There are plenty of social services we should pay for out of basic human decency, despite the cost.
It’s what Australians like to call ‘giving people a fair go’.
What most of us fail to realise, is that many social services can also show a significant return on investment over time.
And in a surprise turn, it’s the much maligned NSW Government that has lead the country by announcing the trial of Australia’s first Social Impact Bond (SIB); a financial instrument designed to provide capital to successful social programs which show a return to investors.
The SIB trial will be modelled on a similar program in the UK and will require the cooperation of government, investors and the community sector.
The principle is fairly simple.
Governments fund social programs which save them money – they’re just not good at quantifying it, particularly when the returns will come years down the track.
In the juvenile justice area for example, there are inexpensive and successful diversionary programs aimed at reducing rates of recidivism.
Reducing recidivism saves the cost of incarceration, which in NSW is around $150,000 to keep one young person locked up for a year.
Our own research shows that by reducing reoffending and time spent in jail, you also reduce adverse health and welfare outcomes and increase the rate of employment, which not only saves money but increases revenue through income tax and GST.
Unfortunately the money available from governments to scale this kind of program is more often than not tied up in the aftermath of ‘tough on crime’ sentencing and providing detention.
But by issuing a SIB, it opens opportunities for private investment.
For example, the government sells the bond – linked to a juvenile justice program - to private investors.
If the program achieves an agreed reduction in recidivism, then the government pays a return to the investor on top of their original debt obligations.
The NSW Government is estimating savings of between $4 and $17 for every $1 it invests which suggest there’s plenty of potential upside to cover the costs and then some.
It’s a wide range, but it’s a new area and there’s still lots of hard work to be done.
For one, investors and government will need to build their capacity to run the ruler over social programs the way they do with potential commercial investments.
Which funds manager will advise a retiree to invest in a social bond if they have no idea if the ‘business’ behind it is sound?
There’s also a question about who carries the risk – is this really a social bond or are you buying equity so that if the program fails you do your dough?
We also need to be wary of the fact that these are people’s lives we’re talking about – we’re not investing in widgets. Any development of SIBs needs to be based on a sophisticated understanding of the issues involved and their impact on individuals, families and communities.
But we shouldn’t allow the prospect of hard work and the need for deeper examination to dissuade us from pursuing SIBs; there are some very attractive features of creating this kind of tradable instrument.
Capital will naturally flow to the most successful programs.
It should encourage innovation, because investors can choose to put money into interesting projects politicians could struggle to get through Treasury or justify to voters…however strong the case.
Community service providers will be pushed to demonstrate tangible outcomes rather than outputs – something we shouldn’t be afraid to do.
And it provides another product for the burgeoning ethical investment market, which will in turn help increase the pool of private capital available to fund successful social programs.
Most importantly, it will allow larger-scale investment with long-lead returns which the three or four year government cycle makes nigh on impossible.
SIBs won’t solve every problem, but you’d be surprised how much money could be saved by investing upfront in solving social ills rather than perpetuating them.
Homelessness, early interventions for children with disabilities and treating people with a mental illness are all areas where investing now can show great returns in the long run.
We use bonds to fund rail and road – so why not social infrastructure?
Toby Hall is the Chief Executive Officer of Mission Australia
This piece was published in the National Times on 14 January
