Funding floods SA social bond as ScoMo eyes a simpler kind of impact investing

By Stephen Easton

Friday March 10, 2017

Melbourne Australia – February 13, 2016: People sleep in front of Westpack bank in downtown Melbourne Australia.

South Australia’s first foray into social impact bonds has drawn a rapid injection of private capital into a three-year program that will provide “housing, life skills and employment pathways” to 600 homeless people, as the Commonwealth looks to a much simpler kind of social impact investment to provide affordable housing.

Social Ventures Australia announced this week that $9 million poured into the new “Aspire” SIB in under a month and had to close the fundraising phase well before its planned March 31 deadline.

The charitable groups working with the SA government include the Hutt St Centre and Common Ground Adelaide while some of the big investors were the Coopers Brewery Foundation along with superannuation funds HESTA and Future Super. The homelessness programs would need to deliver a net financial benefit to the state government in the form of reduced costs elsewhere to be successful, and deliver returns to investors.

The savings in SA are most likely to be found in health services, interactions with the justice system and other homelessness services directly funded by government, according to SVA.

The New South Wales government has had some success with two social benefit bonds but abandoned a third, Victoria has also moved ahead with its own despite qualms about the concept from the Community and Public Sector Union, and Queensland is piloting social bonds as well. Another attempt to set one up in New Zealand broke down and a lot of social services and public administration experts are cautious about the complex financial arrangements, which are not the only way to pay for outcomes.

SVA’s executive director of impact investing, Ian Learmonth, is confident that the SA social impact bond “will make a real and sustainable difference to the lives of 600 individuals” at this early stage and is enthusiastic about the popular new financial instrument.

“We see demand growing from investors across all states, and with SVA working to develop a number of other SIBs in Queensland and New South Wales, there is a growing pipeline of these innovative impact investment vehicles,” Learmonth said in a statement.

The news comes as the federal Treasurer Scott Morrison looks to a “bond aggregator” model as an affordable housing policy ahead of this year’s federal budget, inspired by a similar program in the United Kingdom. Today he announced the establishment of a taskforce to come up with a model for consideration of all Australian governments via the Council on Federal Financial Relations Affordable Housing Working Group.

The panel of three will be chaired by Stephen Knight, former CEO of the NSW Treasury Corporation and a previous member of the Australian Office of Financial Management advisory board. Treasury secretary John Fraser and Community Housing Industry Association CEO Peta Winzar will sit beside him.

According to the Australian Housing and Urban Research Institute, the plan would be based on its research, in which it refers to the aggregator as an Affordable Housing Finance Corporation:

“The AHFC is designed to aggregate and source large amounts of capital from the bond market so as to provide lower interest, long-term loans to not-for-profit community housing providers (CHPs) developing housing for lower income households. The intention is that money would be raised efficiently with reduced financing costs rather than in expensive one-off transactions such as when borrowing from a bank.”

AHURI envisages the AHFC would be a “relatively simple and transparent” nonprofit body that draws on the success of other nations — particularly Switzerland — to maximise sustainable growth of affordable housing stock, while minimising “the impact of debt on government budgets” at the same time.

The affordable properties it would fund would be aimed at people on low incomes, who would pay about 80% of the going price for rent in the local area, but would not be aimed at households that survive on welfare payments alone. The type of bonds that would be issued are a fairly standard low-risk, low-return arrangement backed by government guarantee:

“AHFC bonds would come with a carefully structured guarantee such that interest and loan payments due to investors would be paid by the Australian Government should a CHP borrower be unable to make a repayment. This lowers the perceived riskiness of the bond, resulting in a lower interest rate paid to the investor. The Swiss Bond Issuing Cooperative guarantee scheme that the AHFC is based on has recorded no repayment defaults during its many years of operation.

Standard and Poor’s noted that, compared to Australian Government balance sheets, the size of potential risks to be guaranteed by the AHFC was minute, and therefore was unlikely to impact the Government’s credit ratings.”

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