When is a social impact bond (SIB) not a SIB? Should we care?

SIB pic

There are advantages and disadvantages to the term ‘social impact bond’ (SIB).

From the time it was coined it has caused confusion. The word ‘bond’ implies that capital is guaranteed, that interest is fixed, and that cash flows for the principal occur at the beginning and end, with ‘coupon’ or interest paid in the interim. Some SIBs are like this, particularly in the US. But some are a set of contracts and cash flows that bear almost no similarity to a bond at all. So should it be called something else? The Peterborough contract actually uses the words ‘Social Impact Partnership’, a phrase also chosen for the Western Australian paper on SIBs. But the word ‘bond’ has attracted more interest from the financial sector than ‘partnership’ might have, an observation I first heard expressed by Social Finance’s Toby Eccles. In Australia, the bulk of media on SIBs has occurred in the Australian Financial Review, which has loved ‘bonds’, but may have been more inclined to put stories about ‘partnerships’ in its sister publications for general news.

To figure out what is a SIB and what’s not a SIB, I use the definition we came up with at the Cabinet Office:

The Centre for Social Impact Bonds defines a Social Impact Bond (SIB) as an arrangement with four necessary features:

  • a contract between a commissioner and a legally separate entity ‘the delivery agency’;
  • a particular social outcome or outcomes which, if achieved by the delivery agency, will activate a payment or payments from the commissioner;
  • at least one investor that is a legally separate entity from the delivery agency and the commissioner; and
  • some or all of the financial risk of non-delivery of outcomes sits with the investor.

More recently, however, I’m seeing the words ‘social impact bonds’ and ‘social investment bonds’ refer to financial instruments that look much more like bonds. They borrow money at a fixed rate, use it to do something which generates some kind of income, and then pay the money back at the end. They don’t involve financial risk for the investor that is pegged to the non-delivery of social outcomes.

So is there a problem?

I like my world ordered, and it initially bothered me that a concept I define so tightly was being applied to something else. How are we to collect relevant literature on something if our key search terms are being used to refer to something else? Disaster! But then I remembered why social impact bonds interested me in the beginning: they interrogate and align the incentives of stakeholders in social programs. These other bonds showed innovative thinking about structuring finance to deliver social outcomes. That’s worth celebrating! Let’s put the definition aside and celebrate a few variations on the theme (NB: dates relate to announcements – most are still in development):

  1. Khazanah Nasional – social impact bond / social impact sukuk – Malaysia – April 2015

This issue is raising M$1bn (US$282m) and is rated AAA. It will fund a range of environmental and social projects, rather than just one. Instead of investors getting paid more when outcomes are achieved, this instrument pays less. “The Ihsan SRI sukuk incorporates a unique feature where the principal amount is reduced when the selected project hits certain key performance indicators. This means investors will not recover the original sum put in, although they will continue to enjoy an income from the annual distribution rates or coupons. That suggests annual returns will be key in driving demand.

  1. Richmond City (US) – social impact bonds – US – March 2015.

This is a proposal from the Richmond Community Foundation, but which Richmond City sells social impact bonds to raise money that the community foundation could use to buy homes. Local workers rehabilitate the homes, which will then be sold to people through first-time home buyer programs.  A sale of $3 million in bonds was expected in March 2015, pending final approval by the Richmond City Council. That would pay for the rehabilitation of 20 properties a year over five years.

  1. Instituto de Crédito Oficial (ICO) – social bonds – Spain – January 2015.

The funds raised from investors via the “social bonds” will distributed as loans to finance micro-businesses and SMEs. The bonds are rated and total 1 billion euros, with a term of 3 years and an annual coupon of 0.50%.

  1. IIX – Women’s Impact Bond – International – October 2014

The WIB will raise US$10 million, deployed as loans to a selected group of clean cook-stove-related businesses. The bond will have a maturity of 4 to 5 years. The WIB is a pooled fixed income security issued by a special purpose vehicle (SPV) created by IIX.

  1. Midlands Together and Bristol Together – bonds/social impact bonds – UK –July 2013

Triodos worked with Midlands Together to raise a £3m bond for a five-year term and offered investors an annual fixed return of 4 – 6 per cent secured against the company’s assets. This followed £1.6m of funding across two raises for Bristol Together, both in the form of a five year bond issue. The ‘Together’ model involves using the money raised from the bond to buy empty and sub-standard homes and works with social enterprise partners to employ ex-offenders in the repair, refurbishment and restoration. Once the properties are fully restored they are then sold and the original capital, plus any profits, re-invested back into the business and used to pay investors.

Other examples of Triodos Bond raises for environmental and social organisations are here.

Unit costs – what do they mean?

unit costs

Both the G8 Social Impact Investment Taskforce report and Impact Investing Australia’s report to the G8 have called for publication of unit costs of government services, in order to encourage social innovation and social investment. The assumption behind this seems to be that:

  1. If people know the cost of delivering something, then
  2. They might develop a preventative social program that allows these costs to be avoided, which
  3. Saves the government money, and
  4. Delivers better social outcomes for the population.

Well this may be true for things like employment services, where the government saves cash by not paying unemployment benefits. But you might not get a lot of enthusiasm from some other parts of government. And that’s because a reduction in demand for government services doesn’t necessarily mean that government saves money. In order for this to happen, costs must be able to be recouped i.e. they must be marginal, reflecting the additional cost to the system of more people requiring more services. Marginal costs represent what can be saved if this government service isn’t required. So it all depends on how government spending currently occurs.

Let’s take a look at types of unit costs and how they are calculated. And then see what this means using the reoffending unit cost examples from the NSW Government’s Office of Social Impact Investment:

Unit cost How is it calculated NSW example  What does it mean? What’s it useful for?
Average operating cost Divide entire budget, (including the cost of things like the head of the department and their staff) by service units e.g. total nights spent in custody in one year It costs Corrective Services NSW $189 per day to keep an inmate in custody. Savings may result in response to reduced demand if a prison or wing of a prison closes, but only if staff are sacked and the prison is not maintained. Useful for governments to benchmark their costs against other governments or identify trends in their expenditure over time.
Cost of time and other items Work out how much time is spent on something and the salaries of the people spending that time. Add in any incidentals like photocopying, petrol, travel. It costs NSW Police $2,696 to finalise an offending event in court. This represents time that could be spent on other tasks- If the number of crimes drops, Police are more likely to reallocate their time, than be sacked. Time, rather than money, is saved. Useful for governments to analyse ways to better allocate human resources.
Capital expenditure Look at budget for new buildings in response to increasing demand. This was not a cost given by NSW Government, but new prisons can cost several hundred million. If demand can be reduced by a certain proportion and maintained for a certain period of time, a new prison may be avoided and the amount budgeted for it maybe saved. Useful for looking at long-term government budget allocations and thinking about the best ways to spend a given amount of money.
Marginal cost (sometimes referred to as cashable savings) The cost of things purchased specifically for one more unit of service  i.e. new trainers, toothbrush, appointments with psychologists, water for washing clothes, food for one more person. It costs Corrective Services NSW $19 per day for every additional inmate in custody Every time a unit of service is avoided, the government can avoid spending this much money. Useful for people outside government to understand their potential impact on government expenditure.

If we assumed that cash recovered from NSW marginal costs were used to fund preventative services, we would:

  • take the $19 per day marginal cost
  • multiply it by the 49% of unsupervised parolees that reoffend within 12 months[1]
  • multiply it by the average 1.8 proven offences they commit in within 12 months[2]
  • multiply it by the 31% of those proven offences that are sentenced to prison[3]
  • and multiply it by the 8 out of 12 months we expect these people to spend in prison from those sentencing (average sentence is 486 days[4] and average time of entry during 12 months post-release is around four months after release[5]).

Then we’d have $3.48 per person per day to spend on our services over the first 12 months. Not a lot.

This doesn’t mean that it’s not worth spending money on preventative services for people who are released from prison. It just means that we need to realise that this isn’t a ‘no brainer’ for government and that it’s a serious spending decision that has to be weighed up against other uses for the cash. It’s certainly not the hugely misleading [6] calculation put forward in the G8 Social Impact Investment Taskforce report:

“Say, for example, that a £10 million, five-year SIB for reducing recidivism delivers an 8% financial return and significant social impact by succeeding in rehabilitating 1,000 youth offenders, each of whom would have cost the UK government £21,268 a year. Using the Unit Cost Database gives a value for the social outcome in just the first year of £21 million, and an associated social return per annum of about 15% (internal rate of return) for the SIB” (p.16).

In order for unit costs to be useful, we need to be informative and realistic about what they represent. Marginal costs will reduce as demand falls. But people quoting average operating costs back to government as if they represent savings? Not so helpful.

[1] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0003/168339/Statement_of_Opportunities_2015_WEB.pdf p8

[2] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0003/168339/Statement_of_Opportunities_2015_WEB.pdf p8

[3] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0003/168339/Statement_of_Opportunities_2015_WEB.pdf p8

[4] http://www.bocsar.nsw.gov.au/agdbasev7wr/_assets/bocsar/m716854l11/nswcustodystatisticsdec2014.pdf p22

[5] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0006/168873/Market_Sounding_-_Reducing_reoffending_and_return_to_custody.pdf p12

[6] Six fallacies of this calculation can be read here http://www.themandarin.com.au/5274-will-publishing-unit-costs-lead-social-investment/

Social impact investment: Why are we here?

In the last two weeks I’ve been at two major social impact investing events, both of which were conducted in the language of investors, and both of which left me actively searching for the perspective of social purpose organisations. There’s a lot of discussion about what social purpose organisations need to do to get investment ready, but where’s the conversation about what investors need to do to get impact ready? SOCAP14 On September 3rd, the second night of the SOCAP conference, I attended an event held by Echoing Green, who support young social entrepreneurs. One of the young entrepreneurs was attending SOCAP.  Four of her friends excitedly asked her what it was like. She said “I don’t know. I’m still trying to figure out if it’s for me. I go to these sessions, but I don’t understand what they’re talking about.” I asked her what the issue was. She said the language and the concepts were so foreign to her that she struggled to find meaning in the proceedings. Only that morning, Sir Ronald Cohen had said, “that’s what impact investment is about: enabling social entrepreneurs whether they’re working through not-for-profits or for-profits, to raise the capital they need in order to improve the lives of others, or the environment”. How did we fail to communicate this to our target market? Continue reading

Breakdown of social impact bond investors in Australia

There are two social impact bonds in Australia that have raised investment and are delivering services. They have been called “Social Benefit Bonds (SBBs)” by the New South Wales Government, the state government that initiated them. They are the Newpin SBB and the Benevolent Society SBB and both of them work to strengthen families to ultimately reduce the need for children to be placed in care outside their homes. Investment for both deals was open to wholesale investors upon application. One parcel of investment in the Newpin SBB was transferred to a retail investor in August 2014, so is not shown on the chart. Also interesting to note is that the Benevolent Society, the charity delivering services for one SBB, has invested in the Newpin SBB, as well as in their own. A breakdown of investor types for each SBB is below.

Newpin investor breakdown(Source: Presentation by Ian Learmonth, 2013, p.14)

Bensoc investor breakdown(Source: KPMG Evaluation of the Joint Development Phase of the NSW Social Benefit Bonds Trial, 2014, p.30)

Social Investment – supplying and demanding what?

There’s a diagram/framework that keeps being used to describe the social investment market and it drives me mad! [I’m not going to point fingers, but its use is fairly widespread, to the point where some organisations use it to label their computer files…]supply and demand

This diagram assumes that your world revolves around money. When you see it, you are supposed to see a very logical display of: the supply of money; the demand for money; and the things that help these two connect.

But social finance is about more than money. It’s about people and changes in their lives. Social purpose organisations use the words ‘supply’ and ‘demand’ to talk about housing, food, services, blood…

As social finance/social investment/impact investing become more widely discussed and practised, our use of language is central to its development. Whatever our perspective, we need to use as little jargon as possible, communicating meaning effectively. We should ask people to explain what they mean, reduce our use of acronyms and assume that the world view of others is not our own.

The diagram above can be useful if we all understand what it means, for example:

investors and investments

It’s still a little money-centric, but it involves fewer assumptions. Is it clear enough?

Update July 2014

Until now, the bulk of social/impact investment reports have been written by investors, for investors, with a few written by policy makers trying to encourage investors. We’re just starting to see the emergence of publications on social/impact investing written for social purpose organisations. Big Lottery Fund has published Social Investment Explained, beautifully written David Floyd at Social Spider and Nick Temple at Social Enterprise UK, with support from Dan Gregory. It sets the benchmark for communication – its language and structure make it accessible to the organisations that are the basis of the existing and potential market.

Adapting UK Social Investment Policy Initiatives for Australia

In many discussions about social investment in Australia, someone expresses the idea that we are 10 years behind the UK, with the implication that if we do everything they have done, we will catch up. But the landscape for social purpose organisations and investment differs between the two countries, and we need to think clearly about the context behind UK Government policy and adapt, rather than adopt their initiatives in Australia.

social investment - 2 focii

Dan Gregory, in his paper Angels in the Architecture, made a useful distinction between definitions of social investment as that which is (a) about social sector organisations accessing finance, and/or (b) about increasing the social impact of finance. The majority of Cabinet Office policy falls fairly squarely in the first category, but Australian efforts so far heavily involve the second.

Why UK initiatives don’t always fit the Australian context

roo in UK hat

  1. Australian social sector organisations include much larger, more powerful organisations that deliver across a wider range of services in the UK. In the UK, the largest charities are almost fully funded by philanthropic donations, whereas in Australia big charities are largely funded through delivering government contracts.
  2. Australia has avoided the recession and resulting austerity that has gripped the UK and many of their European neighbours since 2008. Thus our investors and investment vehicles are, by comparison, healthy and attractive.
  3. The UK has a large (over 100 staff) Office for Civil Society situated in the Cabinet Office that is responsible for strong, centralised policy for the sector. This is in addition to their Charities Commission and has resulted in a range of policy initiatives that have led to the UK being labelled leaders in this area. Australia’s Office of the Not-for-Profit Sector that was part of the Department of Prime Minister and Cabinet will be disbanded under an order signed on 18 September 2013.
  4. In the UK, the ‘social enterprise’ identity is assumed by far more organisations than in Australia. Many organisations in Australia that fit within definitions of social enterprise do not use the term, although it is becoming more popular.

This does not mean that social investment policy initiatives in the UK will not produce benefits if applied in Australia, but it does mean that we should only attempt a translation of initiatives where the implications, costs and benefits in the Australian context fall in our favour. A replication of initiatives accompanied by the expectation of replicated results will only lead to disappointment.

Summary of recommendations


A blow-by-blow analysis

1.      Investment readiness program (Investment and Contract Readiness Fund + Social Incubator Fund)

icrf example

The Investment and Contract Readiness Fund (ICRF) is a 3-year, £10m fund that provides grants of between £50,000 and £150,000 to ambitious social ventures, with the potential for high growth. These grants are used to purchase tailored capacity building support to help raise social investment or to bid for public service contracts. The ICRF is managed by the Social Investment Business and is arguably the policy initiative valued most by the sector.

The Social Incubator Fund is a 3-year, £10m fund that aims to help drive a robust pipeline of start-up social ventures into the social investment market by increasing focus on incubation support and attracting new incubators into the market. Incubators must raise 1:1 match funding from third-party investors to secure investment from the Social Incubator Fund. The Social Incubator Fund is managed by the BIG Fund (the non-lottery arm of the Big Lottery Fund) and has made two commitments so far.

Applicability to Australia – HIGHLY RECOMMENDED

Of all the initiatives in the UK, the Investment and Contract Readiness Fund is the most transferable and will potentially have the greatest impact. The SEDIF funds have enhanced the supply of social investment, but there have been few initiatives to create demand for this finance. There has been an increase in the number of co-working spaces and other support for start-ups, but there is a gap in support between initial seed-funding and readiness to take on further investment. The Investment and Contract Readiness Fund also supports the growth of social finance intermediaries, organisations that are relatively small and scarce in Australia as compared to the UK.

2.      International events – UK G8 Social Impact Investment Forum to Australia’s G20


In June 2013, the UK hosted the G8 and conducted the first side event on social investment. About 150 attendees from the eight nations joined special guests (such as Australia’s Rosemary Addis) for a day of speeches and interaction. Tweets from the event can be viewed on #G8ImpInv. Outcomes of the event were reported in a policy paper and include a global taskforce led by Sir Ronald Cohen.

Applicability to Australia – HIGHLY RECOMMENDED

Over 90 leading organisations from across the world signed an open letter congratulating the UK Government on bringing social investment to the G8. “We urge the G8 to translate the outputs of the June 6 meeting into bold action and encourage the G20 to take note and follow suit.” Australia is the host of the next G20. The G20 is a far more suitable forum for this discussion than the G8 because it includes all the emerging ‘BRICS’ economies of Brazil, Russia, India, China and South Africa (of these, only Russia attended the G8). The G20 also includes other countries that are doing interesting things in social investment, namely the Republic of Korea, Mexico, and Canada. This would be an opportunity for Australia to shape the international agenda and demonstrate our considerable strengths in this field.

3.      Social impact measurement – the Inspiring Impact program

Inspiring impact 2

Inspiring Impact is a UK-wide collaboration between eight organisations to make high quality impact measurement the norm for charities and social enterprises by 2022. Over the next decade Inspiring Impact will focus on encouraging the adoption of shared approaches to measurement and on developing appropriate, affordable and accessible impact measurement data, tools and systems. The Cabinet Office is providing £100,000 to Inspiring Impact over three years, alongside support from Big Lottery Fund, The City of London, Deutsche Bank and the Diana, Princess of Wales Memorial Foundation.

Inspiring Impact is only at the beginning of its journey, but already the outcomes matrix and accompanying shared measurement frameworks are being used. If anything, their work lacks promotion and presentation, but it is excellent quality and the collaborative way this project is run encourages greater buy-in.

Applicability to Australia – RECOMMENDED INVOLVEMENT

This is an area where we can adopt many of the measurement frameworks almost without adjustment, except perhaps for Aboriginal programs, so a similar initiative would be duplicating work unnecessarily. There may be some benefit from supporting a few individuals to connect with the UK network, to disseminate and publicise materials in Australia and make any adjustments that might be necessary for the Australian context.

4.      The Social Value Act

Social Value Act

The Public Services (Social Value) Act 2012 states:

(1)    If a relevant authority proposes to procure or make arrangements for procuring the provision of services, or the provision of services together with the purchase or hire of goods or the carrying out of works,

(3)    The authority must consider—

(a)   how what is proposed to be procured might improve the economic, social and environmental well-being of the relevant area, and

(b)   how, in conducting the process of procurement, it might act with a view to securing that improvement.

The Social Value Act does not actually change the procurement laws that were in place previously, but it emphasises consideration of impact beyond cost and quality of service delivered. It has been widely supported by the social sector and has empowered and encouraged social sector organisations to demonstrate their social and environmental impact when responding to tenders. It encourages the inclusion of social value in cost-benefit analyses, an area of previous confusion.

Applicability to Australia – RECOMMENDED LEGISLATION

Australia is leading in this field with the emergence of social procurement. Social procurement includes social and environmental requirements as clauses in the tender or as selection criteria and thus is clearer and more proactive in pursuing social outcomes. There is, however, still a benefit in producing an equivalent of the social value act that makes it very clear to public servants and social programs that social value for money is important to government and a real part of economic consideration.

5.      Review of legal and regulatory barriers to social investment


The ‘Red Tape Challenge’ program aims to get rid of unnecessary regulation across government. The Red Tape Challenge on Social Investment was open for four months. It involved sector representatives, encouraging engagement with government and produced achievable actions that made a difference on the ground. Actions are detailed in this letter from the Minister for Civil Society and include simple, but effective steps such as “the FSA has provided a named contact to industry and other interested parties on matters relating to social investment” (p.1).

Applicability to Australia – RECOMMENDED

A similar process could engage the sector in conversations with government about how to improve the social investment opportunity. It is a cost-effective way to identify legal and regulatory barriers and anomalies and make easy, simple changes that produce a real impact.

6.      Tax incentives

The UK Treasury is currently undertaking a consultation on social investment tax relief. The consultation involved the release of a paper and a tax relief consultation working group comprising 22 sector representatives. This initiative was due, in part, to the comparative disadvantages for social investment against tax relief associated with investment in venture capital. The announcement of intention has been well received by the sector, but details of what the relief will involve are not yet decided.

Applicability to Australia – RECOMMENDED AS A REVIEW

Tax incentives for social investment in Australia would encourage growth in this area. There would be benefit in combining this work with a review of the tax implications for social investors, for example the implications of financial returns from social investment by a private ancillary fund (PAF). While the UK tax code is not the same as ours, there are useful ideas in the government’s consultation paper and in responses from the sector (e.g. Social Finance’s response).

7.      Social Impact Bonds and central government contribution to payments

SOF example

There are about 12 social impact bonds (SIBs) operating in the UK and several more in the pipeline. The Cabinet Office has established a £20m Social Outcomes Fund which, in addition to the Big Lottery Fund’s £40m Commissioning Better Outcomes fund, will ‘top up’ payments by government agencies procuring SIBs. Applications to the funds will close mid-2016.

The £60m available will be given to average about 20% of SIB outcome payments. This sets a short term (3 yr) expectation of over £300m worth of social outcomes commitments. At the rate of current applications, there is likely to be a huge shortfall in funding distributed. Significant investment has gone into supporting the pipeline of SIBs towards the funds, including additional support for commissioners from Social Finance and the Local Government Association and the Centre for Social Impact Bonds which has developed some resources, including an encyclopaedia for SIBs, the Social Impact Bond Knowledge Box.


There may be some benefit in some agencies of the Australian Government collaborating with state governments and paying a proportion of outcomes that represents federal benefit or savings. Rather than allocate a large pot of money, an in-principle statement would encourage SIB development, set parameters and allow funding to respond to need as it arises.

8.      Innovation funds for new preventative services

DWP example

The £30m Department of Work and Pensions Innovation Fund is often included in discussions on SIBs, but merits separate attention here. The fund was established to improve long-term employability for disadvantaged young people. DWP did not have a history of delivering preventative programs, so wanted to spur innovation and see what providers could do. They commissioned 10 programs across the UK (there’s one in Wales, one in Scotland and eight in England) with various arrangements for social investing. Unlike other SIBs, payments are made monthly on the basis of evidence presented by program managers and is not compared to a comparison/counterfactual before payment is made. At the end of the three years of funding there will be a large evaluation of 1100 young people who have participated in the programs and about 1700 who haven’t. This evaluation will be able to compare effect sizes of the different programs and also do some sub-group analysis.

The 10 programs funded by the Innovation Fund are diverse and interesting. This a huge achievement in a space where there was previously little government funding. Program managers report that the Innovation Fund is easy to work with and that the outcomes chosen seem to be the right ones. There is some criticism that the measurement related to payments is not based on a measured improvement against a comparison group, but the trade-off is that the transaction costs associated with the set up and administration of this Fund are far less than other SIBs. The final evaluation will also measure effect robustly, however there will be no financial reward or penalty based on this measurement. The strongest criticism of this suite of programs is that there is no commitment or stated intention to implement preventative programs long term based on the evidence collected.

Applicability to Australia – RECOMMENDED IF SITUATION ARISES

The approach taken by the Innovation Fund promotes innovation and evidence-building, but is only applicable in some situations. It is best suited to areas where a bucket of funding is available for services in a new area. It is a great solution when implementing programs in the absence of well-evidenced interventions – it provides strong local evidence and innovative approaches developed in situ for further scaling and development. Impact can be captured and maximised as part of a long-term strategy.

9.      A social investment wholesale bank – Big Society Capital


Big Society Capital draws its funds from unclaimed assets. In the UK, these resided with the banks. In Australia they return to the coffers of the Commonwealth but are not ring-fenced for any particular purpose. For this reason it would be difficult, although not impossible, to ring-fence these assets.

Big Society Capital was set up as a wholesale bank, providing funds to social investment finance intermediaries (SIFIs) that provide affordable finance to social organisations. It does not invest in the front line. Difficulties include:

  • The lack of places to keep the bulk of funds until they are invested i.e. Coop Bank? Capital markets?
  • The difficulty of achieving a 6% return in an emerging market
  • The relationship with and demands of the banks – see Merlin agreement
  • The mismatch between the size of the loan social organisations want and the size of investment it is cost-effective for SIFIs to make
  • That social finance can be more expensive and restrictive than commercial finance
  • The argument that early stage social enterprises need equity, not debt

For more insight see David Floyd’s analysis of Big Society Capital at two years and his February interview with Nick O’Donohoe.

Applicability to Australia – NOT RECOMMENDED

Social organisations in Australia appear to have a smaller appetite for debt and are more easily able to access grant-funding. There are also fewer SIFIs in Australia than in the UK. Loan finance is available through the SEDIF funds, but these suffered due to a lack of demand from investment-ready organisations. Big Society Capital hasn’t provided all debt. It has taken some equity stakes and in some cases has taken over organisations similar to a private equity firm. It has also invested in Social Impact Bonds.

Update June 2014 – the three SEDIF recipients have increased their volume and frequency of loans in 2014, such that demand for funds may soon outstrip supply. This may suggest a role for a wholesale social investment bank in Australia, although the constraints and interest rate required would need to be set appropriately for the Australian context.

10.  Funds for social ventures/enterprises

funds examples

All funds have struggled with a lack of demand for loan finance. The Bridges Fund was launched in August 2009 and has raised £12m. In its first three years of operation, however, it committed only a third of that. An early evaluation of the SEIF fund found that “A large majority of the fund was used as grants, raising questions over the demand for loan finance amongst social enterprises and charities in the health and social care sector.” A National Audit Office report states that the fund faced considerable underspend and had committed the majority of its funds as grants, rather than loans.

Applicability to Australia – NOT RECOMMENDED AT THIS STAGE

The major Australian Government initiative in the social investment space has been the establishment and matched funding of the Social Enterprise Development and Investment Funds (SEDIF). These have been well-received by the sector and have attracted international attention. However, each of these three funds has had some difficulty making loans due to a lack of demand. This seems to be consistent with experience in the UK and does not suggest a demand for further loan finance.


Cabinet Office (2012) Growing the social investment market: HMG social investment initiatives.

Local Currency: ‘A Direct Assault on Global Trade’

lemonade stand

While HSBC (advertising campaign featured on the right) tells us ‘In the future, even the smallest business will be multinational’, local currencies and the communities that use them are deliberately bucking the trend.

The idea of the local currency is that it can only be spent in local businesses, signalling a commitment to buy locally by the customer, the business and the supplier.

The local currency concept is not new, in fact the WIR bank in Switzerland has been operating since 1934 as a way of providing Swiss businesses with credit and stability, using each other to increase sales and buying power. Annual sales in WIR Francs are now worth billions of pounds a year.

While not of the same scale, local currencies in the US and Europe are continuing to emerge with the belief that social, environmental and economic benefits will ensue.

Who has a local currency?

  • Prien am Chiemsee ‘Chiemgauer’, Bavaria, Germany ‘Chiemgauer’ 2003 begun by an economics teacher and his students, it is growing at 100% per year – expires every three months to encourage circulation.
  • Berkshire ‘Berkshares’, Massachusetts, 2006 ‘envisions a diverse and resilient regional economy that supports and prioritizes responsible production and consumption’
  • Totnes Pound, UK, 2006 ‘Local money helps us think about our local economy, enquiring where our money goes once we spend it and finding ways to keep it from leaking out.’
  • Lewes Pound, UK, 2008 ‘Making Money work for Lewes’
  • Brixton Pound, UK, 2009 now available in electronic form with the ability to pay by text
  • Villeneuve ‘Abeille‘, France, 2010 declines in value over time to encourage spending
  • Pézenas ‘Occitan‘, Languedoc-Roussillon, France, 2010 ‘resiliance’
  • Bristol Pound, UK, 2012 ‘Bristol Pounds stick to Bristol’
  • Oxford Pound, UK, announced in 2013 to support local independent shops

This is not an exhaustive list, there are many more examples from across the world and throughout history!

Buy local

Local currencies are a concrete way of implementing ‘Buy Local’ ideology, which has seen increasing interest. Plymouth Council was one of a group of local organisations that committed to the procurement of local goods and services and reported boosting the local economy by millions of pounds. Across a network of 29 UK communities, Totally Locally emphasises the social benefits of their work: ‘Totally Locally is about people. Great people. People who care about what they do, what they grow, what they make. And people like you who care about what they buy and where they shop.’

San Fran local suppliers croppedLast week I was at an event where the digital currency bitcoins, was discussed. Bitcoins have a transaction log and are controlled by the bitcoin community. It is seeing advantages for particular purposes emerge, such as having evidence of a patent transaction for use if challenged in court. Someone in the audience lamented that electronic payments have removed the social aspect of financial transactions, with some pensioners really missing the physical collection of their pension cheque. Buying locally embraces social, environmental and economic goals in unison. This photo (taken by planwise founder Vincent Turner) from San Francisco shows what has become common in cafés there – a proud list of local suppliers on the wall. These suppliers are not only local but committed to their community and sustainable practices.

Where’s it heading?

Wider recognition and uptake of local currencies are reflected in:

Perhaps in the future all business won’t be multinational. Perhaps in the future we will see a strengthening of this emerging trend to reconnect finance to people and communities.

Something old or something new?

The social investment market is characterised by new organisations, new programmes, new models of financing, and new cohorts of service users. There is great value in demonstrating the social return of something new, but the risks associated are inherently greater. Investors may therefore require a higher financial return. Investors in innovation often receive valuable media attention, as new programmes are more newsworthy.

Some social programmes have been robustly evaluated as to their effect. These evaluations can cover applications of the programme in different places and to different intervention groups. The culture of developing, defining and trade-marking a social programme such that it has training and resources and can be delivered across contexts is more apparent in the US. With these types of programmes, investors are likely to perceive less risk, as they have data relating to previous effect sizes and the proportion of programmes that achieved them. They also have the organisation that developed the programme providing training, resources and support to the service providers.

The words ‘evidence’ and ‘innovation’ are both commonly used by all parties when justifying involvement in a social impact bond (SIB). In all SIBs, there is likely to be innovation around the partnerships that are formed, the way services are delivered and the people services are delivered to, and the basis on which Government pays – outcomes, There is also likely to be more evidence gathered about the outcomes of a programme than has previously been collected or made publicly available. SIBs are paid for on an outcomes basis, which means that service delivery organisations are free as to how services are delivered. But this is not always the case.

The Peterborough SIB collects performance management data and uses this to improve its services as the SIB progresses. Contracts are renegotiated with service providers annually and changed to better deliver the outcome of reduced reoffending. The NY City SIB for young offenders on Rikers Island is developing a new programme, but its primary component is Moral Reconation Therapy, a model of Cognitive Behavioural Therapy, that has been well researched and has an evidence base. The Essex SIB will deliver Multi-Systemic Therapy and Manchester City Council is looking to provide Multi-dimensional Treatment Foster Care. These programmes also have an evidence base.

So can you have a greater impact if your SIB delivers a programme that is already well-evidenced or can you have a greater impact if your SIB delivers something completely new?

In The Good Investor, Hornsby and Blumberg (2013) argue that potential social return is greater for programmes that have yet to establish an evidence base.

“Investments that lie on the higher sections of the curve are likely to be increasingly characterised by less well tested, less evidenced approaches, but which are innovative, and present the potential for high levels of impact generation (e.g. through effecting a game-change in the prevailing dynamics). Investments that lie on the lower sections of the curve are more likely to be in established approaches and fields of operation, where investors know more what they are going to get, but the impact that stands to be generated is comparatively modest”.

Good Investor

NESTA conceptualises the impact objectives of its funds in its report Standards of Evidence for Impact Investing using the diagram below. They aim to invest in early-stage innovations where both impact risk and potential impact is high, and then reduce impact risk as they scale effective programmes by increasing available evidence (Puttick and Ludlow, 2012, p.7).


It should be noted that well-evidenced programs are not spread evenly across areas of social need, thus reliance on evidence – or programme outcomes that are easily or cheaply evidenced – could create a bias towards investment in certain social issues.

In their 2012 report, From potential to action: Bringing social impact bonds to the US, McKinsey gives three primary benefits of SIBs, one of which is:

“SIBs are a tool to scale proven social interventions. SIBs could fill a critical void: other than market-based approaches, a structured and replicable model for scaling proven solutions has not existed previously. SIBs can give structure to the critical handoff between philanthropy (the risk capital of social innovation) and government (the scale-up capital of social innovation) to bring evidence-based interventions to more people. SIBs can do this by aligning incentives among a broad set of stakeholders and shifting financial risk away from government” (p.7).

The McKinsey perspective may be reflective of a culture of evaluating and comparing social programmes in the US, such that it is possible to chose from a range of proven social interventions to bring to scale. The role of philanthropy as the ‘risk capital of social innovation’ may also apply more to the US than other jurisdictions. The cultural and political contexts of SIB development seem to be driving different assumptions concerning the impact of evidence-based versus innovation models. There may emerge an overwhelming conclusion as to which is the more attractive for a SIB model, but it may be more appropriate for each SIB to respond the objectives of its stakeholders.

Crowd funders: investors, philanthropists or consumers?

kickstarter I was interested to see the article Collusion pen for iPad ‘unusable’ in the Sydney Morning Herald the other day. The article detailed the disappointment of backers of the Collusion pen app who’d pledged support for the project on Kickstarter, one of the most popular and successful crowd funding internet sites.

On Kickstarter, individuals pledge sums of money to projects they’d like to see developed. The pledge is essentially a donation, but many projects offer a reward to those pledging a certain amount of money. This reward is often the product of the project, in this case, the Collusion pen and app.

Kickstarter’s website says “Backing a project is more than just giving someone money, it’s supporting their dream to create something that they want to see exist in the world.” Crowd funding is often included in the social investment spectrum. It’s a way to enable innovative ideas and organisations to get off the ground. But like all start-ups, risks are high. These are people who by definition have not done this thing before. There are no guarantees that they’ll be able to make their vision a reality, and there is no recourse for their investors if they don’t.

The Sydney Morning Herald article portrays the Collusion pen as a product of purchase, with the backers featured coming across like angry consumers betrayed by false advertising. The article refers to an ‘investigation’ by CNN Money Why 84% of Kickstarter’s top projects shipped late that shows many Kickstarter projects are not completed within their deadlines. I’d be surprised if they were! If you add optimism bias to the development of a new product, many first-time project managers and the steep learning curve of new regulatory environments then it’s not surprising that those posting their projects on Kickstarter fail to underestimate the timescales and risks.

The article also refers to ASIC guidance on crowd funding. I’m pleased to see that this has been developed, but really disappointed that it only contains warnings for investors and details of custodial sanctions for people breaking the law. Likewise, the Australian Government’s Money Smart advice on Crowd Funding focusses only on protecting the investor/donor.

I’d like to see the Australian Government develop guidance for those seeking crowd funding for their projects too. Simple, reliable guidance on these pages would help legitimate projects to negotiate their legal requirements and promote best practice. Creating an environment in which innovation is supported and encouraged is vital to our economy. Kickstarter investors are supporting a vision, not simply buying a product. Although, as a quote in the CNN article reminds us “Kickstarter is not a store, but boy, it sure feels like a store to the people who back it.”