25/05/2015 - 12:19

Social bonds designed to have an impact

25/05/2015 - 12:19

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Social impact bonds could deliver more money and market discipline to the not-for-profit sector.

NEW CONCEPT: Mark Fitzpatrick at the Vincentian Village near Midland. Photo: Attila Csaszar

Social impact bonds could deliver more money and market discipline to the not-for-profit sector.

A mental health facility on the outskirts of Midland is an unlikely place to hear a pitch for a new investment opportunity, but that is what the St Vincent de Paul Society is hoping to present in the not-too-distant future.

Vinnies is one of several not-for-profit groups in Western Australia exploring the potential to issue social impact bonds, which are designed to open up a new funding option for the sector.

Chief executive Mark Fitzpatrick says social impact bonds should appeal to people who donate with their heart and invest with their head.

SIBs combine the two by linking investment returns to the delivery of agreed social outcomes.

“It changes the way investors relate to the social enterprise sector; they get a market return from a social investment,” Mr Fitzpatrick told Business News.

The very first SIB, issued in the UK in 2010, was used to fund rehabilitation programs at Peterborough prison.

The returns to investors are tied to rates of reoffending after the prisoners are released.

The concept is simple – if the rehabilitation program works well, the government saves lots of money and shares some of the proceeds with the investors.

SIBs are a market-based mechanism; the private investors and the service provider have an incentive to deliver the best possible outcomes, as that will maximise their financial returns.

The investors carry financial risk – if the service does not deliver on agreed outcomes, they will not get all of their money back.

It also means government only pays for outcomes, not for activities.

While the concept is simple, putting it into practice has proved complex and time consuming.

About 40 SIBs have been issued since 2010, including two in Australia, and each is unique.

Social capital

Mr Fitzpatrick was introduced to the concept at Harvard, where he was studying with one of the top executives from advisory group, Big Society Capital in the UK.

After returning to Perth, he hooked up with Jenna Palumbo, who had worked for Big Society Capital and is now state director of Social Ventures Australia.

Together they are talking to government, investors and other service providers about the opportunity presented by SIBs.

Mr Fitzpatrick believes SIBs can also help to change the mindset of government.

“They can stop being the gatekeeper and start being a facilitator,” he said.

The key to success is delivering a program that is focused on outcomes rather than activities, and ensuring the outcomes can be properly measured.

Speaking at a Social Ventures Australia breakfast in Perth this month, executive director Michael Traill said the creation of SIBs was one step in developing what he called an efficient capital market for social purpose.

“Desired outcomes should be the starting point for allocating capital,” Mr Traill said.

“We must be clear about the outcomes that we want capital to achieve and be able to measure them.”

OUTCOMES: Michael Traill wants to create an efficient capital market for social purpose. Photo: Attila Csaszar

Mr Fitzpatrick is working on a project he believes will appeal.

“We need to go to market with something that we know works and can be scaled up pretty quick to deliver a decent rate of return and manages the risk for the investor,” Mr Fitzpatrick said.

He wants to raise about $10 million so Vinnes can replicate its mental health service hub in Midland in another part of Perth.

It consists of a three-tier service model for people with severe and persistent mental illnesses, comprising 28 beds in the society’s Vincentian Village with intensive 24-7 support, a further 28 beds in share housing in a community settings with part-time support, and independent living.

Layered over that is a resource centre providing drop-in support for families, carers and consumers.

Potential performance measures may include hospitalisation rates, recovery rates and social inclusion metrics.

Vinnies estimates each service hub will cost $550,000 a year to run, but save the government $16.1 million per annum.

That is based on the cost of a psychiatric bed in a hospital ($1,200 per day) compared with the cost of beds in its facilities.

“The economics stack up pretty quickly,” Mr Fitzpatrick said.

Foster care provider Key Assets was also keen on SIBs, state director Judith Wilkinson told Business News.

That is based on the experience of its parent company, Core Assets Group, in the UK.

“As a company, we have great interest and a good deal of expertise in SIBs,” Ms Wilkinson said.

“It provides an opportunity to get capital that wouldn’t otherwise be there.”

However she cautioned that SIBs were not easy.

“There is a long lead-in time, it takes a lot to set them up,” Ms Wilkinson said.

“You need a long time to establish the outcomes and to then agree how to measure them.”

Social Ventures Australia worked on Australia’s first SIB, for Uniting Care Burnside in NSW.

The $7 million Newpin bond has been used to fund the expansion of a family counselling program, designed to keep vulnerable children out of institutional care.

For investors, it targets a return of 10-12 per cent per annum over the seven-year term of the bond.

The terms include a minimum 5 per cent interest over the first three years and early termination rights for poor performance from year three.

The Benevolent Society issued Australia’s second SIB, with backing from the Westpac and Commonwealth banks.

It had a very different structure, with a low-risk tier offering a capital guarantee, and a smaller high-risk tier offering potential for much higher returns.

There had been plans for a third issue in NSW but it has not eventuated.

The South Australian government has been implementing a program that some would like to see adopted in WA.

It issued a discussion paper in 2013, followed by a series of capacity-building workshops run by Social Ventures Australia.

Ms Wilkinson said the workshops were very useful for many not-for-profit groups.

“It gave them a good grounding in knowing what they can’t do,” she said.

“When they saw the complexity involved, a lot of agencies decided it wasn’t for them, at least not at the moment.”

The workshops were followed by an expression of interest phase, which closed recently.

Social Ventures Australia’s Jenna Palumbo said her organisation had received strong interest from not for profits in WA that were keen to explore new partnership models and engage with private investors.

“We believe there are a number of organisations, working in the areas of mental health, children in care and hospital avoidance that are well placed to engage in SIB development,” she said.

Ms Palumbo said she was keen to see more engagement by government, particularly given the opportunity to leverage private investment in a tight budget environment.


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