14 August 2014

SOCIAL IMPACT BONDS - JUST WHAT SA NEEDS OR THE EMPEROR’S NEW CLOTHES?

The Bertha Centre for Social Innovation and Entrepreneurship at UCT’s Graduate School of Business is researching the applicability of Social Impact Bonds (SIBs) to South Africa in a project that is partly funded by the National Treasury with a specific focus on Small Business Development and job creation.  The Bertha Centre recently held an information session with interested stakeholders in the Cape Town and Johannesburg. 

What is a Social Impact Bond?

Image www.gov.uk


According to Ryan Short, a director of Genesis Analytics, it is “a contract in which the government agrees to pay private investors for securing improved social outcomes. Socially minded investors provide up-front working capital to NGOs, charities, social enterprises and private service providers, to fund their programmes and test innovative interventions. If the programme achieves agreed targets, investors receive a variable return on investment from the government — the more successful the programme, the higher the return. If the programme fails, investors do not recover the investment.”
In short, the benefit to government and governmental organisations is that only pays if the agreed outcome occurs and the risk of the project transferred to the initial investor(s).  It sounds pretty good for government.
Source: http://emmatomkinson.com/ as of February 2014

The first SIB was issued with much fanfare in 2010 in the United Kingdom and was hailed as the “future in non-profit financing”.  Since then 17 have been launched in the UK and range from North America to Australia and even the Mocambique Ministry of Health is working on one.


WHY NOT JUST GET A REGULAR LOAN?
According to Aunnie Patton from the Bertha Centre 
“In one word: incentives. In other words…
  1.  DATA: Since outcome-based payments rely on outcomes measurement, service providers, investors and governments are incentivised to create realistic, rigorous metrics for assessing the intervention. Bonus: often this data can lead to benchmarks for similar government programmes to come.
  2. DILIGENCE: Government in essence outsources the due diligence of the service provider to private investors, who risk losing their capital if the provider fails (hence, again, an incentive).
  3. RISK: Investors are used to putting risk capital on the line for a reward commiserate with that risk. Governments are used to spending capital to provide public services. But SIBs shift the risk of a new approach, allowing governments to pay only when outcomes are delivered and investors to be rewarded for taking on the risk of the pilot (once again, incentives all around).
  4. COORDINATION: Often the structure of a SIB requires multiple service providers to coordinate their activities into a “total intervention”. But individual service providers are only rewarded if this total intervention works (one last time, an incentive for all).[1]”

Are these points unique to SIB’s or are we just allocating an additional layer of administrative cost to an already overburdened non-governmental sector meaning that even LESS money gets to the beneficiaries?

Is a SIB Necessary? Let us look at the benefits raised above:
1.       DATA Collection –Plenty of research is already done on the effectiveness of projects and outcomes.  The Jobs Fund has discontinued significant funding from organisations that do not reach their job creation targets per their original contracts without a SIB in place.
2.       DILIGENCE – Here Ms Patton is correct in that the diligence of the provider is outsourced.  It is a normal part of contracting arrangements for NGO’s.
3.       RISK – This is discussed further below, but in essence there is very little risk being transferred.
4.       COORDINATION – This is perfectly doable in the normal course of project funding and should be BAU.

ARE WE TRANSFERRING RISK?
Looking through the list of investors it is telling that there are very few new names and at least 3 of the SIB’s in the UK are funded by the Government itself[2] and as of June 2014 there is no mix of government and non-government funding in UK SIB’s so the much hoped for private-public partnership does not seem to be bearing out.  In addition most of the non-governmental funders are philanthropic organisations, organisations with a government mandate for social investment or foundations or corporates who would be spending the funds on similar projects as part of their sustainability objectives.  Previously these organisations provided funding with no guarantee of return i.e. they took on the risk.  The list of parties showing interest in a South African SIB does not appear any different.   Goldman Sacs appears to be an exception to the rule, but in addition to receiving a 22% return on one of their investments (the average return is 6-8%) they have obtained a guarantee for 75% of their exposure to one project and are the preferred creditor in another as well in what one article called “part of their image remake program after 2008”[3].

While there could be a transfer of risk SIB’s do not appear to have not been effective so far in bringing new money to the problem and with an added layer of costs (financial intermediary, administration, co-ordination), excluding the return the effect is SIB’s are reducing the funds available to the final recipient.  It is also unlikely that private investors are going to get involved in projects that have no track record so the risk is related to implementation or specific circumstances rather than a complete unknown.  Is that worth the additional cost layer?  Apparently there has been “millions of pounds worth of private funding as a result” of these instruments according to Bertha Centre’s Dr Susan de Witt, but these numbers are not available outside of academia and it is subjective as to whether this is additional funding beyond “normal” social corporate responsibility levels.

The Bertha Centre is currently calling for a 30% tax relief for social investment in addition to current donations tax exemptions and BEE ranking benefits.  In the case of a SIB this effectively amounts to a 30% surcharge on the cost to the fiscus on a “pay for results” investment.

There is no doubt that outcomes based project evaluation is lacking and even basic monitoring and evaluation beyond how the funds are spent, but the answer is not to create another layer of cost.  The cost effective solution is to put together a framework of monitoring and evaluation for all projects and ensure that there are sufficient trained staff that this is BAU for all projects and organisation and not just those that are lucky enough to find a 3rd party funder willing to take the risk on them.

For a more balanced review of SIB’s in South Africa I would recommend reading “Thinking About Social Impact Bonds in the South African Context (lessons from the United Kingdom)[4]” published by Cornerstone Economics which presents reasons for and against a local SIB as well as detailed analyses of 3 of the projects in the United Kingdom for further reading on the topic.


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