The government has been urged to use the same thinking with social bonds as it does with public–private partnerships (PPPs) to attract investments from super funds.
Richard Brandweiner, chief investment officer of First State Super, said the government recognises that they need to share risk in order to attract money for greenfield infrastructure projects and that this thinking should be applied to social bonds as well.
“Mike Baird has led the strategy around restructuring public–private partnership arrangements so that the private sector does not wear unforecastable risk,” Brandweiner said at the Impact Investment Summit in Sydney this week. “They’ve accepted that the money is not available for high risk greenfield projects unless risk is shared or absorbed by the government in the early stages.”
“Cross over to social impact investing, that thinking is not there yet. At the moment the desire is to transfer all of the risk over to the private sector from the outset.“
He drew the comparison as PPPs and social bonds both effectively outsource a government service to the private sector.
The traditional model of PPPs, used with the Sydney cross city tunnel, no longer attracts investors because the associated risks cannot be gauged accurately before the asset is delivered. The NSW Government’s approach to WestConnex, where they absorb the early risk until traffic numbers are realised before looking to privatise, reflects a new way of thinking.
Brandweiner said: “The government could absorb the risk early in the lifecycle of these investments, and then progressively transfer the risk to the private sector over time. Rather than issuing one bond at a time, issue a series of the same bond for five years in a row, and every year gradually transfer the risk over to the private sector.
“What that will mean is the funding raised early on can be used to do the research, the measuring, the evaluation and the randomised controlled trials, all the things institutional investors actually are going to need to make a decision in, say, three years’ time when they have to wear the risk. None of this exists at the moment.
“This is also a role for intermediaries, for fund of funds and other platforms that can channel large sums of money.”
Brandweiner added that it was very difficult for him to look at a $10 million impact investment, a social bond for example, and work out its likelihood of success.
“As this ecosystem grows, as there are more experts that can actually form that assessment that is going to make the process easier,” Brandweiner said.
Chris Cuffe, chair of UniSuper, who was also on the panel, agreed saying: “To build on that, there is a definite role for a middle man. UniSuper was the first investor in Australia to own green bonds that were put out by the World Bank. If you follow that through who is the person who is starting all that, in the third world country, it’s a rollup exercise that some government has then stood behind, in this case the World Bank stood behind the thing and it makes it sizeable for us.”