Australia, similar to Canada, France, Germany, and the USA, has a growing pool of investors seeking opportunities to see their money not just make returns, but create a major impact on the good of society. Despite good intent and a burgeoning number of impact investing funds both globally and in Australia, we currently have just three social benefit bonds in action in Australia — Newpin, the Benevolent Society, and the newly announced ACSO-arbias venture — all in NSW.
The lack of transactions signifies a huge missed opportunity for Australia to be at the forefront argues Ruth Lawrence, associate director, advisory at KPMG Australia.“The approach offers collaborative possibilities that cut across sectors traditionally demarcated by ideological boundaries.”
“A new class of investors want their money to do more; to directly benefit people and create returns that transcend traditional notions of investment,” Lawrence says. “These investors understand that their money can generate endless possibilities to tackle the toughest, most complex problems in society.”
For non-governmental organisations looking to implement programs that address complex issues across a myriad of areas — including recidivism, education, unemployment or health — social benefit bonds (SBBs) present a resource of investment to help them implement change. For government, there are potential savings on future spend if these incubating issues are caught early and mitigated.
The challenge for Australia to move from just three active SBBs to a scene of thriving programs is vast — but Lawrence says that with a clear vision for change, a strong social agenda, the willingness to collaborate and effective success measurement systems, there is no reason why ground can’t be broken.
“They are a wonderful opportunity to achieve outcomes — but you can do it poorly, or you can do it very well,” she says.
How do SBB’s work?
SBBs are contractual arrangements that tap into the need for NGOs to fund their innovative programs to fuel positive social change; for government to direct precious taxpayer dollars to innovative or proven solutions to combat complex social challenges; and for investors to see their money achieve positive, lasting outcomes.
“The approach offers collaborative possibilities that cut across sectors traditionally demarcated by ideological boundaries,” Lawrence says.
There is enthusiasm from all sides — including government ministers who want to see them come to fruition. However, Lawrence says bonds can be incredibly complex in terms of input, design and measuring outcomes.
“A minister can want to see a transaction get up and running but the key questions is, what are the policy objectives? Bonds should help improve outcomes across the whole of human services. The bond should be a platform to improve measurement and rigour and to push the sector.”
Each contract is currently bespoke, tailored to a specific objective, with different expectations and definitions around risk and return. If the program proves successful through rigorous measurement, government will pay an agreed return on investment. If the bond is unsuccessful, government will not pay a success fee — protecting constrained budgets.
“For example, with Newpin, there is a baseline that around 55% of children in foster care eventually go home. At the end of the third year, taking into account any reversals, the program has seen that rise to around 65 percent — so investors received 12% return. Each transaction is quite different,” Lawrence says.
Myths get in the way
SBBs have traditionally suffered from a great deal of misconception about how they work, the impact they can have, and the myth that they are ‘easy money’.“Their baseline was a complete overstatement of who should need special services later on.”
“When there is a bond released you can expect to see negative press around it — things like “cash for kids”, “the privatisation of human services”, or “slashing government services”, Lawrence says.
There is a need to bring the market along on the development of bonds, and realistically appraise what bonds can and cannot offer the market. Misconceptions slow down market development and get in the way of more people developing innovative, impactful financing arrangements. With SBBs the key is measurement — and establishing solid baselines and powerful benchmarks for long-term success.
“There are a couple of examples where bonds have been discontinued, so you have to ask, what is a robust way to measure success for bonds?” she says.
In a system where returns rely on outcomes, robust measurement is vital.
“The public must demand that programs are transparent, that there is good data, that outcomes are measured,” Lawrence says.
Government must also mandate clear standards for measurement, all fitting into a broader social benefit policy or goal.
“Policy objectives for governments should increase outcomes in services, transparency in programs, value for money and innovation.”
In the US state of Utah, the success of a bond was questioned due to failure to put in place a suitable baseline for measurement. Lawrence explains that the bond was established to provide extra care to a group of preschoolers judged likely to need special education down the track.
“Out of 400 children, they predicted 115 would need special education. They gave them two years of special services. At the end, only one student needed special education. It was heralded as a success.”
However, when asked what their baseline for measurement was, it was revealed to be flawed. The baseline test was in English despite the fact that many of the children were non-English speaking.
“Their baseline was a complete overstatement of who should need special services later on.”
What’s the current status?
There is movement within state governments showing openness to SBB development, Lawrence says.
NSW government has a clear commitment to a number of impact investing transactions each year; in South Australia, the government asked for proposals in six areas and is currently developing one proposed bond; in Queensland, negotiations are under way to develop bonds; Victoria is currently conducting market sounding workshops and is expected to go to market in late 2016 in two areas. Other states such as Tasmania and Western Australia are not yet showing activity.
The important thing on all sides to remember is that it is not a “miracle cure” to issues, but done well, it offers an opportunity to reverse the relationship between organisations and government around social problems.
For organisations looking to develop a SBB with government, a strong proposal to solve an issue in a challenging area is essential. There needs to be solid data, a demonstration of savings for government and both societal and financial returns for investors.
“You need to find a new solution to something they haven’t been able to solve,” Lawrence says.
Pitching to government is one thing, but investors also need a powerful message.
“The idea of investing for financial outcomes in human services can be quite foreign initially. It is important to remind people to be realistic — it is complex but optimistic.”
A case to scale up
The increasing number of impact investment funds in Australia are testimony to the growing interest in the area. However, these funds have encountered challenges in finding scalable solutions and offerings. Scaling up the number and size of SBBs will help attract major investors, such as superannuation funds and fund managers that have hurdles around the minimum size of investment in which they can participate.
“Government needs to support NGOs to measure their outcomes. Then you will have more deals. NSW has led the way with their impact investing policy, but more needs to be done about educating the market, nationally, about what it means for success. We have the opportunity now here in Australia to accelerate the market and for it to take off.”
Failure can happen with SBBs, such as with the Utah example, but Lawrence says this should not deter the market. Rather, it is an opportunity to learn.
“It is about achieving change and focusing on the broader change agenda; seizing on the opportunity to work in new ways with investors to achieve social outcomes.”