In 2013 the New South Wales Government established Australia’s first social benefit bond pilot. Social benefit bonds are a financial instrument that pays investors a return based on the attainment of agreed social outcomes. Following the promising performance of two ongoing social benefit bonds, the NSW Government has made a request for proposals (RFP) from organisations in the non-profit sector to be a part of the next round of social benefit bonds. The RFP closes at 9am on 15 February 2016. Even if your organisation is not ready to participate in this round, it may consider preparing for the next round.
What is a social benefit bond?
Social benefit bonds are a financial instrument that pays investors a return based on the attainment of agreed social outcomes. Social benefit bonds are the primary initiative in the NSW Government’s Social Impact Investment Policy. Social impact investment has been promoted by the NSW Government as a fresh approach to tackling social challenges today and in the future. Social benefit bonds seek to ensure better access to capital for non-profit organisations by encouraging private sector participation, expanding the pool of funds available and relieving the pressure on limited government resources. Although new to Australia, social benefit bonds have been implemented around the world providing useful models to build on.
How does it work?
Instead of receiving upfront funds through a government grant or private donation a social benefit bond raises capital for social impact projects from private investors. Private investors can invest in non-profit service providers through a social benefit bond. The investment is used to implement a non-profit service provider’s work in the community. Where a typical government bond would provide returns on an initial investment to investors through an interest rate, social benefit bonds give returns that correlate to the measurable social impact achieved by the non-profit service provider.
How is social impact measured?
Social impact is measured by the cash savings it delivers to the NSW Government. The NSW Government reserves a portion of these savings for the non-profit service provider which then passes on a return to investors and repays the investment when it is due. The exact rate of return and percentage of the initial investment that is repaid is calculated by comparing the achievements of the non-profit service provider with the state of affairs that would exist in the absence of that service.
Example: The Newpin Social Benefit Bond NSW
Private investors subscribed to a $7 million social benefit bond. Those funds are being used by UnitingCare Burnside to implement programs aimed at restoring children in out-of-home care to their families. In the two years since the bond started, UnitingCare Burnside has returned 66 children to their families and has prevented children in 35 families from entering out of home care. This equates to 61.6% of children participating in their program being returned to their families. Without this service it was estimated that only 25% of children would have been restored. Thus, the Government savings generated by having an additional 35% of children living with their families, rather than in Government provided out-of-home care, was used to pay a 7.5% return to investors after the first year and a 8.9% return at the end of the second year. If the rate of children being restored increases in the future, the returns to investors will also increase. The full amount of the initial investment will be repaid if Newpin can maintain a restoration rate of 55% for the duration of the bond.
Measuring social benefit has been a significant challenge faced in the development of social impact investment policies. Although the flow on effect of a program could generate indirect savings for the NSW Government for decades to come, it is nearly impossible to determine an exact dollar figure for such benefits or to directly attribute them to participation in a program. Furthermore, they are beyond the lifetime of the bond. Instead, social benefit bonds rely on more concrete results, such as the number of children at home as opposed to out of home care in the case of the Newpin Bond.
Who bears the risk?
It is important to remember that social benefit bonds are not a risk free investment. The risks are distributed amongst those who obtain the rewards of the bond. As the recipient of the majority of the financial reward the investor bears the most risk. A social benefit bond does not involve a promise from the non-profit organisation or the NSW Government that improved social outcomes will be achieved. However, in order to make social benefit bonds more appealing to the private sector, the NSW Government has sought to reduce the risk that investors are exposed to. In the two pilot programs the NSW Government provided a standing charge, an early payment for services that amounted to approximately half of the costs of delivery of the social services.
Who is eligible?
For the upcoming round of social benefit bonds the NSW Government is primarily seeking proposals that address chronic health conditions and mental health hospitalisations. However, they will consider exceptional proposals from organisations that target other areas as well. Further, the NSW Government is committed to expanding the social impact investment market, promising the potential for a wide range of social challenges to be tackled by social benefit bonds. IMPACT Australia predicts that the social impact investment market could grow to AUD $32million within 10 years. With such exciting developments in social impact investment ahead there are significant opportunities to be taken advantage of by service providers operating in the non-profit sector.