What is a social benefit bond?
The first social impact bond was in England, United Kingdom in 2010. New South Wales, Queensland and South Australia have had such bonds since about 2012. Victoria only announced an intention to explore the issue in the 2016 State budget. There are very few examples and everyone is learning as they go.
How do social benefit bonds work?
Private investors provide capital to a service provider to achieve improved social outcomes. If these outcomes are achieved, then the cost savings to governments are, in effect, used to repay the upfront investment plus a dividend/interest.
Who can be investors?
Investors might include large institutions such as banks, superannuation funds, public benevolent trusts, private trusts with wealthy families etc. Naturally, the investment must be very attractive to investors i.e. high return for high risk and really good social benefit. The risk is high to investors because they would lose their investment totally if the organisation did not achieve the agreed outcomes.
Are social benefit bonds suitable for our organisation?
Social benefit bonds may be more suitable to some organisations more than others, and there are several factors for your consideration.
The emphasis for an organisation interested in social benefit bonds must not be on outputs or actions but rather outcomes. These outcomes are to be measurable and set fairly and reasonably for an organisation, with measurement to be based on benefits and data to show benefits. The service delivery model plus outcomes must be agreed with the government.
Innovation is also important. Preventative or early intervention programs involving crisis or acute services are ideal. Improvement to a current program may be an acceptable option. A largish proportion of the population to benefit is preferable than any number too small.
An organisation will also need strong data collection and reporting capacity. It needs a strong record of social needs achievement and have a good reputation for governance, financial control, quality service delivery and outcomes measurement.
For a social benefit bond to be viable, then the proposed program must satisfy government considerations, i.e. viability of the program notionally to save government expenditure but predominantly to meet a pressing social need. If the government is currently paying a lot of money on a social program, then it is likely to look to enter into bond arrangement to save a lot of money, especially if there can be fairly immediate impact. The program will not be approved if the government is not making a financial saving.
The government pays an organisation remuneration for its services plus sufficient to pay back the investors their capital plus interest. This usually happens at the end of the program and only then where outcomes are achieved. It might be possible to get a service fee payable to the organisation during the project for its services.
Organisations bear a reputational risk and losses from the provision of its services should it not achieve the agreed outcomes. Thorough due diligence by an organisation will be critical to ensure viability.
A summary of our legal help:
- We can get involved in negotiations with the government or other responsible authority, alongside your organisation. Sometimes it is too late when we get involved after completion of negotiations. We can better protect your organisation's interest from the outset.
- The negotiations for social benefit bonds are generally complex and lengthy. The interests of your organisation would need to be protected, in the following key respects at the very least:
— First, by negotiating an upfront non-refundable lump sum fee, for example 25%, followed by five non refundable fees of 10% for each benchmark, with the final 25% plus investor return being paid at the end;
— Secondly, a return to investors might also be factored in so that the risk of a total loss of investment is reduced (and maybe then the high premium on their investment return could also be reduced with lessened risk of losing the lot);
— Thirdly, a lot of government contracts come unstuck when the government is given a broad right of early termination. This needs to be limited with these projects/contracts because the risk is with your organisation and the investors;
— Fourthly, performance management, performance review and reporting issues need to be got right from the outset; and
— Lastly, if there is disagreement as to whether the agreed outcomes have been achieved or not, then an independent evaluator should step in to make an expert determination one way or the other based on the agreed measurements, data, etc.
- These are just five pluses in us getting involved from the very outset, including with negotiations. The main social benefits bond contract can then contain all the fruit of these negotiations.
- In approaching investors, such as banks, public superannuation, private trusts and the like, we can assist in developing an expression of interest document by way of private prospectors, seeking the necessary funding for the new program on terms and conditions appropriate for a social benefit bond.
- We would usually recommend establishing a separate special purpose entity to an organisation for the particular social program. Investors would advance their funds to this new entity rather than to the organisation direct. This new entity would be the contracting party with the government for the provision of services and payment arrangements. This separate contracting entity would sub-contract with your organisation as the main service provider and perhaps there would be other sub contractors. Your organisation would actually provide the services to the end users in need of the social program.
- The actual investment vehicle between the investors and the independent contracting entity can be quite broad, such as a unit trust supported by a simple/plain English private prospectus.
- The prospectus would detail the social need, government support, services to be provided and financial aspects, including the possibility of investors losing their investment totally.
- Everything would need to be included in a subscription or like agreement between the independent entity as trustee for the unit trust and each investor. That would include a call for additional funds from the investors if needed. A full release and indemnity in favour of the independent entity and all sub contractors is recommended, with no guarantees to be provided. Perhaps if security could be offered to the investors then that might improve their risk. However, if, at the end of the social program outcomes are met to the satisfaction of the government, then the government would pay the contracting entity and the contracting entity would then reimburse the investors for their initial investment plus whatever was the agreed return. The contracting entity would pay the balance of funds to the organisation for its services. All of this and more would need to be included in the agreement with the investors.
- Depending on the type of social program and the agreement with the government or authority, government funds would be only be paid to the contracting entity once all outcomes have been achieved at the end of the program or there may be a service fee payable by the government or relevant authority during the performance of the contract as a means of providing additional capital not able to be procured from the private investors.
- There would be a head contract between the government or the relevant authority, the independent contracting entity (and perhaps your organisation as the service provider).
- It might be that your organisation could be the service provider in a collaborative manner with another service provider, in which event a joint venture agreement between your organisation and other service providers may also be helpful. This would happen when your organisation does not have sufficient skills, resources or knowledge.
- Sometimes there maybe need for specialist support to raise investment capital or to provide specialist advisory services, especially where a contract is being created in a new sector. There would be a need for a contractual relationship with any such specialist.
- A separate deed of assurance may be appropriate from a main subcontractor (such as your organisation) to the government or other authority in respect to fulfillment of its own obligations.
Depending on the structure and particular needs of your organisation, there may be other aspects of legal help which we can assistance you with. We recommend that you seek legal advice prior to setting up a social benefit bond.
Any tips
- It is important to protect your interests from the outset. If you are interested in social benefit bonds then we highly recommend you seek legal advice at the earliest opportunity.
- Thorough due diligence by your organisation will be critical to ensure viability.
- Social benefits bonds can be structured in different ways so it is important to obtain legal advice to ensure that there is a structure which will best meet the needs of your organisation.
If you require further advice or assistance, please do not hesitate to contact us on 1300 205 506 or filly in the contact form below.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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