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APM Workcare takes riskier tranche in social bond pilot

Friday 7th April 2017

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APM Workcare took on the riskier tranche of debt in the government's pilot social bond, which officials see as indicating the Australian-owned vocational rehabilitation and disability services firm's confidence in delivering a successful programme. 

The local unit of the Perth-based company was announced as the operator of the government's pilot social bond scheme in February, tasked with supporting people with moderate mental health issues back into the workforce. The five-year programme aims to place up to 1,700 people diagnosed with a mental health condition in work and supports them to try to keep them in a job. The pilot is restricted to the Auckland suburbs of Manukau, Manurewa, Clendon, Papakura, Pukekohe and Waiuku. 

The $1.5 million bond is broken up into two tranches, $1.2 million that offers an annual 7 percent return on the base case of placement rate of 43 percent, and a $300,000 tranche paying 13 percent on the base case. 

APM took up the riskier tranche, which would see the firm face a negative return of 19 percent if the placement rate is as low as 26 percent, but could generate annual returns of 17 percent if the top placement rate target of 47 percent is met. 

In a November report to Bill English when he was still finance minister and Health Minister Jonathan Coleman, Ministry of Health and Treasury officials said APM had already "indicated its interest in taking the entire class B tranche (the most risky) which provides a tangible incentive to ensure the outcomes are delivered and represents a strong signal of their expectation of success." 

The other tranche was ultimately taken by philanthropic fund Wilberforce Foundation, Johnson & Johnson subsidiary Janssen-Cilag, and property developer Adrian Burr's Prospect Investment Management. Returns on that $1.2 million tranche range from as little as 2.9 percent at the lowest target, or as high as 9 percent if the top placement is met. That rate of return was broadly in line with similar performance contracts and public-private partnerships, government officials said. 

If APM meets the highest target the financial services firm could pocket $255,000 on top of the repayment of the $300,000 bond, while the $1.2 million tranche could attract a total return of $540,000 over the five years, meaning the Crown could pay as much as $2.3 million. 

The bond's small size and link to social outcomes where investors have little experience made it difficult to find investors and most fund managers weren't seriously prepared to consider the instruments as an option, the report said. 

Government officials said the social bond offers "high rates of return to the Crown" even if it performs well below expectations from lower benefit payments and extra income tax, projecting a benefit-to-cost ratio of 2.7 times net present value at the lowest success rate, rising to 5.7 times at the top end. 

The base case placement rate of 43 percent compared to an existing target of 30 percent under the current Ministry of Social Development work-to-wellness contract.

Government officials said there were risks employment could "lead to worsened mental health outcomes in some cases" and that those risks needed to be minimised and well-managed. The original contract included general principles of good practice to try to achieve that, and an extra safeguard has added a requirement that any enrolments needed to identify links with a GP to provide a "base degree of assurance that any obvious deterioration in a client's mental health will be identified." 

APM started operating in New Zealand in 2011 and has 12 contacts with the Ministry of Social Development to deliver employment services and a national contract with the Accident Compensation Corp to provide rehabilitation services. Accounts filed with the Companies Office this month show the company posted a 6.2 percent decline in profit to $1.8 million in the year ended June 30, 2016 on a 14 percent gain in revenue to $24.3 million.



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