Are social impact bonds the future of welfare funding?

New impact investing approaches need to prove their viability

Queensland is the latest Australian state to pilot some of the exciting ideas in impact investing that are shaking up the social welfare sector. Following NSW, it wants investors to get involved in funding new ways of tackling old problems.

Such as cutting the road toll on the Bruce Highway, Australia's most dangerous. The UK-based FIA Foundation has prepared a case study where investors would pay upfront for $3 billion worth of upgrades and get a positive return on the resulting cost savings to government and insurers from preventing an estimated 340 deaths and 2660 serious injuries during the next 20 years.

Queensland is also devising 'pay for success' schemes where investors get a return for backing successful ways to cut the number of homeless people, or young people in detention, or in foster care.

And affordable housing is attracting ethical investors, including Australian industry super funds such as HESTA. It is investing $6.7 million in Horizon Housing, a not-for-profit community housing provider in Queensland, expecting an infrastructure fund rate of return from rents.

HESTA hopes to "encourage other institutional investors and develop Australia's impact investing market".

Social impact investing in Australia came of age during the 2008 financial crisis which saw the collapse of Australia's largest childcare provider, ABC Learning's 1000 centres.  Social Ventures Australia and Mission Australia got together with other charities, the government, 41 investors and NAB and Macquarie banks to raise $165m and rescue two-thirds of the centres. 

Social investing takes various forms. The charity Opportunity International is devising a loan in Australia that will allow it to make more micro-loans to Third World countries. That will provide a community benefit and generate a return that can repay investors, making a greater impact than through traditional fundraising.

It hopes to tap into the growing culture of US-style corporate philanthropy in Australia that wants to support social ventures and ethical investing.

‘There is still a long way to go in developing measures for social change. In the not-for-profit sector it can be difficult, expensive and time consuming'

SARAH ADAMS

A new asset class

The new impact investing approaches are energising the sector, but still have to prove they are practical enough to be sustainable, attractive to investors and able to be scaled up to widespread use.

An instrument generating excitement is the social impact bond (SIB), also known in Australia as a social benefit bond. This involves investors providing upfront money to fund preventative schemes at a time when government is forced to allocate most resources to urgent symptoms, not the causes.

It builds on another big idea – focusing social services on outcomes rather than activity. These programs, in theory, encourage government and investors to focus scarce funds on approaches that are proven to work.

The big dream is to put hard-to-solve social problems – such as intergenerational poverty and dysfunctional families – into investable entities to create a new asset class that can provide a reasonable chance of returns, that appeals to ethical investors and can encourage innovation.

NSW is leading the way with two SIBs, including one to fund more UnitingCare Newpin centres which provide therapy and education for families to improve parenting and create positive behavioural change to break cycles of abuse and neglect. If 65% of the children are restored to their families, investors get a return of 12% p.a.

Investors will only stand to lose their capital if the restoration rate falls below 45%. The program finishes in 2020, has 59 investors, and the intermediaries are Westpac Bank, Commonwealth Bank and the Benevolent Society.

Impact measurement

Measuring success is pivotal to SIBs, according to Sarah Adams, a lecturer in the school of accounting at UNSW Business School.

"It's a tricky issue. With social impact bonds, identifying a suitable measure of success is critically important, but it can also be very challenging," Adams says.

"For example, one measure of success in out-of-home care is the proportion of children who are kept out of out-of-home care. For some children, this is a positive outcome; however for others living in very dysfunctional homes, out-of-home care may actually be a better outcome for them. This makes measurement challenging.

"There is still a long way to go in developing measures for social change. In the not-for-profit sector it can be difficult, expensive and time consuming. However it can offer many benefits to organisations, such as encouraging them to reflect on what they are doing and whether they are doing it well.

"Social benefit bonds place extra demands on the role of social impact measurement because it sits at the heart of the financial instrument, and forms part of the mechanism by which investors are paid. While there is a lot of goodwill by investors to the bonds now, in future there may be attempts to manipulate or game these measures," Adams says.

‘It is time Treasury, financial services and social services’ representatives got together to devise a clear view of where we are heading on social issues affecting our wellbeing’

ANDREW YOUNG

Extending the big idea

The social impact bond lobby has its critics – for its rosy view of markets, for embracing neoliberalism and a 'government failure' model to justify its approach.

Andrew Young, CEO of the Centre for Social Impact at UNSW Business School, likes SIBs but has some micro-criticisms of the pilot schemes, such as the high cost and time spent drawing up contracts for SIB projects.

"It took 18 months to write up a contract for $10 million in one case – ridiculously complicated," he says.

Young also wonders if the government would allow investors to have 20% to 40% of the successful outcome savings from the government in projects worth hundreds of millions of dollars – or take over the program themselves.

"The SIB is a good model. Spending money now to make savings in the future. [Rather] like tunnel infrastructure, [with] banks putting up the money now and getting a return in the future from tolls," Young says.

"Pilots are good for early stage investigation but we might need different models after that. [Such as] like the pharmaceutical industry drug development pipeline, [where] there are different funding models for stage one and for stage two and three."

Yet Young sees the larger issue as a need to extend the big idea behind social impact bonds – funding outcomes and fostering innovation – to evaluate spending across the whole of government.

He is critical of the silos in government and of the 'cross-silo' authority, federal Treasury, for recently abandoning its mission to 'improve the wellbeing of the Australian people' and narrowing it in favour of a focus on 'the budget, lifting productivity and securing the benefits of globalisation'.

"We are spending $500 billion on health, welfare and education. This has increased five times since the 1970s per capita in real dollars," Young says. 

"The debate is not about getting more money or spending less. It is time Treasury, financial services and social services' representatives got together to devise a clear view of where we are heading on social issues affecting our wellbeing. We need to get more effective social investment."

Early moderate success

UK consultancy Social Finance designed the world's first SIB in 2010 for the UK government with investors paying for private sector rehabilitation providers to try to cut re-offending by 3000 short-term prisoners. The six-year 'bond' (a misnomer because it did not offer a fixed return) had early moderate success (8.4%) but did not reach the target (10%) to trigger a dividend.

In July 2016, Social Finance reported there were some 60 SIBs launched in 15 countries, raising more than $200 million in investment to address social challenges. Of 22 projects that have posted results, 21 have positive outcomes, 12 programs have made outcomes payments and four SIBs have repaid investors in full with a return on their investment.