Les Hems | CSI Blog

In April last year I wrote in The Conversation about an innovative financial investment mechanism called Social Impact Bonds, that was designed to address some of society’s wicked problems by engaging government agencies, not-for-profit organisations, private investors and financial institutions.

At that time only one of these SIBs was operating in the United Kingdom. After what seems to have been a long pause, the increasing levels of interest and rhetoric have turned into some tangible products, including here in Australia.

In the last weeks two new SIBs have been launched in the United States – one in New York and the other in Massachusetts. Meanwhile in NSW, three SIB propositions are now under negotiation.

The most interesting aspect of these new initiatives is how the basic SIB concept developed in the UK has been adapted in different jurisdictions.

As I have explained in my previous story, the way a SIB works is by a bond-issuing organisation raising capital from investors, based on a contract with government, to deliver improved social outcomes that generate future government costs savings.

As well as repaying the principal, investors are paid a reward if the agreed outcomes are achieved.

The growing interest in SIBs is driven by a number of factors. Firstly, Governments are developing long-term outcomes focused “payment by results” or “payment for success” mechanisms to replace inefficient and ineffective mechanisms such as contracts, fee-for-service or grant-in-aid mechanisms.

Secondly, not-for-profit organisations are increasingly focused on delivering long-term social impact. However, many not-for-profit organisations are “permanently failing” – with demand for services outstripping supply, they are under-capitalised, use a short term revenue funding model, and rarely use debt finance.

Thirdly, investors of all shapes and sizes are increasingly seeking to achieve an appropriate balance between commercial returns and the social and environmental value created.

There is now a shift from ethical and socially responsible investing – based on screening out investments associated with social and environmental damage – to social impact investing where commercial returns are blended with the creation of social and/or environmental value.

This shift chimes with Professors Michael Porter and Mark Kramer’s vision of creating shared value.

SIBs offer the potential to harness these three drivers and re-engineer the traditional relationships between government agencies, not-for-profit (NFP) organisations and investors to create social benefit

Given this positive analysis it might have been safe to assume that first UK SIB focusing on recidivism would be rapidly replicated in other jurisdictions and across other policy fields.

However, the UK experience showed it takes a long time to develop a SIB proposition and measuring success is not only complex, but absolutely essential in order to find a point where all partners will agree to proceed.

The first UK SIB is reportedly progressing well and is on schedule to deliver the target outcomes.

But it’s most striking attribute is that it is an “all-at-risk” investment; where the failure to achieve the target reduction in recidivism leads not only to investors losing the reward payment for use of their capital, but also losing the principal.

Government has therefore achieved a complete transfer of risk to the private investor – although it has to be acknowledged that it is difficult to assess risk in such an innovative mechanism.

It is therefore unsurprising that all the investors in this innovative mechanism are philanthropic institutions – trusts and foundations – which can rationalise the downside risk as a donation as well as a failed investment.

Trusts and foundations traditionally use the financial returns on their investments to provide grants with the goal of achieving social value. The SIB mechanism offers them a mechanism to also use their corpus to achieve social value. However, if accessing commercial investment capital is a SIB goal, then arguably the UK SIB has failed.

The deal was formulated by a specialist intermediary – Social Finance; they hold the contract with government to deliver the agreed outcomes and are responsible for the ongoing management of the SIB.

Social Finance sub-contract the delivery of the intervention programs to a number of not-for-profit organisations. Finally, the reward payment and repayment of the investors’ capital will come from an innovation fund rather than the mainstream service delivery budgets.

The New York SIB is also in the field of recidivism, but with some significant adaptations to the original UK SIB, particularly around the nature of the risk sharing and the involvement of a commercial investor.

For instance, in the NY SIB, the prime investor is investment bank Goldman Sachs, along with with Bloomberg Philanthropies – the charity of New York major Michael Bloomberg – which is providing a credit guarantee that limits losses to a quarter of the invested capital. A further adaptation is a research centre – the MDRC – is coordinating the delivery of the recidivism program.

In Massachusetts, two “payment-for-success” based initiatives are under development which relate to recidivism and homelessness.

At this stage it is not clear what structures may be used, but it is interesting to note that the process is being driven by government and is following a traditional procurement process.

This is also the case with the Social Benefit Bond (aka Social Impact Bond) trial in NSW.

Three proponents are now involved in a negotiation process and while the full details aren’t known, at least one proposition includes two mainstream financial institutions, another involves a specialist intermediary, and all three have on-board very large not-for-profit organisations.

An overarching conclusion is that in these early stages, social impact bond propositions will need more “trials” to better understand stakeholder behaviour as well as how to optimise incentives.

In these early stages the costs of the measurement and research must also be borne outside of the SIB mechanism, or else transaction costs will undermine their financial viability.

In the UK there are a range of institutions and funding sources, including BIG Lottery, NESTA and Big Society Capital. In the US, President Obama established a fund of US $100 million to develop “payment for success” mechanisms.

But in Australia there are no similar sources of funding to support measurement, research and development. If SIBs are to become more widely used here, this is a significant gap that has to be remedied.

This article was previously posted on The Conversation and on the CSI Blog under: Will social impact investing finally pay dividends?

Linda Lavarch | CSI Blog

Charities are in Crisis is the opening statement of a new book Driven by Purpose – Charities that make the difference. The authors Stephen Judd, Anne Robinson and Felicity Errington stress that it is not a crisis of money, professionalism or leadership but a crisis of identity. Judd et al look at the ways in which each charity should revisit its purpose to overcome any identity crisis.

But there is an even bigger issue to grapple with. There is only a limited understanding or recognition of where charities sit within the landscape of Australian society. As a society we cherish the work that they do and we want our charities to succeed but we need to figure out how they should be supported and regulated. Having 178 pieces of Federal, State and Territory legislation and 19 separate agencies determining charitable purpose does not begin to demonstrate the regulatory nightmare that some charities endure. It has become beyond ridiculous.  Thankfully a better deal for Charities is about to begin and this reform is broadly supported by the Not-for-profit sector in Australia.

Today, the Government introduced the Australian Charities and Not-for-profits Commission (ACNC) Bill, the Consequential and Transitional Bill, and the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill to Parliament.

The importance of the ACNC as an independent, statutory regulator for the Not-for-profit sector cannot be understated.  Without the ACNC we leave this important sector which is estimated to represent over 4% of GDP and 8% of the Australian workforce to an incoherent, costly, uncoordinated, complex regulatory regime in which the ATO has assumed the position of default regulator. It is therefore not surprising that Not-for-profits have been calling for an independent regulator like the ACNC for so long. These calls have been supported by no less than six major inquiries since 1995.  All of these inquiries including the significant inquiry undertaken in 2010 by the Productivity Commission, Contribution of the Not-for-profit Sector, have unequivocally called for a ‘one-stop shop’ national regulator for the sector.

It’s not just the Not-for-profit sector that will benefit from the ACNC. While many of us roll our eyes as soon as we hear the words ‘regulatory reform’, we all have an interest in a stronger, more sustainable Not-for-profit sector. There would be very few of us not touched by the work of some 600,000 Not-for-profits that exist in Australia. Whether it is helping to organise meals on wheels, supporting grass roots sport or caring for our natural resources, Not-for-profits are often the glue that holds our communities together. Australians donate around $7 billion in money and $14.6 billion in time each year. The last thing we want is the good works of our charities and the army of volunteers who help them being held back by the current haphazard regulatory environment.

The ACNC Bill follows many months of consultation with Not-for-profits. This consultation resulted in a number of significant changes since the first draft was released in December 2011. This has also led to the Government delaying for 12 months to 1 July 2013, the introduction of the financial reporting and governance standards. A decision welcomed by the sector.

The 2010 National Compact between the Government and Not-for-profits committed both parties to working together on a shared vision to improve Australia’s social, cultural, civic, economic and environmental outcomes.  This shared vision was based on an appreciation of the unique contribution that a strong and vibrant Not- for-profit sector makes to Australian society.

The Not-for-profit sector looks forward to continuing our engagement with Government on standards that strike the right balance between accountability and ensuring that we do not stifle the vibrancy and responsiveness of the sector.  Australia needs a creative and productive Not-for-profit sector that can serve the Australian community into the future.  I am confident the ACNC’s role of ‘light touch’ regulatory oversight combined with education and support will become profoundly important to underpinning civil society in Australia and then we will be in no doubt about the difference charities make.

This post previously appeared in the CSI Blog: From Haphazard to Harmony – Australian Charities and Not-for-profits Commission

Peter Shergold | CSI blog

It was in May 1968 that Robert Kennedy, with characteristically brilliant oratory, identified the abject failure of governments to measure the quality of life afforded their people.  The traditional statistic – per capita Gross Domestic Product (GDP) – “does not allow for the health of our children, the quality of their education, or the joy of their play;  it does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials …  It measures everything, in short, except that which makes life worthwhile.”  Listen to the speech on YouTube:  it will raise the hairs on the back of your neck.

Two generations on, governments are struggling to address Kennedy’s challenge.  As not-for-profits increasingly seek to measure social returns on investment, and companies to give quantitative dimension to societal as well as financial value, give a thought to the world’s statisticians.  Frustrated with the shortfalls of GDP as an indicator of wellbeing, they are struggling to find alternative means to measure progress in the quality of people’s lives.

It’s not a moment too soon.  Democracy is under challenge.  Levels of trust in politicians are worryingly low.  Less remarked upon is the lack of public confidence in official statistics.  In France and the UK, for instance, only one-third of citizens believe official figures.

Not surprisingly there is a renewed sense of urgency amongst government statisticians.  In May this year the OECD, as part of its 50^th anniversary celebrations, launched the Better Life Index.  It builds on a French initiative, the Commission on the Measurement of Economic Performance and Social Progress, led by renowned American economist Joseph Stiglitz, which reported in 2010.    The Commission concluded that for many purposes there were better economic statistics than a measure of production, GDP:  levels of real household income, for example, or the extent of income inequality.  It is not that GDP is a wrong measure but that it is often inappropriate as a measure what people care about.  In many instances data on social or environmental wellbeing is more relevant.

The Better Life Index seeks to respond to the Commission’s challenge.  It measures 11 dimensions, with 1-3 indicators in each:  housing, income, jobs, education, the environment, governance, health, life satisfaction, safety and work-life balance.  It’s proposed to add more criteria in the future.

The challenge, of course, is how to address the relative importance of such indices of well-being.  The OECD deftly sidesteps the problem by making the index interactive.  Each visitor can weight the variables on-line as they want and share their views with others via Twitter or Facebook.  This is statistics in the age of social media.

It’s made difficult to work out which of the OECD’s 34 member states scores best.  You have to measure the height of flowers and the size of their petals!  I know you don’t believe me but take a look.  Weighing all variables equally on the horticultural scale Australia, I think, is placed second, just behind Canada and just ahead of Sweden in the Better Life garden fertility stakes!  Some 75% of Australians are satisfied with their lives compared to just 59% for the OECD as a whole.

As a nation we rate particularly well on the Community dimension.  Around 95% of Australian respondents believe that they know someone they could rely on in a time of need.  Interestingly 65% report that they have helped a stranger in the last month, compared to an OECD average of only 47%.

The United Nations is also actively seeking to move beyond traditional measures of national wealth. The UN Development Program argues that “an excessive obsession with the creation of material wealth can obscure the ultimate objective of enriching human lives”.  Seeking to redress that defect it has recently issued its 2011 Human Development Report.

Frankly it doesn’t pack the enjoyment of the Better Life Index, requiring its users to possess some understanding of income logarithms and geometric means.  The data, which graph trends back to 1980, is probably more compelling.  It creates a composite index of human development by measuring 3 dimensions (health, education and living standards) against 4 indicators (life expectancy at birth, years of schooling, expected years of schooling and gross national income per capita).

Now I know that your ethical self will recognise the dangers of putting such data into league tables.  But I also know that your inquisitive self wants to know how Australia performs.  The answer is that of 269 countries (47 developed nations) we rank 2^nd after Norway, performing slightly better than the Netherlands, the US, New Zealand and Canada.  In short, the more comprehensive statistical metrics suggest that Australia provides a better quality of life than measures of GDP indicate.

Peter Shergold is the Macquarie Group Foundation Professor at the Centre for Social Impact (CSI) at UNSW. This blog post first appeared on the CSI blog.