Construction & Major Projects

Increase text sizeDecrease text sizeDefault text size

Focus: Social benefit bonds – their role in the funding challenge for social infrastructure and services

20 March 2015

In brief: With the recent Intergenerational Report having further highlighted the need to deliver social outcomes in an efficient way, Partners David Donnelly (view CV) and James Darcy (view CV) report on the potential role of social benefit bonds in providing social infrastructure and services.

How does it affect you?

  • The first social benefit bonds issued in Australia in 2013 have delivered successful outcomes for both the public and private sectors.
  • Governments are interested in capacity building in both the public and private sectors, in order to create a deeper market for social benefit bonds.
  • Social benefit bonds may prove a valuable addition to existing infrastructure projects where incumbent operators can provide social benefits that may save the public sector money.1

Social impact bonds – what are they?

A relatively new phenomenon to emerge in debt capital markets, social benefit bonds are an innovative funding mechanism to privately fund programs and initiatives aimed at improving social outcomes, usually for disadvantaged groups in society, through the reduced future cost of the poor social outcomes they replace.2 They encourage innovation through the sharing of risks associated with developing new approaches to the delivery of social services, and provide a mechanism to maximise the social and economic benefit of philanthropic investment.

Social benefit bonds (also known as 'pay for success bonds' or 'social impact bonds') are issued to raise funds from the private sector to run programs designed to address a specific social issue. Examples of social issues that have been targeted by social benefit bonds include:

  • improving cohesion in at-risk families;
  • reducing recidivism and improving reintegration of former prisoners;
  • social housing projects aimed at reducing the level of homelessness and rough sleeping; and
  • implementing preventative health programs.

The programs are usually run by not-for-profit groups experienced in the relevant sector, who bid to the government to issue the bonds and deliver the programs. Private sector operators – such as private medical providers or custodial services providers – are also well placed to provide services that tackle these issues and improve social outcomes for affected groups.

The programs have specific aims of delivering relatively improved outcomes as measured against existing benchmarks. The participating government department pays a return on the private investment, based on the success of the program in delivering the sought-after social outcomes, measured against the pre-determined benchmarks (and notionally funded by the reduction in government spending on the social issue that has been improved).

The risk-adjusted return on investment means that the private sector can achieve attractive returns on bonds that fund a successful program, while the government is funding results through future savings derived from a more efficient allocation of public sector resources and the reduced impact on society of the social issue targeted by the funding. A critical issue in structuring a social impact bond is setting benchmark levels (in terms of outcome and permanency), and establishing the tools for monitoring and reporting against those benchmarks, that appropriately reward the private sector investors while providing certainty around government savings.

How are they structured?

Social benefit bonds are usually fixed term bonds with variable rates of return, based on the success of the funded programs in achieving marginal improvements in a social outcome. In essence, if the relevant social program succeeds, in addition to the investor meeting its philanthropic objective, the investor receives a return on their investment (which they may reinvest in other philanthropic causes).

Australia's first social benefit bonds

Australia's first social benefit bonds were issued in 2013 under a trial program established by the New South Wales Government. Two bonds were issued, addressing early intervention to assist families at risk of breakdown, including minimising the need to put children in foster care (or to assist in returning them safely to the family).3

Arranged by consortia including Westpac Institutional Bank and the Commonwealth Bank of Australia, the bonds were structured to provide a return on the basis of agreed performance outcomes that reflected the degree of relative improvement delivered by the programs in assisting to preserve the relevant family units over a period of five to seven years. The two bonds were subscribed to a value of $17 million.

The Benevolent Society Social Benefit Bond comprises two tranches – a $7.5 million principal protected component with returns of up to 10 per cent, and a $2.5 million performance-based component with returns of up to 30 per cent, with the interest payable based on the funded program's success in keeping families together.

The Newpin Social Benefit Bond has a targeted return of 10–12 per cent per annum over the seven-year term of the bond (with, for example, returns varying from 7.5 per cent for a 60 per cent restoration rate of children to families, as approved by the NSW Children's Court, up to 15 per cent for achieving a 70 per cent restoration rate).4

While these bonds have generally been considered successful, both the public and private sectors acknowledge:

  • that additional capacity building and experience on both sides is necessary, in order to be able to more efficiently issue bonds of this nature; and
  • scalability and repeatability of transactions will be important, in order to reduce transaction costs and increase certainty in terms of threshold settings and government savings over time.

Additionally, measuring the outcomes of funded programs, and the government savings derived from those outcomes, is a key challenge to be addressed as the market for social benefit bonds develops. Ultimately, it is these measurements which drive the ultimate return on the bonds. Naturally, social endeavours for which there is an observable and direct link between the outcome and government savings are more appropriate for funding by way of a social benefit bond than those programs for which there is less certainty in quantifying outcomes in a monetary sense.

While a greater standardisation of risk allocation and documentation have been mooted as improvements necessary to facilitate a quicker and more efficient process for future bonds, participants in the process have also emphasised that a flexible and innovative approach to developing these bonds is necessary, to ensure that the benefits they are able to provide are not limited by an over-restrictive market precedent. In other jurisdictions, most notably the UK, work has been undertaken to develop template contracts for social benefit bonds, providing a starting point for the market. Such an approach potentially reduces the upfront cost of establishing a social benefit bond, while acknowledging the importance of tailoring for project specifics and not being only prescriptive.

Potential uses in social infrastructure projects

Currently, some social infrastructure projects incorporate the use of payment incentives to reward outcomes that can be characterised as creating a social benefit. For example, recent projects involving the private operation of a prison have incorporated incentives for the private operators to run programs designed to reduce recidivism and increase reintegration rates for former prisoners.

While these incentive mechanisms effectively reflect the risk and reward structure of social benefit bonds, they provide less certainty around the costs and benefits of the programs (as they are able to be subsidised by the remainder of the service offering), and they are not currently structured in a manner that is able to facilitate investment from philanthropic sources. These initiatives have been government led. There is possible scope for private sector bidders to incorporate a social benefit bond (or similar incentive mechanism) into a 'greenfields' social infrastructure project as an optional, 'value-added' component, or to deliver more of the 'scope ladder' without increasing the overall funding cost to government.

There is also room for innovation in existing service contracts. Examples include:

  • existing privately operated prisons – where a social impact bond could be added to fund programs to reduce recidivism and increase reintegration rates for the prison cohort; and
  • private medical facilities – where a social impact bond could fund health programs (particularly programs aimed at chronic illness) that are designed to reduce presentations and in-patient admissions at public hospitals.

Incorporating such initiatives into an operational project with an incumbent operator is also likely to involve less of a 'step change'.

The cohort (and potential for improved outcomes) should be well known and understood; the benchmarks clear; the measurement tools established; and the integration into the broader service offering more incremental.

Where such bonds are being attached to a debt-funded project, consideration will need to be given to the relationship between the financing structures and the security arrangements, but these issues are soluble.

At a new service or program level, it is possible to readily envisage service offerings that would:

  • improve social housing outcomes;
  • reduce the number of presentations by socially isolated and homeless people at hospital emergency rooms; and
  • improve access to education or opportunities for disadvantaged groups.

The NSW Government is again leading the way in this area, through the Premier's Innovation Initiative. The South Australian Government is following suit and is currently seeking expressions of interest in its own social benefit program, and one would expect that other Australian state governments would be considering the development of this market. These initiatives form part of the growing international development and awareness of this innovative funding structure for social good.

  1. The authors would like to acknowledge the contribution of Fiona Borrelli, General Counsel, Good Super in preparing this paper.
  2. Evaluation of the Joint Development Phase of the NSW Social Benefit Bonds Trial, KPMG, p.6.
  3. Social Ventures Australia website.
  4. About: Newpin Social Benefit Bond, Social Ventures Australia.

For further information, please contact:

Share or Save for later

What are these?


To save this publication on your smartphone or
tablet for off-line reading (eg on a plane flight),
we recommend Pocket.



You can leave a comment on this publication below. Please note, we are not able to provide specific legal advice in this forum. If you would like advice relating to this topic, contact one of the authors directly. Please do not include links to websites or your comment may not be published.

Comment Box is loading comments...