Source: 
Nicole Shenfield, Paxton-Hall Lawyers, 31 July 2015

In the first reading of the 2015 Queensland Budget Speech on 14 July 2015, Treasurer Pitt announced that the Queensland Government will pilot 3 social benefit bonds aimed at sourcing funds from the private sector to finance the achievement of quantifiable social outcomes in the community.  The pilot bonds will be focused on the reduction of criminal re-offending, homelessness and Indigenous disadvantage.

So, what are social benefit bonds and could they be a force of change in financing the not-for-profit sector?

How do they work?

Social benefit bonds (SBBs) (otherwise known as social impact bonds) are a form of social finance to fund preventative programs to achieve social outcomes.  SBBs are effected through agreement between private investors, bond issuers, community service providers and the government.

Social benefit bonds differ from the traditional type of bond in that they do not offer a fixed rate of return; rather, repayment to investors in contingent upon the achievement of the desired social outcomes.

SBBs are created as follows:

  1. Bond-issuing organisation contract with government for the creation of an SBB including the terms of return to investors;
  2. Bond-issuing organisation offers bonds to investors.
  3. The funds obtained from investors who purchase the bonds are provided to the agreed community service providers which provide the preventative programs;
  4. The preventative programs undertake activities to achieve the desired social outcomes;
  5. If the programs achieve the desired social outcomes, the investors receive their reward which is paid by the government from the savings generated by the preventative programs. However, if the outcomes are not achieved, the investors are not paid.

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This results in savings to the public sector as government is only liable to pay if the desired outcomes are met, as opposed to funding a program from inception to completion, with no guarantee of success.

Given the nature of the bonds and the need to be able to accurately determine whether the programs have been successful for the purpose of paying a return, only programs which have clear and quantifiable social outcomes are compatible with SBBs. This would include reducing re-offending of former prisoners, the incidence of homelessness and relocation of ill patients back home from structured care.  However, it would exclude other programs with indirect measures of success.

Purpose and history

The purpose of an SBB is to fund the activities of social or community organisations that address complicated social problems through preventative programs by utilising available funds in the private sector. 

The concept of a SBB was first suggested in 1988 by New Zealand economist, Ronnie Horesh.[1] However, it was only in 2010 that the first SBB was issued in the UK to finance a prison rehabilitation program over a 6 year period. The program is aimed at rehabilitating 3,000 short term prisoners receiving intensive intervention whilst in prison and once back in the community.  Investors will receive a return if reoffending is reduced by at least 7.5%.[2] It will be interesting to see the outcome of the SBB once the term expires next year.

SBBs have been generating increased interest across the UK, US and Australia.  In President Obama's proposed 2012 budget, $100m was allocated to running Social Impact Bond pilot schemes.

In 2010 the NSW Keneally government announced its intention to trial SBBs.  This policy direction was adopted by the Baird government following its election win in 2011.  In 2013, the NSW Government created 2 bonds directed at achieving results for families at risk, namely:

  • the Newpin Social Benefit Bond aimed at returning children in care to their families and preventing children from entering care over a 7 year period; and
  • the Benevolent Society Bond aimed at helping families deal with domestic violence, substance misuse, mental health, unstable housing and family functioning over a 5 year period.[3]

The NSW Government continued with this policy direction by announcing the launch of its Social Impact investment Policy on 4 February 2015 which will presumably involve additional SBBs.

On 25 November 2011, the Senate Standing Committee on Economics released its report[4] on its inquiry into finance for the not-for-profit sector.  In that report, the Committee discussed the broader context of social finance and innovative ways in which to fund the sector and social change. The report examined the first SBB issued in the UK mentioned above and noted that of the £5M raised through the SBB, two-thirds of the 17 foundations and charitable trusts allocated the funds through their balance sheets, rather than their cash grant allocations.[5]  The report quoted Sir Ronald Cohen on this point who said:

"[y]ou have £100 billion of assets in foundation balance sheets, and you have a couple of billion pounds that are given away by foundations…so if you begin to use these financial instruments to attract capital from balance sheets…you start off with a massive amount of money that can be focused on social issues."

This tends to suggest that SBBs may be attractive to philanthropic investors and private and public ancillary funds, which want to obtain a return on investment but also help effect social change in the community.

Benefits and drawbacks

Some identified advantages of SBBs include:

  • SBBs provide a way for governments to resolve two critical social issues simultaneously; namely:  addressing intractable social problems and the raising of funds to deal with those social problems;
  • The attraction of capital for community organisations in a way not possible through philanthropy;
  • Sharing of risk between government and private investors;
  • The focus on the prevention of social problems (rather than treatment) means future savings will flow to government and the public sector;
  • Every party involved in the creation and performance of an SBB has a vested interest in the success of the program;  and
  • SBBs allocate resources which achieve the greatest impact.[6] 

However, SBBs may also pose some challenges, such as:

  • SBBs can only be utilised in policy areas where outcomes have quantifiable metrics and so are not suited to all social problems; 
  • SBBs are probably not suitable where the desired impact exceeds 20%;
  • SBBs could unintentionally alter incentives for existing funders and providers in the sector.[7]

Implications for Queensland

SBBs have great political appeal as they allow government to address social problems without committing large cash resources and shouldering the entire risk of success.  Additionally, because sector specialists will provide the preventative services, as opposed to government, there is an argument that the success of the programs will be more likely.

SBBs are one of the newer forms of social finance and are steadily becoming more popular.  In a time where the traditional community role of government is slowly becoming outsourced to the not-for-profit sector, SBBs are likely to be adopted and embraced. However, government support and pioneering by both the public and private sector will be necessary to further establish and stimulate the SBB market.

There will always be more worthy recipients of funding than funds available.  SBBs, and indeed other forms of social financing, should be considered serious alternatives to traditional funding models.

References

[1] Cooper, Graham & Himick, Social Impact Bonds: Can Private Finance Rescue Public Programmes?, 29 April 2014, page 12

[2] Social Finance, The United Kingdom: the social impact bond pioneer, http://socialfinance.org/

[3] NSW Government Premier media releases, "NSW delivers Australia's first social impact investment policy".

[4] Investing for good: the development of a capital market for the not-for-profit sector in Australia.

[5] The Senate Economic References Committee, Investing for good: the development of a capital market for the not-for-profit sector in Australia, paragraph 6.68: Committee Hansard, 1 August 2011, pp 65-66

[6] The Young Foundation, Social Impact Investment: The opportunity and challenge of social impact bonds, March 2011, pp 16-17.

[7]Ibid. 

About Nicole

Nicole Shenfield is a lawyer practising in the divisions of property, not-for-profit law, company and commercial at Paxton-Hall Lawyers in Brisbane. 

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