Government seeks 'bond' investors willing to bet on social outcomes

Thursday 24th October 2013

The government has approved a Ministry of Health pilot to test the appetite of healthcare providers and investors for social impact bonds which would only pay out on measurably improved social outcomes such as reductions in alcohol and drug use or teenage pregnancy.

The pilot follows a handful of trial schemes overseas including a 5 million pound programme to reduce recidivism at the UK's Peterborough prison, a US$9.6 million, four-year programme to reduce reoffending among incarcerated youths at New York's Rikers Island correctional facility, and three pilots in New South Wales of as much as A$10 million.

Though the offshore schemes are in their infancy and results aren't yet conclusive they have gained traction. New York's 'payment for success' programme is funded by Goldman Sachs through a US$9.6 million bond, with assistance from Bloomberg Philanthropies, the charitable arm of New York mayor and Bloomberg LP founder Mike Bloomberg.

Westpac Banking Corp and Commonwealth Bank of Australia helped arrange the A$10 million social benefit bond to be used for projects in NSW, which closed this month after strong demand. The five-year bond was broken into two tranches with different risk and return profiles.

The senior tranche includes a A$7.5 million capital protected component and is aimed at institutional investors. It offers a return of between zero and 10 percent a year, based on agreed performance outcomes. The junior tranche of A$2.5 million was taken up by charitable foundations and philanthropic family trusts. Such structures shift the risk onto the private sector as state agencies only pay on results.

In New Zealand, such schemes may attract financiers including Philanthropy New Zealand (PNZ) members, who include ASB Community Trust, the Tindall Foundation and the Todd Foundation. Philanthropic groups provide about $2.67 billion of funding a year to New Zealand, based on a 2011 estimate by BERL, up from $1.4 billion in 2006.

"We think it's a really interesting opportunity from the philanthropic sector's point of view," said Liz Gibbs, chief executive at PNZ, who met officials involved in the Peterborough prison scheme when last in the UK and has been in talks with both the Ministry of Health and the Treasury in New Zealand.

"What returns are realised remains to be seen," she said. "The tricky part is having really good measuring metrics. It will not be right for every funder."

For the Peterborough social impact bond, returns to investors were estimated at between 3 percent and 6 percent though it is currently on track to be at the low end of that range. Still, banks do see such schemes as a commercial proposition. Morgan Stanley has estimated returns on its social financial programmes of between 6 percent and 18 percent. Social bonds are a small part of the overall social finance sector.

"We believe this investment paves the way for a new type of instrument that enables the public sector to leverage upfront funding from the private sector," Goldman Sachs chairman Lloyd Blankfein said at the launch of the New York-based social impact bond last year.

The New Zealand government has called for registrations of interest from social service providers for the Ministry of Health pilot. Officials are kicking off a series of market briefings in Auckland, Wellington and Christchurch next month. Health Minister Tony Ryall says a decision on the shape of the pilot could be made in the next couple of months though "it would be two to three years before we know how it's going."

"Social bonds are new and we haven't got any experience of them," Ryall said. "I think it is worth giving it a go. It needs very strong evaluation, baselines, KPIs."

Ryall says he's not so concerned what methods service providers use to meet targets. "We would stand away and let them get on with it."

The stakes may be much higher than the likely level of funding for initial schemes suggest. The National government's 'Better Public Services' strategy aims to be results driven and officials say a successful social bond programme could pave the way for outcomes-based financing for core government services.

BusinessDesk.co.nz

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