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Investors await detail of NZ's first social bond, including how returns are structured

Wednesday 3rd June 2015

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Potential investors in the government's first social impact bond say they are open to the concept but are awaiting details, including how returns are structured.

A pilot delivering employment services to people with mental health conditions is to be the first of four social bond programmes allocated $28.8 million in Budget 2015. Details of how the mental health social bond is to be structured and which organisation are involved has still to be decided by the cabinet.

A social bond allows the introduction of new, private money into social programmes without increasing public debt and without the need to decrease existing spending, with investors paid based on the level of social value achieved. But they bring "significant public policy and economic difficulties", according to a 2011 report for the Department of Internal Affairs by Ross Philipson Consulting. Those include difficulty evaluating the success of the contract and potential for a low rate of return with high risk.

"It's important to look at innovation in this space for social services support in the community," said Liz Gibbs, chief executive of Philanthropy New Zealand, whose members pump about $2.6 billion into local communities each year. "Philanthropy is such a diverse sector, some of our members have a real appetite for this and others don't."

Gibbs said the challenge is that social issues to be addressed through social bonds "are really complex" and the investment cycle for a philanthropic programme is typically longer term than the election cycle.

Social impact bonds are a new phenomena worldwide and one of the first and most widely cited is the UK's Peterborough prison pilot aimed at reducing the rate of re-convictions. That pilot was shut down mid-flight last year, not because of the results, which were below target, but because the government introduced a broader policy that subsumed what was being trialled at Peterborough.

The Ross Philipson report, tabled in the parliament by Health Minister Jonathan Coleman this week, noted that social bonds were at risk of political blow back because of "a lack of public understanding and acceptance of outcome based initiatives and a perceived caution for private involvement in social policy."

In New Zealand, the government has already managed to navigate outcome based contracts with the private sector, including outsourcing of management of the Mount Eden remand prison and new facility at Wiri to listed UK company Serco Group.

The mental health social bond may end up being a hybrid structure. In announcing the programme, Finance Minister Bill English said returns for investors "will be partially determined by whether or not agreed social targets have been achieved," while the Ross Philipson report said typically all of an investor's capital was at risk if the outcomes weren't achieved. That would make such bonds more appealing to charitable or philanthropic investors than those needing a more reliable return.

"There would definitely be part of AMP that would be interested in these programmes. We have community trusts and iwi within our client base," said Vicky Hyde-Smith, fixed income portfolio manager at AMP Capital. "As yet we don't have enough information. We're just starting to engage, with meetings scheduled this week. We are supportive in principle."

The Ross Philipson report said it can be difficult for governments to allocate funds to preventative initiatives that don't deliver immediate results because they are often under political pressure to fund "crisis" issues.

"Over time, SIBs could prove an effective way to reduce public expenditure because preventative interventions are generally cheaper than tacking problems," it said.

Also, payment is tied to success, meaning risk is transferred to the private sector, which has a strong incentive to ensure success.

"Speaking generally, we are monitoring the development of social impact bonds, which are a new and interesting approach to social financing, globally and in New Zealand," said Catherine Etheredge, head of communications at the New Zealand Superannuation Fund. "As social impact bonds are very much in their infancy, their current lack of a track record makes predicting their potential growth, and their risk/return profile, difficult for institutional investors such as ourselves."

"We note, however, that social impact bonds have a large pool to source capital from, including high net worth individuals, philanthropic foundations and other social investors," she said.


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