Trends, Performance and Challenges of SIBs in Australia Social Impact Forum YOKOHAMA 2017 22nd April 2017 1
Outline of session 1) Background and development of SIBs in Australia and examples 2) The distinct characteristics of SIBs in Australia compared to SIBs in the UK and US (for example, governance structure, outcome metrics) 3) Implications of SIBs for finance 4) Key success factors5) Main challenges of SIBs 5) Main challenges of SIBs 2
1. Background and development of SIBs in Australia
Development of SIBs in Australia TIMELINE 2011 2012-13 2015 2013-2017 Feasibility Study NSW Government launched social impact bond trial Request for proposals - 2 pilot bonds Joint Development Phase (JDP) with three proponents First Australian SIBs launched KPMG evaluation of JDP Launch NSW Government policy on impact investing Focus on outcomes, innovation, prevention, partnerships Commitment to two transactions per year Yearly Statement of Opportunities Development of 5 bonds; 8 in development SA, QLD and VIC launched bonds Federal government released a discussion paper (2017) Source: NSW Government Office of Social Impact Investment http://www.osii.nsw.gov.au/ 4
Australia overview of current state of SIBs development Topic Stage of Development Target Population Family preservation (NSW) Launched Family support to avoid 0-5 year olds entering foster care Family restoration (NSW) Launched Family support to restore 0-5 year olds from foster care to their families Recidivism in criminal justice (NSW) Launched Prisoners released from custody with the aim to reduce recidivism Homelessness (SA) Launched People who are homeless Family restoration from out of home care (QLD) Launched Aboriginal children in out of home care (0-5.5 year olds) Managing mental health hospitalisations (NSW) Negotiation phase Mental health -specific target population in development Young people leaving out of home care (NSW) Negotiation phase Young people leaving care Homelessness (VIC) Negotiation phase People who are homeless - specific target population in development Young people leaving out of home care (VIC) Negotiation phase Young people leaving care Managing Chronic Health conditions (NSW) Negotiation phase Chronic Health specific target population in development Improving outcomes through early childhood education (NSW) Negotiation phase In development Homelessness (QLD) Negotiation phase In development Youth reoffending (QLD) Negotiation phase In development Addressing youth unemployment (NSW) RFT phase In development Increasing permanency through Open Adoption (NSW) RFT phase In development Source: NSW Government Office of Social Impact Investment http://www.osii.nsw.gov.au/ 5
Stage of the market in Australia and New Zealand traffic light report NT Not gone to market Western Australia Not gone to market Queensland 1 bond launched: 2 bonds in progress (homelessness, reoffending) Commonwealth Discussion paper released early 2017 Early work SEDIF Funding ($20m), Goodstart Early Learning, Great Barrier Reef Foundation Bond) South Australia 1 bond released (homelessness) Tasmania Not gone to market New South Wales 3 bonds launched (OOHC, recidivism) Multiple bonds in development Victoria 2 bonds in process (Young people leaving out of home care, homelessness services) NZ 1 bond Feb 2017 6
Size of the Australian market Growth in the Australian market is strong: The Australian impact investing market is still in the early stages of development but with strong potential, and is estimated to grow to a $32 billion market by 2022. 2017 2022 The Impact Investing Australia 2016 Investor Report shows that in Australia. Active impact investors aim to triple the size of their impact investment portfolios over the next 5 years The majority of active impact investors will likely be in Victoria and New South Wales based on current trends QLD, NT, WA, SA, Tas; 13% Non-active investors expect to consider social and environmental impact in investment decision making over the next 5 years NSW & ACT; 33% VIC; 54% Source: Impact Investing Australia 2016 Investor Report, Impact Investing Australia, 2016: https://impactinvestingaustralia.com/wp-content/uploads/impact-investing-australia-2016-investor- Report.pdf 7
Example 1 Newpin Social Impact Bond, NSW Source: SVA Investor report found here http://www.osii.nsw.gov.au/initiatives/social-benefit-bonds/ Area Intervention Design Newpin is a long-term, intensive support program that works with families to improve parenting so children can live safely with their families Australia s first social benefit bond Designed to support children and young people in foster care to be safely returned to their families Target population 700 families (with at least one child under five years of age in foster care) Outcome metric The restoration rate of children who enter the program. Baseline is 25% of children return home within one year. Results- three year average 61% restoration rate; 130 children returned home up until 30 June 2016, 47 prevented from entering care. Evaluation method Matched control group Capital raised $7m; 7 year term Principal repayment 50% guaranteed to be repaid at the maturity date 100% repaid if the restoration rate reaches 55% Investors UnitingCare Burnside; high net worth individuals; Family Foundations; Superannuation Funds Interest Source: Minimum interest rate is 5% p.a. over the first 3 years; maximum interest rate is 15% p.a. over the full term Target is 10-12% p.a. 2017 delivered 12.2% return to investors SVA Investor report can be found here http://www.osii.nsw.gov.au/initiatives/social-benefit-bonds/ 8
Example 2 Recidivism SIB to prevent reoffending ACSO-arbias joint venture (Australian Community Support Organisation and Alcohol Related Brain Injury Association) Area Design Organisations ACSO, arbias, and National Australia Bank (NAB) Intervention Target population Outcome metric On TRACC (Transition Reintegration and Community Connection), an intensive support program that will provide individualised support to parolees, particularly in the first 16 weeks of parole Up to 3,900 adult parolees with a medium to high risk of reoffending, released to supervision in selected Sydney metropolitan areas, over five years Reduced rate of re-incarceration in the 12 months post release Reduced financial costs to government of parolee reoffending with reduced pressure on criminal justice system Evaluation method Matched control group; outcomes measured by NSW Bureau of Crime Statistics and Research Upfront finance National Australia Bank and ACSO Source: NSW Government Office of Social Impact Investing. http://www.osii.nsw.gov.au/news/2016/07/12/new-social-impact-investment-to-reduce-parolee-reoffending-and-re-incarceration/ 9
2. The distinct characteristics of SIBs in Australia
Comparing Australia/ UK/ USA Similarities Similar bond design involving three parties (not for profits, government and investors) Rigorous measurement of outcomes using scientific methods (usually a comparison group) Government driving and sponsoring impact investing; government initiated governance structures Strong not for profit tradition for human services in all three countries Calculation of savings through economic cost benefit analysis Differences Maturity of impact investing funds varies (Social Innovation Fund in USA; Big Society Bank in UK) Driver of the market varies (government or combination of market led and government) Place of not for profits in social policy varies Specific method for measuring success varies (use of random control trial or comparison group) Use of consortia to deliver the results (eg: UK and USA has examples of large consortia) Source: KPMG Australia 11
Comparison of Australia/ UK /USA SIBs Initiation of bonds Level of government involved Investor landscape Familiarity with pay for success in social policy areas Governance Australia Government initiated and driven State (Federal government is considering its role Emerging impact investment funds Yes (although more limited experience than UK) Government structures Government agenda for policy priorities (NSW) Treasury and Department of Premier and Cabinet Expert Advisory Committee UK First bond market driven; now government driven Local State Federal Big Society Bank Key funds established Yes Government structures HM Treasury USA Federal government and state government led State Federal government fund Social innovation fund (2014) Emerging impact funds Yes Government structures Social innovation fund exploratory work 12
Comparison of approaches (continued) Success rates and design Outcome metrics establishing attribution Calculations of savings Australia Structure of bond based on known evidence base and level of complexity of the client Comparison groups; Matched group or random control trial High standard of scientific evidence Economic cost benefit analysis; calculation of future savings to government UK Structure based on evidence base where known otherwise test and revise approach adopted Comparison groups (matched group) or historical baseline Varying standard of evidence employed Economic cost benefit analysis; calculation of future savings to government USA Structure of bond based on known evidence base and level of complexity of the client Comparison groups; Matched group or random control trial High standard of scientific evidence Economic cost benefit analysis; calculation of future savings to government 13
3. Implications of SIBs for finance
For Government - shift in types of contracting The shift towards payment by results contracting In-house Contracting focus for provision of services Own staff Contractors Input based Output based Impact (short term) Outcomes (medium to long term) Outcomes Payment for success Outcomes Social Bonds Current position Simpler transactions Potential position Shift to the right More complex Source: KPMG NZ 15
Implications of SIBs for government Brings new money into government services Evidence based policy making; value for money New partnerships with NFPs and investors SIBs are an example of a payment by result transaction and should be seen as one form of impact investment Caution should be applied SIBs should not be used in every circumstance; but be seen as part of a suite of a variety of impact investing transactions. Suitable for social policy area with strong evidence base; outcomes that are amenable to measurement; and intervention with known success rate. Area stacks up with savings for government. 16
Global impact investing Social benefit bonds are part of a suite of social, environmental and development finance instruments. Globally this includes: Social Impact Bonds Green Bonds (labelled) Development Impact Bonds Blue bonds (water) Social enterprises SDG Bonds (issued by World Bank) Impact funds Climate-aligned bonds Other instruments are not included which finance impact but do not necessarily require rigorous measurement of outcomes or link payment to outcomes measurement. 17
The Sustainable Development Goals (SDGs) as an organizing platform SDGs are a useful framework to identify, design and deliver impact investing opportunities: Provides universal goals and a framework to unify and align approaches of disparate actors. Built on a global language that was developed by and is applicable to developed and developing countries. Sets ambitious targets that presuppose an active role for private industry and investors. Inclusive with seven targets for vulnerable populations Focuses agenda with potential for local partnerships, civic engagement and co-benefits from targets SDGs are defined by UNDP as a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity. Source: Sustainable Development Knowledge platform https://sustainabledevelopment.un.org/topics/sustainabledevelopmentgoals 18
4. Key success factors
Success factors for SIBs Success in establishing the market Government champion (to lead government departments and bureaucrats) Joint support within government Strong governance structures including advisory committee Take stock of lessons learnt take time Feasibility study Success in negotiating the contract Pre-work detailed work by government up front before RFT Project management Simplify transaction and contracts as far as possible Time frames (6 months) Transaction success Strong evidence base to the program with a known success rate Well defined cohort Robust measurement and strong scientific method 20
5. Challenges
Challenges for market development for SIBs 1 Scale and scope 4 Risks 2 Bespoke transactions with large transaction costs 5 Maturation of NGOs 3 Speed of market development 6 Mismatch funds are available but lack of transactions 22
Next steps in Australia 1 SIB work over last four years has been reviewed and stock taken of progress 2 New states are learning from more mature states and are entering the market; Federal government considering its role 3 Impact Australia concentrating on two functions establishing an impact investment fund (Impact Capital Australia) and assisting organisations to develop capability (Impact Investment Readiness Growth Grant) 4 Scale up SIBs, industrialise and increase deal flow 5 KPMG concentrating on SIBs as one form of social investment; in parallel designing other impact investment transactions 23
Liz Forsyth Partner Global Lead Health, Ageing and Human Services T: +61 (2) 9335 8233 M: +61 418 659 857 E: lforsyth@kpmg.com.au Dr Ruth Lawrence Associate Director Lead, Impact Investing T: +61 (2) 9346 5554 M: +61 427 664 988 E: rlawrence2@kpmg.com.au kpmg.com/socialmedia kpmg.com/app 2017 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The views and opinions contained in the presentation are those of the author and do not necessarily represent the views and opinions of KPMG, an Australian partnership, part of the KPMG International network. The author disclaims all liability to any person or entity in respect to any consequences of anything done, or omitted to be done. The KPMG name, logo are registered trademarks or trademarks of KPMG International.