration, at least, is one benefit of SBBs. “It was a really exciting process for us as a not-for-profit to be sitting down with senior people in NSW Treasury and NSW Family and Community Services,” Little said. “It was a joint problem-solving exercise. The working relationship to develop and implement the SBB was a genuine partnership and should serve as a model for collaboration between government and the community sector.”

Moreover, many of the lessons learned in the trials are not unique to SBBs. Other policy areas could benefit from a more systematic focus on outcomes and rigorous measurement, as well as improving the information feedback loop between service providers and policymakers.

Initially, some worried that the part-market, part-social nature of SBBs might mean they would not meet the requirements of investors looking for profit, and would end up being funded by the usual philanthropic organisations and high-value individuals. But, Little says, commercial investors, including superannuation funds, have shown plenty of interest: “I think we were tapping into something new.” Research by Social Ventures Australia shows that funds invested in UnitingCare’s Newpin program would not have been used to make donations or philanthropic grants if the SBB investment opportunity was not available.

In fact, Little believes, demand outweighs supply. “There’s this pool of money and there aren’t the proposals for it. We need to understand what the market is and what are the public policy spaces for it. I think there’s definitely a market where people are looking at a combination of market and social returns,” she said.

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