In Australia, there are around 600,000 not-for- profit organisations of all shapes and sizes working in areas ranging from advancing education to protecting the environment. Many want to increase their impact and become more effective for their not-for-profit purpose, whether it be through expanding their service offering, developing new programs or simply improving their long-term financial sustainability.
While governments and philanthropy provide significant sources of funding, not-for-profits are disadvantaged somewhat when compared to their for-profit cousins in being able to access capital investment. Whilst a for profit entity can simply raise equity to investors in exchange for a return on investment, NFPs have been relatively limited in offering similar arrangements due to their NFP status and structure.
The demand for social and environmental solutions in Australia is at record levels, and yet the competition for each charitable dollar and government grant that is on offer has never been so great.
The question arises – how can NFP organisations obtain access to the capital required in order to fulfil their growing not-for-profit purpose?
One potential answer to this conundrum for NFPs is a relatively new concept in Australia called Social Impact Bonds (‘SIBs’). SIBs are a type of ‘payment by outcomes’ funding mechanism that engages private capital. Typically, instead of a government paying directly for the provision of a social service, private investors provide capital to a service provider to achieve agreed-upon social outcomes. If these outcomes are achieved, the Government pays the upfront investment along with a financial return to the private investees.
The first SIB in Queensland was recently announced in March 2017 by the Queensland Government through Social Ventures Australia, to assist in reunifying children in out-of-home-care. This announcement was on the back of a similar SIB launched in New South Wales, which has been generating strong social and financial returns since its inception.
Investor returns on this SIB will be linked to the number of children successfully reunited with their families through the program, and the program is targeting returns of 7.5 per cent per annum.
The benefits of such a scheme are not only for the affected Queensland children, their families and the private investors, but the Queensland Government stand to benefit also. In 2014/15, the Queensland government spent an average of $50,000 on each child in out-of-home care. The multiplier effects for achieving the social and financial returns of each program are therefore clear to see – the more savings that are achieved by the Government, the more likelihood of further SIBs being introduced. The better returns for investors, the more demand for SIBs.
For-profit sector beware.
Whilst SIBs are in their relative infancy in Australia and in particular Queensland, they have been providing access to private capital for charities and NFPs in the UK and other European countries for a number of years. And not just large scale projects that would be out of reach for most of the estimated 600,000 NFPs in Australia – smaller bespoke SIB opportunities in which NFPs can all apply to obtain a slice of the pie.
With growing volatility a concern for many investors in the for-profit sector, the NFP sector may have just levelled the playing field in attracting private investment.
Steve Greene is an experienced chartered accountant with MGI specialising in auditing and consultancy services for the NFP sector.