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Trends, Performance and

Challenges of SIBs in AustraliaSocial Impact Forum YOKOHAMA 2017

22nd April 2017

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Outline of session1) 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

1. Background and development of SIBs in Australia

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Development of SIBs in Australia

TIMELINE

Source: NSW Government Office of Social Impact Investment http://www.osii.nsw.gov.au/

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)

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Australia – overview of current state of SIBs development

Source: NSW Government Office of Social Impact Investment http://www.osii.nsw.gov.au/

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

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Queensland

1 bond launched: 2 bonds in progress (homelessness, reoffending)

Western Australia Not gone to market

Commonwealth

Discussion paper released early 2017

Early work – SEDIF Funding ($20m), Goodstart Early Learning, Great Barrier Reef Foundation Bond)

New South Wales

3 bonds launched (OOHC, recidivism)

Multiple bonds in developmentSouth Australia

1 bond released (homelessness) Victoria

2 bonds in process (Young people leaving out of home care, homelessness services) Tasmania

Not gone to market

NT Not gone to market

NZ1 bond – Feb 2017

Stage of the market in Australia and New Zealand – traffic light report

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Size of the Australian marketThe 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.

VIC; 54%

NSW & ACT; 33%

QLD, NT, WA, SA, Tas; 13%

2017 2022

Growth in the Australian market is strong:

The Impact Investing Australia 2016 Investor Report shows that in Australia….

Active impact investors aim to triplethe size of their impact investment portfolios over the next 5 years

Non-active investors expect to consider social and environmental impact in investment decision making over the next 5 years

The majority of active impact investors will likely be in Victoria and New South Wales based on current trends

Source: Impact Investing Australia 2016 Investor Report, Impact Investing Australia, 2016: https://impactinvestingaustralia.com/wp-content/uploads/Impact-Investing-Australia-2016-Investor-Report.pdf

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Example 1 – Newpin Social Impact Bond, NSW

Area Design

Intervention

• 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• 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

Source: SVA Investor report can be found here http://www.osii.nsw.gov.au/initiatives/social-benefit-bonds/

Source: SVA Investor report found here http://www.osii.nsw.gov.au/initiatives/social-benefit-bonds/

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Example 2 – Recidivism SIB to prevent reoffending

Area Design

Organisations • ACSO, arbias, and National Australia Bank (NAB)

Intervention• 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

Target population

• 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

Outcome metric

• 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

ACSO-arbias joint venture (Australian Community Support Organisation and Alcohol Related Brain Injury Association)

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/

2. The distinct characteristics of SIBs in Australia

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Comparing Australia/ UK/ USA

• 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)

• Similar bond designinvolving 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 governancestructures

• Strong not for profit tradition for human services in all three countries

• Calculation of savings through economic cost benefit analysis

Similarities Differences

Source: KPMG Australia

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Comparison of Australia/ UK /USA SIBsInitiation 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 governmentdriven

Local StateFederal

Big Society BankKey funds established

Yes • Government structures

• HM Treasury

USA Federal government and state government led

State Federal government fundSocial innovation fund (2014)

Emerging impact funds

Yes • Government structures

• Social innovation fund exploratory work

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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

3. Implications of SIBs for finance

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For Government - shift in types of contractingThe shift towards payment by results contracting

Source: KPMG NZ

Current position

Potential position

Outcomes (medium to long term)

In-house Contracting focus for provision of services

Own staff Contractors Input basedOutput based

Impact(short term)

OutcomesPayment for

success

OutcomesSocial Bonds

Shift to the right

More complex

Simpler transactions

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Implications of SIBs for governmentBrings new money into government services

Evidence based policy making; value for money

SIBs are an example of a payment by result transaction and should be seen as one form of impact investment

New partnerships with NFPs and investors

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.

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Social benefit bonds are part of a suite of social, environmental and development finance instruments. Globally this includes:

SDG Bonds (issued by World

Bank)

Social Impact Bonds

Green Bonds (labelled)

Impact funds

Other instruments are not included which finance impact but do not necessarily require rigorous measurement of outcomesor link payment to outcomes measurement.

Social enterprises

Climate-aligned bonds

Development Impact Bonds

Blue bonds (water)

Global impact investing

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The Sustainable Development Goals (SDGs) as an organizing platform

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

SDGs are a useful framework to identify, design and deliver impact investing opportunities:

• 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

• Provides universal goals and a framework to unify and align approaches of disparate actors.

• Focuses agenda with potential for local partnerships, civic engagement and co-benefits from targets

4. Key success factors

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Success factors for SIBsSuccess in establishing the market

Success in negotiating the contract

Transaction success

• 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

• Pre-work – detailed work by government up front before RFT• Project management • Simplify transaction and contracts as far as possible• Time frames (6 months)

• Strong evidence base to the program with a known success rate• Well defined cohort• Robust measurement and strong scientific method

5. Challenges

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Challenges for market development for SIBs

Scale and scope

Bespoke transactions with large transaction costs

Speed of market development

Risks

Maturation of NGOs

Mismatch – funds are available but lack of transactions

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Next steps in Australia

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SIB work over last four years has been reviewed and stock taken of progress

New states are learning from more mature states and are entering the market; Federal government considering its role

KPMG concentrating on SIBs as one form of social investment; in parallel designing other impact investment transactions

Scale up SIBs, ‘industrialise’ and increase deal flow

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)

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Liz ForsythPartnerGlobal LeadHealth, Ageing and Human ServicesT: +61 (2) 9335 8233M: +61 418 659 857E: lforsyth@kpmg.com.au

Dr Ruth LawrenceAssociate DirectorLead, Impact InvestingT: +61 (2) 9346 5554M: +61 427 664 988E: rlawrence2@kpmg.com.au