First Australian maturity provides proof of concept for SIBs

The first maturity of an Australian social impact bond (SIB), used to fund The Benevolent Society’s Resilient Families programme, marks an important point in the local development of the instrument, deal participants say. In particular, they point to the financial and social results as a validation of the use of SIBs to achieve social outcomes.

SIBs are designed to leverage private capital to finance social outcomes directly. A government contracts delivery of specific social outcomes to relevant service providers – such as The Benevolent Society. These entities receive the investment funds from the SIB issue, repayment of which comes from government funds contingent on a successful outcome from the project concerned.

SIB uptake has escalated globally in recent years, including in Australia where there are instruments in various phases of development and implementation in New South Wales (NSW), Victoria, Queensland and South Australia. These have been developed to tackle chronic societal problems such as recidivism, homelessness and mental health.

The Benevolent Society’s A$10 million (US$7.1 million) Resilient Families SIB is the first in Australia to reach maturity, in October 2018. It was initiated in 2013 by The Benevolent Society and NSW Treasury and arranged by Commonwealth Bank of Australia (CommBank) and Westpac Institutional Bank (Westpac). The programme provides intensive family support, with the aim of preventing vulnerable children from entering out-of-home care.

The bond has a two-tranche structure. The protected class offered a 6 per cent return while the exposed class returned 10.5 per cent.

Product validation

Programme performance was measured against a control group receiving standard response from the NSW Department of Family and Community Services. The Resilient Families programme had 32 per cent fewer children entering out-of-home care than those in the control group.

Matt Gardiner, executive director, child and family services at The Benevolent Society in Sydney, tells KangaNews: “The results show that the programme delivered a far more successful outcome for children and families than the control group. If this is an outcome that is valued by society it is something governments should be prepared to invest in.”

Deal sources say the one-third reduction in children entering out-of-home care achieved by this programme should be a resounding argument in favour of the SIB approach in a world in which many governments have either failed to commit to the approach or have withdrawn commitments following changes of administration.

For instance, the world’s first SIB, built around a UK project targeted at reducing recidivism, was cut short following a change in government policy. New Zealand has also unwound its interest in SIBs following a change in government. Establishing a track record of SIB success in social and financial terms is therefore crucial for the asset class’s development.

Craig Parker, Sydney-based executive director, head of structured finance at Westpac, says the NSW outcome shows that SIBs work for committed organisations. He adds that the success of the transaction has led to greater interest throughout the course of the programme.

The results show that the programme delivered a far more successful outcome for children and families than the control group. If this is an outcome that is valued by society it is something governments should be prepared to invest in.

MATT GARDINER THE BENEVOLENT SOCIETY
Moving forward

The signs are positive for further use of SIBs in Australia. Gardiner says The Benevolent Society is in the process of finalising another innovative funding model for the programme although details are yet to be confirmed.

He adds, though, that delivering the model in a larger scale is still the biggest challenge for broader application of SIBs. The recently concluded programme and others prove that the financing model can work, but it is still on a scale that pales in comparison to many of the societal issues that governments and society face.

According to Parker, the problem is not with the level of demand for SIBs. In fact, he says the level of interest – including from institutional investors – is enough to undertake a transaction substantially larger than the original Resilient Families SIB. “Governments should be actively thinking about how to engage these investors and enable the conversation on how to use private capital to finance social outcomes. The demand is there but there is very limited supply,” he says.

Rob Kenna, executive director, debt capital markets origination at CommBank in Sydney, says the matured deal involved a variety of investors including some institutional money. Investors have been broadly positive on the social dividend and the economic return, he adds.

The NSW government has been the most active among Australia’s states in green-lighting SIBs. Including the Resilient Families programme, it has implemented six SIBs and has recently signed a contract for another – a A$10 million transaction aimed at addressing youth unemployment.

The broader application of SIBs is also dependent on service providers being able not only to achieve the outcome they are contracted for but also to measure the outcome and translate this into a coupon payment for investors.

“This expertise does not normally exist inside nongovernment organisations such as The Benevolent Society. It was necessary to upskill and bring staff into the organisation who could do this,” says Gardiner.

Banks are integral not only in connecting investors and service providers but also in advising on the model framework and application. They clearly have a role to play in the further application of SIBs.

“There is genuine interest from all parties in developing the space further. Parallels can be drawn between the development of SIBs and other impact-investment asset classes. Investors are increasingly focused on aligning social outcomes and returns,” says Kenna.