Cheryl Kernot| CSI Blog

The applicability of the model of Social Impact Bonds[i] (Social Benefit Bonds in NSW) is shown in their adoption in the UK by three separate entities: a Council, a charity and a social enterprise. All offer innovative possibilities for Australia.

At local government level, a Social Impact Bond (SIB) to tackle obesity is being planned by Leicestershire County Council. The focus on obesity emerged from discussions between the council and the voluntary sector. The Council (along with three others) is already involved in a national £40m social impact bond pilot project to use bonds for charities that work with problem families. The Council hopes to raise £1 million for the obesity bond project and will allocate £400,000 of its own funds.

The Council identified a need to increase the number of voluntary sector suppliers in the market and also wanted to trial a payment-by-results mechanism. The Council has Conservative Party leadership and SIBS are seen as part of the Big Society agenda.

The disability charity Scope has launched a £20m bond program, the first by a major operational charity. The money will be used to finance the growth of Scope’s fundraising program and network of charity shops. Under recent Charity Commission guidance it is acceptable for charities to make this kind of investment.

The bond will be targeted at investors who need to make a return on their money but are also keen to achieve a social good; it will be launched in several tranches, including one this year which is likely to be about £2m.

The first investment in the bond has been agreed “in principle” with the Big Society Finance Fund, a fund set up by National Endowment for Science, Technology and the Arts to trial products that might grow the social investment market.

Scope has not yet decided the time period the bond will cover or the interest rate it will pay but it is envisaged that the rate paid would be lower than that for a traditional first-time issuer. The bonds would be listed on the Euro MTF market in Luxembourg, a recognised stock exchange meaning that they can be traded freely.

And the third example is a social enterprise Community Interest Company[ii] which plans a £1.6m bond scheme to help ex-offenders. The CIC, Bristol Together, wants upfront investment from the bonds to help it expand its construction training scheme for former prison inmates where it employs ex-offenders on building projects to develop skills before it helps them find further employment.

Money raised from the bond will be used to buy properties in Bristol that ex-offenders can renovate before those buildings are sold, bringing in further cash to buy more buildings and employ more ex-offenders.

Bristol Together worked with Triodos Bank[iii] to develop their model: a bond issue worth £1.6m over the next year, with the first £600,000 issue of five-year bonds, paying 3 per cent interest a year. This has been bought by the Esmée Fairbairn Foundation and one private individual.  (A future model for Australian banks and foundations?)

One important feature of the social investment landscape in the UK is the existence for many years of community investment tax relief. SIBs sold to private individuals will qualify, allowing investors to reduce their tax bills by 5 per cent a year.

In Australia, in a pioneering initiative begun by the Keneally government, the current NSW Government intends to establish two pilot Social Benefit Bonds in the areas of out-of-home-care and recidivism. An indigenous impact bond has also been proposed by Ecotrust.

Many commentators in the UK believe SIBs will be a big market/new asset class relatively quickly.[iv]


[i] A Social Impact Bond (SIB) is a financial instrument that has the potential to re-engineer relationships between government, not-for-profit organisations (NPOs) and social investors. Under a SIB, a bond-issuing organisation raises capital from investors based on a contract with government to deliver improved social outcomes through programs delivered by a not-for-profit organisation. These improved outcomes generate future costs savings for government, which are used to pay investors a reward in addition to the repayment of the principal.

[ii] Community Interest Companies (CICS) are limited companies, with special additional features, created for the use of people who want to conduct a business or other activity for community benefit, and not purely for private advantage. This is achieved by a “community interest test” and “asset lock”, which ensure that the CIC is established for community purposes and the assets and profits are dedicated to these purposes. Registration of a company as a CIC has to be approved by the Regulator who also has a continuing monitoring and enforcement role.

[iii] Triodos Bank is part of SEFA (Social Enterprise Finance Australia), a funds’ manager for the Federal government’s Social Enterprise Development Investment Fund (SEDIF)

[iv] Information for blog collated from many sources.

 

Cheryl Kernot is the Director of Social Business at the Centre for Social Impact (CSI) at UNSW. This blog post first appeared on the CSI Blog.