On February 4 2015, the government of New South Wales in Australia released its Social Impact Investment Policy – the country’s first.
The policy builds on the success of its social benefit bonds (SBB) pilot programme, the Australian version of social impact bonds (SIBs), where private investors financially back social interventions.
The A$7m (€4.9m) so-called ‘Newpin’ pilot is backed by institutional investors including NGS Super and Christian Super – and delivered a 7.5% investment return last year.
The SBB aims to restore children to their families and prevent at-risk children from entering care. Another family-focused SBB is in operation in NSW – the A$10m Benevolent Society Social Benefit Bond, where investors include the Commonwealth Bank of Australia and global insurer QBE, who has earmarked US$100m for SIBs around the world.
This SBB is also showing early signs of success, according to the NSW Treasury. Responsible Investor speaks to NSW Treasurer Andrew Constance about its new policy setting out how the government will grow a social impact investment market, its burgeoning SBB landscape and why it is targeting institutional investors.
What led to the launch of the NSW Government’s SBBs?
In 2010, the NSW Government commissioned the Centre for Social Impact (CSI) to determine the feasibility of social benefit bonds in NSW. CSI concluded that juvenile justice and parenting skills for at-risk families were suitable areas for a pilot in NSW. Following a Request for Proposals process and joint development phase we signed contracts for our first two bonds in 2013, seeking to deliver better services and results for families at risk. The bonds were developed in response to the social challenges facing NSW and are an innovative vehicle to deliver better outcomes for our communities.
The Newpin SBB includes superannuation funds. How did you get these funds on board to invest, especially without a track record? Are there more SBBs in the pipeline?
Our partners in the Newpin SBB, Social Ventures Australia, successfully marketed the bond to some superannuation funds. A key factor in this was the evidence base and track record for the service in NSW and overseas. However, we believe that to grow the social impact investment market in Australia and attract more investment from institutional investors, transactions need not only a service with a track record but to have more scale. We recently launched a Social Impact Investment Policy that involves building on the early success of the bonds and exploring other investment models that involve clear risk sharing among participants such as outcomes-focused grants.Australia’s Community and Public Sector Union has criticised social impact bonds, calling them a way of “dressing up privatisation”. What is your view on this?
The government owned entities may not always be best placed to provide services, and a wide range of public services is already provided by the non-government sector. Social impact investment transactions are a way to partner with the private and non-government sectors to deliver better outcomes. These sectors have a lot to offer and the government and the community can benefit from their capital, innovation and skills through collaborative partnerships, such as social impact investment transactions.
What led to the setup of the NSW Social Impact Investment Policy?
The government believes that social impact investment offers numerous potential benefits. First, it provides an opportunity to identify – and test – innovative ways to address social challenges, with a focus on measurement and delivery of outcomes. Second, it is an opportunity to play an enabling role by creating the conditions for the non-government sector to do what it does best. Third, a strong social impact investment market will provide better value for money for the people of NSW, by driving greater contestability and innovation in service delivery, and paying for results delivered.”
What will be the next steps?
A key part of our policy is our target to deliver two transactions to the market per year. We are currently holding a series of market sounding events to enhance our understanding of the conditions necessary for a successful transaction and to help parties prepare for formal Request for Proposals (RFP) processes later this year. We are also developing work plans to facilitate growth in the market and to remove barriers including through building the capacity of market participants. Further information is available on the NSW Social Impact Investment Knowledge Hub
Are other states in Australia considering making similar moves?
The NSW Office of Social Impact Investment liaises with government departments in other jurisdictions that are working on similar or related projects to share experiences and knowledge. This networking with other jurisdictions will facilitate the development of a national social impact investment market. Requests for details of the work in other jurisdictions should be referred to them.
Are you confident of having enough investor demand for two transactions a year?
The NSW Government seeks to grow the social impact investment market and introduce new investors, particularly key institutional investors, to the benefits of these innovative financial products. We are confident institutional investors are able to participate to a greater extent in this market and look forward to working with them to design and deliver transactions.
What sort of causal areas are you looking at around future SBBs?
We have had some early success with SBBs, but we won’t be limited by them. We are open to other investment models that involve clear risk sharing between participants. The Government has identified priority areas where we believe there are strong opportunities to achieve better outcomes for individuals and communities through social impact investment:
▪ managing chronic health conditions
▪ supporting reoffenders on parole to reduce their levels of re-offending
▪ managing mental health hospitalisations
▪ preventing or reducing homelessness among young people.While we believe these areas have the most potential for social impact investment at this time, we will also be open to other areas.
What sort of returns can investors expect from the deals you plan to structure?
The precise structure of each deal will be determined collaboratively during its development. An ideal investment will deliver market returns to the intended investors in the most likely performance scenario. This will ensure that it is an attractive financial product as well as a vehicle for achieving social benefits. Market returns will differ depending on the intended investors and the balance of risk proposed.