Five years ago, Commonwealth Bank partnered with the NSW Government, the Benevolent Society and Westpac in an innovative funding structure to keep at-risk families together in NSW.
The instrument was a social benefit bond – a financial arrangement that allows government, service providers and private investors to fund and run programs to address challenging social issues.
The bond became one of the first social benefit bonds in Australia. It raised a $10 million pool to establish the Resilient Families program aimed at keeping families together and reducing the need for children to be placed into foster care.
Last month, the bond become the first Australian social benefit bond to reach maturity and the outcomes it has achieved for the community, government and investors have proven the success of this innovative approach.
The funding works like this: investors buy the bonds; this investment supplies service providers with upfront capital to deliver programs to measurably improve the lives of some of society’s most needy – without having to rely on donations or government funding.
Because it only pays on successful outcomes of the program, the government ensures better value for the taxpayer dollar. Based on the cost savings of the successful program, government repays investors with interest. The yield on the bond depends on how successful the program is in delivering outcomes.
“The expertise and collaboration required in developing and delivering this type of funding mechanism was unlike anything the sector had seen before,” Commonwealth Bank Executive Director Debt Capital Market Origination Rob Kenna said.
Family outcomes
Right now, about 50,000 Australian children are living in out-of-home care and away from their natural families.
Matt Gardiner, Executive Director of Child and Family Services for the Benevolent Society, said: “Although recent changes to the system have seen improvements, the number of children entering out-of-home care today is three times the rate it was 20 years ago.
“Too many children are removed from their families because their parents do not have the support and opportunity to learn the parenting skills they require,” he added.
“Part of the Resilient Families program is being able to help address some of the complex underlying issues that impact a child’s safety and wellbeing such as poverty, housing security, mental illness, drug and alcohol abuse, relationship breakdowns and domestic violence,” he said.
“We knew if we wanted to make a bigger difference in this space then we needed to change both our funding and program approach – we needed to innovate.
“We saw the opportunity like the social benefit bond, and working with companies like Commonwealth Bank, as a means to push us to work in a different way and demonstrate to our sector that measurable results are the future of the social services.”
Through the social benefit bond, The Benevolent Society was able to deliver Resilient Families – an intensive, early intervention, in-home family support program. More than 300 families were referred to the program over the past five years.
The program's performance was assessed against a control group of families that received a ‘business-as-usual’ response from the NSW Department of Family and Community Services.
The result was highly effective – for families who were referred to the program, there was a 32 per cent less likelihood of the children moving into care.
“Through the program, we saw one-third fewer children entering out-of-home care,” Mr Gardiner said.
“This makes Resilient Families among the strongest performing family preservation services in the world – it’s the first time we’ve had tangible evidence that families can be supported to remain together safely, at a much higher rate than is currently achieved.”
Investor results
For investors, this was the first social benefit bond in Australia to be arranged by a consortium consisting of two major domestic Australian banks.
“It was a unique set up. It was the first bank-arranged issue of a social benefit bond in Australia so it is structured more like an actual bond, with capital protection measures to manage investor risk and rewards,” said Commonwealth Bank’s Mr Kenna.
“We wanted to make the bond attractive to as many investors as possible and part of the solution was to offer different risk/return profiles.”
The scheme had two classes of bonds – one where principal was protected with lower returns, and the other where principal was at-risk but potential returns were much higher.
“We split the $10 million bond between two tranches, a $7.5 million capital protected notes and $2.5 million of capital exposed notes,” Mr Kenna said.
The investment community enthusiastically supported the bond, with a broad group of private investors – both institutional accounts and individual sophisticated investors.
At maturity, all investors received the principal committed to the bond plus a compounded return of 6 per cent on the Protected Class and 10.5 per cent on the Exposed Class.
“The results demonstrate how private investors can commit funding to a social program that has clear measurable outcomes and earn a return if the program is successful – it’s yet another positive validation of the concept of impact investing via a bond,” Mr Kenna said.
The future of social bonds
Momentum for social benefit bonds is on the rise. There’s a growing number of investors that not only want to make returns, but want their investment to have a positive impact in society.
“The strong performance of the bond demonstrates the balanced and sustainable outcomes that can be achieved for investors, government and the community,” Mr Kenna said.
“These are obviously major, long-term societal challenges, but the success of the Resilient Families program is evidence of the effectiveness of this funding approach.
“Government spending and philanthropic donations aren’t always sufficient to tackle the variety of social problems facing many Australians.
“Social benefit bonds could potentially fill a significant funding gap. The results of the Benevolent Society bond show the benefits of working collaboratively with industry, government and the private sector.”
Read more about the Benevolent Society, the bond and the final report on the results of the Resilient Families program.