By Rebecca Thurlow
SYDNEY--Plans by Australian state governments to save money by
keeping people out of jails, hospitals and foster care are creating
an opportunity for yield-hungry investors.
The states are increasingly turning to a new type of
debt--dubbed social-impact bonds--which are tied to programs aimed
at saving billions of dollars in dealing with issues caused by
criminality, family breakups and other major social problems.
Australia is the first country in the Asia-Pacific region to tap
bond markets for social-welfare programs. It works like this:
Investors buy the bonds at a certain price and the government uses
the cash to pay for social programs run by local charities and
community groups. The bondholders are rewarded if the project's
goals are met.
It could mean a yield of as high as 12% in a given year,
compared with as little as 2.3% for 10-year Australian government
bonds currently. Governments pay the coupon, as well as repaying
the principal when the bond matures.
Successful results would include things like lower reoffending
rates for ex-prisoners, reduced homelessness, and better
self-management of chronic health problems--reducing the need for
foster care, hospital beds and bigger prisons. Governments can use
some savings to pay the return to investors and still come out in
front.
New South Wales will this month seek proposals from
nongovernment organizations as it considers innovative funding
schemes for welfare programs, including social-impact bonds.
Australia's most populous state said it was encouraged by two
recent programs that helped raise 17 million Australian dollars
(US$13 million) and reduced the number of children needing foster
care.
It is a boon for yield-starved global investors desperate to
discover pockets of value in an ultra-low-interest-rate world. Both
of New South Wales' trial offers were oversubscribed and attracted
high-net-worth trusts and individuals, as well as pension
funds.
Australia's first social-impact bond, known as Newpin, was
launched in 2013 and returned 7.5% in its first year. "These things
feel like they are a fabulous, innovative creation whose time has
come," said Gary Brader, chief investment officer at QBE, an
insurance company that has already allocated US$100 million to
social-impact bonds globally.
In the U.S. and Europe, the market is also in its infancy.
Social bonds started life in the U.K. in 2010, and about three
years later New York City launched the first U.S. social-impact
bond to reduce reoffending rates among Rikers Island prisoners.
Several U.S. state and local governments have since launched
pilot schemes. In February, Portugal launched a bond to help fund a
school program to teach computer coding, mirroring similar schemes
in Belgium, the Netherlands and Germany.
"Most of what state government does is really waiting at the
bottom off the cliff catching people as they fall," said Jack
Snelling, health minister for South Australia, which is about to
launch its first social-bond test program. "We really don't invest
enough to stop people falling off."
The state is assessing everything from reducing homelessness to
lowering the number of Borderline Personality Disorder sufferers
needing hospital treatment as it prepares for its first social bond
trial.
Governments understand that they can save money through these
kind of early intervention programs. Foster care is more expensive
than a parental support program, for instance. But shifting budget
funds away from crisis management is difficult--getting the private
sector involved solves the problem of sourcing the extra upfront
capital.
Social impact bonds, also known as pay for success bonds, can
also be a more efficient way of delivering services as they only
pay if the service actually works. And whereas traditional
procurement contracts specify every step of an intervention, social
impact bond contracts, by paying for outcomes, also leave room for
innovation that can drive up the quality of outcomes and reduce
costs.
Many local fund managers are delighted by the new investment
trend. "Bring it on," said Anthony Rodwell-Ball, chief investment
officer at NGS Super, which invested in the A$7 million Newpin
bond. "We'd like to see more opportunities."
Mr. Rodwell-Ball said he was evaluating a social-bond proposal
aimed at helping young South Australians find jobs.
The Newpin bond funded the expansion of a scheme run by
UnitingCare Australia for children facing violence or neglect at
home. The program helped restore 28 children to the care of their
parents by creating safer family environments, and prevented 10
from at-risk homes from having to enter care.
One person who benefited from this program was Sarah (who asked
for her surname not to be mentioned), whose two young children were
placed in foster care to protect them from the violence of her
then-partner. The 29-year-old from Sydney's western suburbs said
Newpin gave her the emotional support and guidance needed to
establish a stable life without her abusive partner. Her children
were returned to her care in December following a 15-month
separation.
"Newpin rebuilds your life and your family from the ground up,"
she said. "If I hadn't have come here and got all the support I
needed, I wouldn't have my children back."
Investors can't ignore the significant amount of risk they
shoulder when it comes to social programs tied to targets exposed
to so many variables, such as people's ability to recover from
serious addictions. After all, if a program doesn't deliver on its
goals, bondholders may not receive a payout or might even incur a
loss on the principal.
Still, investors like QBE's Mr. Brader believe the size and
number of social-impact bonds will only get bigger as investors
look to diversify their portfolios to hedge against the performance
of other asset classes amid economic uncertainty.
"Hopefully, it's the calm before the storm," he said. "There is
clearly a lot of interest in this space."
Write to Rebecca Thurlow at rebecca.thurlow@wsj.com
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