Elyse Sainty, director in the Impact Investing team and outcomes contracting advocate, spoke with Patrick Flynn, director of Public Affairs, to share her insights after 10 years leading SVA’s work in social impact bonds (SIBs). Part 1.

In part 1 of this conversation, Elyse, one of the most experienced SIB practitioners in the country, explains what SIBs are, reflects on the initial SIBs and explores why the various parties get involved.

In part 2, Elyse reflects on the role of data and opportunities for data analysis that outcomes contracts provide, the lessons learnt, how state and federal governments can grow the benefits of this work, as well as what the future holds more broadly for outcomes contracting.

To hear the full conversation, click on the audio above.

What are SIBs?

Patrick Flynn: Can you give us the layman’s version of what a social impact bond is?

Elyse Sainty: At its core, a social impact bond or an outcomes contract starts with somebody, generally a government, who wants to commission a program that’s going to create change. More usually when they fund activities or services they might attach payments to outputs, such as how many people were served, or how many people finished a course; activities like that.

The critical difference with an outcomes contract is it’s more about the destination, not the journey, and attaching payments to the outcomes generated.

Most nonprofit organisations who are running these services can’t afford to wait around to find out whether they’re going to get paid for the work that they did. So the social impact bond component is that an investor will provide capital upfront to fund the work while we wait to measure those outcomes and see what level of impact it has. And if it goes well, then the investor would be repaid their capital. If it doesn’t go so well, they might not be. So they’re taking performance risk. They’re also effectively providing bridging finance for the work to be done before the payment comes.

In a nutshell, an outcomes contract is a deferred payment that’s based on the level of performance of a program in creating social change.

For more on this listen to podcast, 4:47-7:09.

Patrick: What’s the benefit to governments?

Elyse: Governments are interested in this concept partly because they are such large commissioners of, and funders of, services. A lot of the work that’s done ultimately is funded by government. They have very large amounts expended on programs, and they want to make sure that they’re getting bang for buck, for all our taxpayer money. They are particularly interested because they have very large expenditure items in things like health, justice and child protection, and a lot of the expenditure in those systems is on fixing problems and, as the expression goes, catching people at the bottom of the cliff.

They are very interested in seeing if more effective work can be done in that preventative space. So it started with the question ‘how do we generate savings?’ And the concept was that they pay for the services out of the savings that are generated in other cost centers.

Patrick: Where did the concept start?

Elyse: It came out of England. We can credit some of the early thinking in this space to the UK. The very first social impact bond there was the famous Peterborough Social Impact Bond, which was focused on trying to keep people from re-offending, keeping people out of prison. That was the early application of the concept of measuring change in a robust way and then making a payment based on the level of impact.

“So I’ve grappled with: how do you find an outcome metric that you measure in the early years that is a good predictor of something that happens decades down the track.”

It initiated this really experimental phase over the last decade, starting in the UK, but then it came to Australia, firstly in New South Wales. We’ve now seen that experimental concept being applied in a lot of different ways, in a lot of different jurisdictions.

There are challenges in its application because some of the best preventative work is done many, many years before the problem arises. And it would be a very patient investor that would wait 20 years to measure an outcome from an intervention in order to be repaid.

For example it does get harder when we’re in a space like a child’s early years. What happens in those first few years can really set a child up for a lot of possible futures. But you can’t wait around to see if they have a job, or have gone to prison, when they’re 20 years old. So I’ve grappled with: how do you find an outcome metric that you measure in the early years that is a good predictor of something that happens decades down the track.

It’s been amazing to see over the last decade the growth in the linkage of data sets, and longitudinal studies. We don’t do enough of that, even in the social impact bond space – having the patience to follow individuals that have been involved in an intervention for those 10 or 20 years.

For more on better use of data and understanding of causation listen to the podcast: 11:38-16:39.

Beginning of SIBs in Australia

Patrick: Let’s go back to the beginning of your journey at SVA, but also the beginning of the social impact benefit bond market in Australia. Can you tell us about what was happening at that time with that first batch of bonds?

Elyse: One of the interesting things is that there was bipartisan interest right from the get go. It initiated in NSW under a Labor government and then there was a transition to a Liberal government. Famously the story is that Mike Baird went through the pile of briefs as incoming Treasurer and went, ‘Oh, that looks interesting. We’ll definitely keep that thing going.’

There were three proponents that were selected in that very first round. One became the Newpin bond, one was the Benevolent Society’s Resilient Families Program, and there was a third with Mission Australia in the recidivism space, with which we were also involved.

There were early signs of that experimentation, of trying several things – it wasn’t just in the child protection space, it was in justice as well. And having different programs with different metrics and different financing structures in all of them; we were creating as we went along.

We had to figure out how these payments and measurements would work. I do remember some of those early sessions where we just did not have the data to start with to know what the baseline was that we were trying to change. So lots and lots of very collaborative feeling of our way occurred.

The contracts did shake up the government-service provider relationship. The government was now much more accountable for data and referrals, rather than just being the contracting party saying, ‘we’ll pay you for doing this work’.

It was new for every state that started this journey, and for everyone that was involved. Even though you can read about something that others have done, it never quite applies to your exact circumstance.

For more on this, listen to the podcast: 21:44-24:55

Patrick: Not all of the first round of social impact bonds in Australia were successful, particularly there were a lot of challenges around the justice one. What did we learn from some of those early stumbles?

Elyse: The things that don’t work should be more talked about because there’s so much richness of learning in there.

I’d even go back to the proposal phase. There’s a lot of work that organisations do just to put in a proposal for one of these contracts, because they have to think through not just the program design, but then the metrics and the logic – and that is expensive.

One of my hopes is that the proposal phase gets easier because there’s better data or there’s better standardisation, or we don’t put the onus on the proponents to think things up that should be determined by government beforehand.

“… a program like this needs to fit into the commissioning department’s priorities.”

So in addition to the Newpin transaction, SVA actually submitted another proposal at that same time with a consortium of organisations in the justice space, and that didn’t get up.

One that did was a proposal from Mission Australia also in the recidivism space, which we became involved in once the development work commenced. We all went through a year’s work on that project and it didn’t come out the other end as a contract, but it did highlight challenges.

The challenge for that project was not data; we had great data. The challenge there was probably a more fundamental one, which is that a program like this needs to fit into the commissioning department’s priorities. Once it has moved past Treasury, or whatever central agency is helping to create it and it’s live, it needs to be meaningful and contribute to the policy priorities of the department. That wasn’t the case with that recidivism project, because there were a lot of other things that were going on in that sector at the time.

For more on this, listen to the podcast: 24:55-29:03.

Why do service providers want to be funded by a SIB?

Patrick: SVA gets approached regularly by services wanting to do a SIB. Why do you think that is?

Elyse: There’s an allure in the fact that SIBs are generally large scale and long term. Longer term funding cycles is one of the things that I hope translates out from these contracts to broader application. It allows organisations to set up a program properly, allows it to settle into a rhythm and gives staff some certainty of tenure – all those things have come with programs funded by SIBs.

And organisations are really interested in doing something where they can properly measure their impact.

However often because they haven’t been involved in a SIB before, there’s a lack of understanding of how complex that process can be. So I do spend a fair amount of time telling people why they don’t need a social impact bond, or why it’s not the right mechanism for them.

I often come back to the critical question: why an outcomes contract? Why do you want to be paid this way? Unless they are really clear on the benefits of this approach, then their interest might be more narrowly about it being a potential source of funding.

Patrick: And what do you think is the benefit of being paid that way?

Elyse: I think it is that freedom to focus on getting the best outcomes for the people that you serve rather than delivering a project at the lowest cost according to a particular set of criteria. So it flips the focus of the work to: do what it takes for the outcomes. It means that you need to be focused on working with everyone that is going to be measured and not just the people who stay engaged.

That’s very appealing for a lot of organisations who really want to increase their impact.

SIB investors and private capital

Patrick: Who was investing in this at the start?

Elyse: At the start, and all the way through, there has been a wide range of different investors. SVA has had more than 200 investors that have invested in our eight, soon to be nine, social impact bonds. They range from high-net-worth individuals who have a real passion for using their money to generate impact as well as returns, all the way through to large financial institutions, and public offer superannuation funds. A lot of trusts and foundations that have a philanthropic granting purpose are looking for a double-up bang for their buck by investing the corpus of their fund into something that creates impact as well. So it’s quite a diverse investor base who have different needs and different risk appetites.

Patrick: Why do you think they go to the trouble of investing in what is a pretty unusual kind of investment?

Elyse: I think they’re quite sophisticated. They understand what the purpose of this approach is. They like that they can contribute to meaningful change and that there is a path to creating broader impact at scale through building the evidence base, and the potential implications for the broader policy setting.

And if you could get a decent return and generate something positive for the world – why not?

Patrick: What do you think is the benefit of having private capital involved in these kinds of instruments? And when should it and shouldn’t it be involved?

Elyse: If you’ve got an outcomes contract, private capital can be the difference between a project happening or not happening because someone has to take the performance risk. So fundamentally with an outcomes contract, the government is saying we’re protecting taxpayers from that performance risk, and we’re only going to pay you if it works.

Some non-profit organisations can absorb that risk and get paid less than it costs them to do the work if it doesn’t produce results. But a lot can’t. And it would put at risk their broader operations and their existence if it was big enough. It’s very risky for a sector that doesn’t have deep capital reserves and resilience. If you’re living on the edge and if you layer in an outcomes contract, that could tip you over the edge.

Someone has to take that performance risk. So that’s where the investor capital comes in. And they’re saying, if it doesn’t work, we will bear the pain. I think it is reasonable that if you’re effectively providing insurance, then there is a premium that’s paid or return that’s generated for that service.

In some circumstances, philanthropy could fund it and take the risk that way. There is a great role for philanthropic money to help, particularly with funding more experimental programs, but you are not going to be able to do that consistently or at large scale. Involving capital that has a return on it creates the opportunity for many more and larger experiments.

Patrick: Do you have a view on when private capital should and shouldn’t be involved in this kind of thing?

Elyse: We always size the capital need based on the risk appetite; understanding what the risk mix is. So, firstly, how much risk is the government still bearing – how much of the payments are on a fixed basis. And then we talk with the service provider about their ‘maximum tolerable loss’.

“So we quantify that maximum tolerable loss, and then the residual risk has to go to the investors.”

No one expects things to go badly. Everyone always comes into a project focusing on what we’re going to do, and the upside, and how good it’s going to be. But what if it really doesn’t work for whatever reasons, and in a few years’ time you haven’t been paid – when does the board start to have the really tough conversations?

So we quantify that maximum tolerable loss, and then the residual risk has to go to the investors. We work backwards from there to say, ‘what’s the amount of capital that is required to bear that risk?’

Role of the intermediary

Patrick: Possibly the most hidden and most misunderstood role is the intermediary, which is the role that SVA has played throughout. What is the role and why is it important?

Elyse: We bring it all together. One of the benefits of an organisation like SVA is that we can be an accumulator of knowledge and capability. So that we can take that knowledge from the work on one project to the next state, or the next program. We can share that history. We’re perhaps like bees going from flower to flower trying to spread that information and that capability.

We can also do things that are hard for service delivery organisations in particular, but also governments, in terms of the technical skill set: the analytic work and the financial structuring work.

We obviously need to deal with the capital side if there are investors involved. So we have a financial services license, we structure financial products and we raise capital. In that narrow sense, that part of the transaction is firmly on our ‘to do’ list.

But because SVA has deep immersion in the broader social sector, we can add value to the service providers we work with in some of the program logic and implementation work. And we understand the government perspective, what their requirements are in terms of making sure it works from their cost-benefit approach.

My hope is that the sector as a whole gets more experienced at this and organisations and governments can lean less on intermediaries.

Read part 2, here.

For more on this, listen to the podcast: 46:07-48:54.

For the full podcast, click below:

Elyse is passing the baton to Kirsten Armstrong, who has joined SVA in the role of Director Impact Investing to continue our outcomes contracting and social impact bond work. For more information, contact Kirsten at karmstrong@socialventures.com.au or Pat Bollen at pbollen@socialventures.com.au.