Social Impact Bonds and systemic risk: a preliminary analysis

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3 responses to “Social Impact Bonds and systemic risk: a preliminary analysis”

1. 

   Geoff Wells

   October 5, 2015

   Comments from Paul Madden, Chief Executive, The Wyatt Trust, posted with permission:

   Thanks for your very well thought through paper on systemic issues related to Social Impact Bonds. While I don’t agree with the central propositions, particularly as they relate to the potential impact on philanthropic behaviour, I do accept that it is a widely held concern. The reasons I have more confidence that altruism will continue to be central to philanthropic behaviour are as follows:

   • Philanthropists see, and government determines by legislation governing Private and Public Ancillary Funds, a clear separation between their grant making and investment activities.

   • For PAFs and PuAFs, which represent the vast and growing number of trusts/foundation, legislation requires a 5% (for PAFs) & 4% (for PuAFs) distribution of corpus per annum to DGR 1 entities therefore grant making levels are legislated.

   • The legislative requirements for distributions mean that for most Trusts and Foundations around 90-95% of their funds are invested in things that do not align with their core purposes. It is the way that philanthropic trusts use these investment funds that is of particular interest to them and they are seeking to better align their investments with their core purposes.

   • Groups like Wyatt are progressively moving to allocating greater amounts of their investment funds to social investments but this is not at the expense of grant making. As trusts that aim for perpetuity, their grant making will always be tied to about 4-5% of corpus as perpetuity cannot be assured beyond that level. Social investment for them is about doing more to advance their purposes than they can do with grant making alone and one does not detract from the other because in that sense the money comes from different buckets. (i.e. Grant making funds & investment funds)

   • SIB’s can only operate in a very narrow band (very few programs are suited to it) and they are likely to represent only a limited part of the social investment landscape. Based on the investments coming through the system, the vast majority of social investment funds will be directed at major social projects around housing, health, social infrastructure and the like. There are some other quite interesting economic development type investments coming through the system – e.g. http://www.Marqet.com.au which focus on localised economic benefit.

   • Philanthropy is not the key target for social impact investment in the longer term though it is one part of the target area. Super funds and the like constitute the key targets by virtue of their financial capacity to contribute to the growth of funds into the sector and the undertaking of major projects. Under prudential guidelines, even small (percentage wise) investments from super funds, mutuals and the like would have a major impact.

   No doubt there will be some philanthropic groups that are influenced in the ways suggested, however, that is not the mainstream thinking and in any event legislation will keep a brake on it even if some want to move their grant making toward investment. It may well be that a degree of systems disruption will occur at social investment enters the “market place”, but the trade off from my viewpoint is increased innovation in both delivery and funding, development of metrics to better measure social outcomes, an expansion of resources available to the social sector and in time a more holistic investment market that values investment in social outcomes.

   Reply
2. 

   Geoff Wells

   November 2, 2015

   Comment from Ben Gales, CEO SEFA, posted with permission:

   Thanks for the email and the paper. I enjoyed reading it but disagreed with some of the comments and assumptions about what a SIB is about. For example, the proposition that SIBs offer philanthropists sub-market rates of return for guaranteed investment is incorrect. Just look at the investors in the Newpin SIB, the returns they are getting, and the risk transfer between government and investors. Paul Madden covers off the impact investing / philanthropy point well – PAFs/PuAFs have committed distributions. Impact investing is about harnessing more resources to address societal issues, not about redirecting existing resources.

   Reply
3. 

   Geoff Wells

   November 2, 2015

   We thank Paul and Ben for taking time out from their roles as busy leaders of their major organisations in the Australian NfP sector to make their comments. We respect their experience and their dedication to trying to do some good—as we all are. We would like to make some comments on their points.

   The argument we have been exploring doesn’t rest on the SIB mechanism specifically. The SIB is being used here as an example of system-wide impacts of social impact investment models. We appreciate that observation and we will recast the paper to make that clearer.

   The question for us is, what precisely are those impacts likely to be? That is what we are trying to model. We are trying to track those impacts that not are just focused and specified project outcomes, even aggregated, but collateral impacts throughout the system. We believe that many of these impacts have been overlooked and that they are particularly important to have in sight.

   On the legislative arrangements, we would note that ours is a generic model, not an Australian model. But if philanthropy stays the same, in the way suggested, and the increase in funds is to come from social investment then the balance in the system moves in the direction of social investment in any case, and the systemic pressures we are suggesting on entities lower in the system are likely to come into play.

   There is a far greater volume of social needs than the combined levels of current philanthropy and projected social impact investments can begin to meet financially. Therefore communities and NfPs will be continue largely to be in the position we have suggested: trying to adapt their methods and processes to a sector which is moving strongly overall to the impact investment model, with the potentially damaging effects—as we see them—that may flow from that.

   Paul and Ben are taking the view of the system from the philanthropist/investor down. That is certainly important and reasonable: that is their position in the system. We would propose that this is essentially a welfare economics view of the issues: its goal is that aggregate welfare improves—that is, there are some significant advances in overall quantitative terms. Again, that is important. However, as is well understood, this framework does not encompass distributive and other social impacts—which we believe may mean that many, perhaps most, communities in social need are likely to be worse off in the ways we sketch, even if the aggregate improves quantitatively.

   In contrast we are looking at the impact of the social impact model on the system from the bottom up: from the perspective of the communities in need and on the NfP organizations working with them. We are attempting a more fine-grained analysis, across the system, one which deals primarily with the people, groups and communities that comprise the system. Our argument is based on experience: we have seen what happens to NfPs and their communities when these quasi-market pressures are applied; and the impacts are indeed complex and in many cases troubling. Taken together these potential impacts are systemic in their implications.

   It’s relatively easy to say that innovation is good in itself, particularly if the aggregate funding pool looks as though it is increasing. In that light resistance to the innovation can be seen as predictable reluctance to change. We are raising a different question: whether social impact investing is in fact a disruptive innovation of the kind proposed, or whether it may be in fact simply disruptive and damaging in ways which haven’t been anticipated.

   Behind this are sitting important differences in principle we would have about what constitutes effective outcomes in community social work and how that is measured. Our position is that this work needs to be community-led, for a variety of crucial reasons, and that the outcomes include multiple levels and kinds of social capital, capability and resilience within those communities, many, even most, of which outcomes may not be measured easily and are certainly not captured as return on investment.

   In a similar vein, the assumption that the application of market, or commercial, assumptions and processes to social needs will produce better results is, as we would argue, open to question; and it has indeed been widely critiqued in the sector literature. So is the idea that sustainable outcomes can be driven by metrics: evidence from research on business experience has shown this to be an unreliable assumption. But that is another conversation.

   Again, our grateful thanks to Paul and Ben for their comments. We look forward to the continuing conversation in our collective determination to do the best we can with the people and communities alongside whom we are working.

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