Five years ago, I was one of ten people gathered around a table excited by the prospect of creating Australia’s first Social Benefit Bond – a financial structure to tackle serious social problems, deliver returns to investors in the form of financial yields and harness private finance for social good.
This week, The Benevolent Society unveiled the third annual report for its inaugural five-year Social Benefit Bond. The results to date show it is on track to outperform on both its social and financial metrics of success.
The Benevolent Society’s social benefit bond is one of two launched as part of a NSW Treasury trial, announced in 2011 to tackle the challenges of out-of-home care.
This initiative from the NSW government represented cutting-edge thinking at the time. The United Kingdom had launched the first social impact bond trial at Peterborough Prison in 2010 and Barack Obama had just made $100m available in the United States for seven similar trial bonds.
Locally, the timing felt right with a Centre of Social Impact report concluding the concept was feasible locally, with NSW having the right market conditions to try this new funding approach.
We decided to respond to the NSW government’s request for proposals because a core part of our strategy is to stimulate market innovation. I also had a personal interest, having been involved in developing private financing for UK social housing when based in London.
It soon became clear Westpac and The Benevolent Society had similar ideas to us, so we partnered together marking the beginning of a fascinating journey. Together we have learnt much about this type of financing, and most importantly, measurably improved the lives of some of our most at-risk families and children in society.
Designing and structuring a bond that met the needs of investors, the NSW Government and The Benevolent Society took nearly two years of hard work.
But three years on since it went to market the success of the Resilient Families program, financed by the bond, speaks for itself. To date, over 360 children from 156 families have been referred to the program, and there have been 21 per cent few entries into out-of-home care for children of families participating in the Program.
The Benevolent Society does an incredible job in running the Resilient Families program, which is designed to improve the safety and wellbeing of all children in the families referred to it by the NSW Department of Family and Community Services (FACS). Families are referred for a range of complex reasons that place their children at risk of significant harm, such as domestic violence, substance misuse, mental health issues and neglect of children.
The bond provides upfront funding for the Resilient Families program, and offer investors a return linked to the effectiveness of the program.
Financiers are not accustomed to considering these types of risk and certainly do not try to quantify them, so the major challenge was structuring success and return measures.
We were aware we had to set returns that could be easily measured and explained to end investors who typically have little understanding of this type of financing and risk.
Another challenge was creating measures of impact of the Resilience Families. As the government would be paying for the performance of the program, we needed to satisfy Treasury that measures were fair and correct and we had structured reward payments to investors commensurate with outcomes achieved.
We wanted to make the bonds attractive to as many investors as possible and part of the solution was to offer different risk return profiles.
The $10 million bond was split between two tranches, a $7.5million capital protected notes and a $2.5million capital exposed notes. While the final returns will be calculated at maturity, they are currently looking strong with at 6 per cent for capital protected investors, and 10.5 per cent for capital-exposed investors.
The investment community enthusiastically supported the bond, which attracted interest and investment from super funds and institutional investors large and small.
Over time, The Benevolent Society, NSW FACS and NSW Treasury have refined the delivery and evaluation of the bond, revising measurement methods and introducing of several improvements following detailed review and analysis, to ensure program performance is accurately reflected.
Westpac’s Executive Director and Head of Structured Finance Craig Parker summed up our shared view:
“This is not about a quick fix, rolled out over a five-year horizon of a bond. This bond is about a collaborative effort across financiers, investors, government and social service providers that lies at the heart of our community”.
At Commonwealth Bank, we actively encourage ideas that deliver returns to our clients and also have real results to society. In the past few years, the bank has developed of a number of innovative financing solutions designed to create real benefits to communities as well as investors – funding vehicles to support long-term projects from local governments, help universities invest in energy efficient assets, and provide affordable housing solutions in Australia.
These are all major, long-term challenges with no easy answers, but we acknowledge the need to work collaboratively with industry, government and the private sector to create real benefits.
Simon Ling is Commonwealth Bank of Australia’s managing director debt markets, with responsibility for the bank’s debt capital markets, fixed income, securitisation, loan markets and syndications.