Social Impact Bonds (SIBs) have become popular instruments for Australia’s state governments in delivering services to the areas of welfare and social security however, both the Turnbull Government and Australian businesses have so far failed to engage with the opportunities these present. Meanwhile, state governments from both major parties have pioneered the trend of social impact financing. This form of financial innovation has proved to be a successful and worthwhile approach towards welfare funding that provides businesses and investors with a stable profit while reducing governments’ budgetary burdens.
Successful impact investment bonds are ideologically agnostic. Large scale social finance first appeared in the United Kingdom in 2007; drawing experts from the finance, government and social sectors, Social Finance UK pioneered the application of bond sales to finance social security projects. Since its creation in 2007, Social Finance has mobilized over £100 million of social investment from investors, primarily through its Social Investment Bank and stand-alone SIBs. These two mechanisms have since been employed in the UK with the launch of Big Society Capital in 2012, which raised £600m to invest in programs of youth justice rehabilitation and poverty relief.
Following this lead, a joint venture between NSW Treasury, Social Ventures Australia, Uniting Australia and the Department of Family Communities introduced the first SIB in Australia when they issued the Newpin Bond in March 2013. The Newpin Bonds raised $7 million from both private and institutional investors for Uniting Australia to finance existing crisis centres over the seven year lifetime of the bonds; as of 30 June 2016, the centres had restored 130 children to their families in a stable environment. In 2016, the savings towards the state government’s welfare budget had allowed for a 12.2% return to investors. KPMG modelling undertaken for NSW Treasury has indicated that the Newpin Bonds could save the state around $80 million by 2030. This is clearly an innovative way in which social results and prudent budgetary management can complement each other, while also providing a handsome return for investors.
In September 2015, the South Australian Government announced the Aspire Adelaide Program, seeking to raise $9 million to help house 600 vulnerable South Australians over a four year period; the bond has an estimated rate of return of 8.5% per annum over its 7.75-year term. The Victorian Government launched the Green Bonds Scheme in July 2016, raising $300 million in under 24 hours to be put towards new and existing projects for energy efficiency and renewable energy generation, as well as green forms of public transport and water treatment. Queensland has a Social Benefit Bond Pilot Program (SBB) to be introduced in the first half of 2017, the aim will be to raise funds for out-of-home-care for 500 young indigenous people from the ages of 15-25. In WA, Social Ventures Australia has led a consortium to manage a $10 million fund to support social enterprise organisations, 21 of whom have already received funding to commence service delivery.
While major multinational firms have been involved in the state government projects, there has been little response from Australian firms and the Federal Government, who have both the skills and capital, in leading other ventures. The success business’ can bring to impact investing projects is clearly indicated with comments made by Goldman Sachs JBWere in 2010, regarding their involvement in the NSW GoodStart Consortium SIB in which the success of the venture “was due to the various capital markets that Goodstart tapped into – philanthropic, hybrid and commercial”.
The risk concerns for Australian firms primarily come from a perceived lack of communication between government, service providers and private investment and how tangible outcomes are achieved for investment projects. Firms are hesitant to involve themselves with government projects if they are politically sensitive or ideologically heavy issues. Such concerns were witnessed when the Peterborough SIB, a £5m project aimed at reducing rehabilitation sentences for young offenders in the UK, stumbled with its funding as private investors suggested that the implementation of the Transforming Rehabilitation programme from the British government left the SIB sensitive to policy shifts. Concerns for these investments are negated by the security offered by governments, as evident within the Social Finance Forum’s November 2012 report An Australian Snapshot: Social Impact Bonds, “the public sector pays if (and only if) the intervention is successful. In this way, Social Impact Bonds enable a re-allocation of risk between the two sectors.” The security provided by a Government AAA credit rating, as well as state funded receipt pay-outs clearly provides a low risk incentive for firms to embrace impact investment. This relationship allows government, the private sector and NGOs to collaborate their respected skills and experience in providing community focused outcomes.
An important perspective raised by Peter Shergold, Chair of the NSW Government’s Social Investment Expert Advisory Group, is that SIBs and Social Benefit Bonds “are not going to be a silver bullet”, rather they provide new opportunities to explore and complement “public funding for social services”. Impact investment provides business’ with an avenue to collaborate with government to deliver socially beneficial outcomes while still retaining a profit for itself and the investors it attracts towards SIB financing. The steady return rate for businesses that invest in SIBs, coupled with bi-partisan political support clearly illustrates that the Federal Government and Australian firms are leaving a worthwhile financial and social opportunity to waste.
Lee Ellison is a political risk intern at FPL Advisory, writing on political and sector risks.