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TheTreasuryLangtonCrescentPARKESACT2600AUSTRALIA 27February,2017

CENTRE FOR SOCIAL IMPACT SUBMISSION TO TREASURY:

Social Impact Investing Discussion Paper TheCentreforSocialImpact(CSI)welcomestheopportunitytosubmititsviewsontheTreasuryDiscussionPaper,SocialImpactInvesting.

Inthissubmissionwerespondtoanumberofthequestionspresentedinthediscussionpaper.Specifically:

1.WhatdoyouseeasthemainbarrierstothegrowthofthesocialimpactinvestingmarketinAustralia?Howdothesebarriersdifferfromtheperspectiveofinvestors,serviceprovidersandintermediaries?

2.WhatdoyouseeasthefutureforsocialimpactinvestinginAustralia:forexample,canyouforeseethedevelopmentofnewstructuresforsocialimpactinvesting?

3.ArethereanyAustralianGovernmentlegislativeorregulatorybarriersconstrainingthegrowthofthesocialimpactinvestingmarket?

4.WhatdoyouseeastheroleoftheAustralianGovernmentindevelopingthesocialimpactinvestingmarket?

5&8.DoyouseedifferentrolesfordifferentlevelsofgovernmentintheAustraliansocialimpactinvestingmarket(forexample,theAustralianGovernmentasco-funderwithStateandTerritoryGovernments)continuingtotaketheleadindevelopingsocialimpactinvestments?ArethereopportunitiesfortheAustralianGovernmenttocollaboratewithStateandTerritoryGovernmentstodeveloporsupportjointsocialimpactinvestments?

6.Arethereareaswherefundingthroughasocialinvestmentframeworkmaygeneratemoreeffectiveandefficientpolicyoutcomesthandirectgrandfunding?

7.WhatAustralianGovernmentpolicyorservicedeliveryareasholdthemostpotentialforsocialimpactinvesting?Arethereanyspecificopportunitiesyouareawareof?

10.ArethereopportunitiesfortheAustralianGovernmenttoformdatasharingpartnershipswithStateandTerritoryGovernments,intermediariesand/orserviceproviders?

11.WeareseekingyourfeedbackonthefourproposedPrinciplesforsocialimpactinvesting.

23.Whatguidanceinparticularwouldprovideadesiredlevelofclarityonthefiduciarydutyofsuperannuationtrusteesonimpactinvesting?

24.Towhatextentarethecurrentarrangementsforprogramrelatedinvestmentsappropriate?

29.Wouldmakingamodelconstitutionforasocialenterpriseassistinreducingthecostsforindividualsintendingtoestablishanewentity?Whatotherstandardproductsorotherindustry-ledsolutionswouldassistinreducingthecostsforindividualsintendingtoestablishasocialenterprise?

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Who we are CSIisanacademicresearchandeducationcentre,workingtoachievebettersocialoutcomesforallAustralians.CSIisanindependent,notforprofitcollaborationworkingacrossthreeofAustralia’sleadinguniversities:UNSWSydney,SwinburneUniversityofTechnology,andTheUniversityofWesternAustralia.Weactasacatalystforsocialimpactbycreatingpositive,meaningfulandsustainablechangeforthebenefitofourcommunity,andparticularlyforthoseatdisadvantageasaresultofcomplex,longtermsystemicissues.Wecreateknowledgethroughouracademicandappliedresearch.Wefocusonknowledgeengagementthroughteachingandpublicengagementactivitieswiththeultimateaimofaffectingpolicyandpractice,improvingoutcomesforthoseinneed.

Background CSI’sresearchexaminesoursocialpurposeecosystem.Wetacklecomplexsocialproblemsandexaminehowpeople,organisations,groupsandsectorsworktorespondandareexpertsinmeasuringandreportinghow,whyandunderwhatcircumstancesoutcomesareachieved.Wehaveparticularexpertiseincrosssectorpartnerships,outcomesmeasurementanddifferentfundinginstrumentstoachievesocialchange.

OurresponsetothediscussionpaperdrawsonevidencefromrecentresearchthatCSIhasledorbeenapartnerto.Thesourcesdrawnoninclude:EvaluationoftheSocialEnterpriseDevelopmentandInvestmentFunds(SEDIF)(forDepartmentofEmployment);GivingAustralia2016(forDepartmentofSocialServices,sponsoredbyPrimeMinister’sCommunityBusinessPartnership);TheOpportunities,RisksandPossibilitiesofSocialImpactInvestmentforHousingAndHomelessness(forAustralianHousingandUrbanResearchInstitute(AHURI),forthcoming),andFindingAustralia’sSocialEnterpriseSector(FASES)2016(conductedwithSocialTraders).

Question 1: What do you see as the main barriers to the growth of the social impact investing market in Australia? How do these barriers differ from the perspective of investors, service providers and intermediaries?

SocialimpactinvestinginAustraliaisstillinitsearlystages.Therehasbeenconsiderablegrowthinsocialimpactinvestmentactivitysince2011,inpartcatalysedbytheSEDIF.However,thisgrowthcamefromaverylowbase(Barraket,Muiretal.2016).Someofthemainbarrierstothegrowthofsocialimpactinvestingareoutlinedbelow:

General

Thereissomeconfusionregardingthedefinitionandconceptualisationofsocialimpactinvestment.Forexample,theAHURIresearchfoundvariationsinlevelsofunderstandingbetweengroupsandtheSEDIFevaluationdemonstratedamisunderstandingthatsocialenterpriseandsocialimpactinvestmentaretwoendsofthesamemarket.Aresourcethatprovidesclarityandguidanceregardingthedefinitionandconstructsofsocialimpactinvestmentisimportantfordifferentactorsandpotentialactorsinthemarkettobetterunderstand,exploreandmakethemostofopportunities.

Investors

EvidencefromCSIresearchprojectsconfirmsthattherehasbeenrelativelylimitedtake-upby:

- Philanthropicinvestors,duetofactorssuchasalackofinvestmentopportunitiesanddeals;thebespokecharacterofthesedeals,associatedtransactioncostsandchallengesofduediligence;uncertaintyoverthedutiesoftrusteesforbelow-marketinvestments,andassociatedcautionamongtrustees.

- Institutionalinvestors,includingsuperannuationfunds,duetolackofdealsofsufficientscale,relativeduediligencecostsandtheneedformarket-relatedreturnsassociatedwithfiduciaryduties.

- Investorsalsofacebarriersrelatingtoriskandreturnlevelswithoutthesamescaleofguarantorsasoverseas(e.g.largephilanthropicorganisationswhoguaranteeacertainproportionofprivateinvestmentpotentiallyatbelowmarketreturnsthroughlayeredinvestments).

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Intermediaries

Intermediariesplayanimportantroleinsocialimpactinvesting.Firstly,theyactasbrokersbetweenthedemandandsupply-sideinvestors(includingcharitabletrusts),whomaylackfamiliaritywithsocialimpactinvestmentandoftenrequireintermediationtoidentifyinvestmentopportunitiesandfacilitatetransactions.Secondly,theyprovideintermediationbetweeninvestorsandserviceproviders.Thiscanassistserviceproviderstounderstandwhatisrequiredbyinvestorsandnavigatesocialimpactinvestmentopportunitiesandinitiatives.

CSIresearch,includingtheFASES2016report,confirmedthatexistingintermediariesarewell-regardedamongbothinvestorsandorganisationsseekingcapital.Nonetheless,Australiahasinsufficientnumbersofspecialistintermediariestosupportastrongsocialimpactinvestmentecosystem(Barraket,Masonetal.2016).InsufficientfoundationalinvestmentinSEDIFlimitedwhatwaspossibleinbuildingthemarket(Barraket,Muiretal.2016).

Demand-sideorganisations(includingserviceproviders)

Publicpolicytosupportmarketdevelopmenthasbeensupply-led;ithasnotalwaystakenadequateconsiderationoftheneedsofsocialimpactproviders,includingnotforprofitorganisations,socialenterprisesandsocialbusinesses.Therehavethusbeenlimitationsintheeffectivestructuringofsocialimpactinvesting.Importantly,therehasalsobeenalackofattentiontothedevelopmentofotherformsofsocialfinance–includingpatientcapital,communitycapital,blendedfinanceandguarantees–tobetterservethecapitalneedsofsomesocialbenefitproviders.Consequently,therehavebeendifficultiesmatchingsocialimpactinvestingsupplytodemand.

IntheUnitedKingdom(UK),widelyseenasthemostmaturesocialimpactinvestmentmarket(Nicholls2010),studieshavealsoquestionedtheabsorptivecapacityofdemand-sideorganisations.Lyons(2016),forexample,foundlowdemandfornon-traditionalformsofcapitalamongsocialenterprises.Similarly,theUKGovernment’sSocialInvestmentTaskforce(2014:29)found‘morecapitalavailablethandemand-sideorganisationscouldreasonablyabsorb’.

Muchofthecapacitybuildingactivityandattemptstoenhanceinvestmentreadinessareprivately-driveninAustralia(forexample,theImpactInvestmentReadyDiscoveryGrantsandImpactInvestmentReadinessFund).Governmentshouldconsideradoptingasupplyfocusedapproachtobuildingthecapacityofserviceproviderstoparticipateinthesocialimpactinvestmentmarket.

Question 2: What do you see as the future for social impact investing in Australia: for example, can you foresee the development of new structures for social impact investing? ConsolidationanduseofexistingformswillbeimportantforthefuturedevelopmentofsocialimpactinvestinginAustralia.Weexaminethisinregardtothethreemainformsofsocialimpactinvesting(DiscussionPaper:10):socialimpactinvestmentfunds,socialimpactbonds(SIBs),andsocialenterprises.

Socialimpactinvestmentfunds

SpecialistsocialimpactinvestmentfundsarerelativelyscarceinAustraliacomparedtotheUKandtheUnitedStates(US).Thosecurrentlyacceptinginvestmentarelargelyoperatedbyasmallnumberofspecialistintermediariesandaresmall-scaleandbespoke.Growthisstymiedbyregulatorybarrierswhichlimittheinvolvementofsuperannuationfundinvestorsand–toalesserextent–philanthropicinvestorsthroughcharitabletrustsincludingPrivateAncillaryFunds(PAFs)andPublicAncillary(PuAFs)(discussedbelow).Thereareclearopportunitiestogrowsocialimpactinvestmentfundsusingexistingstructures,subjecttoregulatoryamendments.

Thereareotheropportunitiesforscale,includingmodelsthatrefineexistingstructures,andhavenotyetbeentrialledinAustralia.AnexampleincludesthehousingbondaggregatormodelidentifiedbytheAffordableHousingWorkingGroupoftheCouncilonFederalFinancialRelations(2016b)andImpactCapitalAustralia(Addis,McCutchanetal.2015).Thisexamplemightalsoworkinconjunctionwithspecifictaxincentives(discussedbelow),whichwouldrelyonsignificantpublicinvestmentfromtheAustralianGovernment.

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Socialimpactbonds

SIBsarepayment-by-resultsinstruments.Theyrelyonanintermediarythatbrokersthearrangementthroughwhichinvestorscanrecouptheircapitalinvestment(whichtypicallyresideswithanotforprofitserviceprovider),aswellasanadditionalfinancialreturn–whichmayvaryfromanagreedmaximumpercentagethroughtonothing–basedonachievementofagreedresults.

SIBshavebeensuccessfullypilotedwithinthecurrentinstitutionalframework(includingtheNewpinSocialBenefitBondwidelyidentifiedasasuccessfulgloballySIB).ThechallengesrelatedtoimplementingSIBsandthenegativecommunityeffectsofSIBfailuresintheUShavebeenwell-documented.EvidencefromsomeexamplesofSIBimplementationalsoraisequestionsabouttheextenttowhichtheyareleveragingnewcapitalinsupportofsocialissuesversusreorganisingexistingcapital(particularlyfromphilanthropy)withgreatertransactioncostsinvolved.Thereareanumberofreformsincludingboth‘soft’policyreformsand‘hard’legislativereformsthatcouldimprovetheirefficacy.Thesecanoccurwithintheexistingstructuresandaredescribedbelow(seeQ3).

Socialenterprise

ThedescriptionofsocialenterpriseprovidedintheDiscussionPaper(p.31)isnotconsistentlyapplied.ItisalsonotconsistentwiththedefinitionmostcommonlyusedintheAustraliansocialenterprisesectororAustralianpublicpolicy(includingpublicpoliciesspecificallytargetedatsocialenterprisedevelopment).WhilethereisnouniversallyuseddefinitionofsocialenterpriseinAustralia,themostcommonlyemployedinpublicprogramsderivesfromFASES2010,inwhichsocialenterprisesweredefinedasorganisationsthataimtofulfilamissionconsistentwithpublicorcommunitybenefit,tradetofulfiltheirmission,andreinvestasubstantialproportionoftheirprofitorsurplusinthefulfilmentoftheirmission.Inbroadterms,socialenterprisesarebusinessesthataimtoattainsocialoutcomesandfinancialsustainability,someofwhicharestructuredasfor-profitsandabletodistributeprofitstoowners(orlimiteddistributiontomemberssuchascooperatives)(Barraket,Collyeretal.2010;Barraket,Masonetal.2016).

TheDiscussionPaperdescribessocialenterprisesasappealingtosocialimpactinvestorsastheycanreceiveequityinvestments.However,Australia’smostsignificantmappingofsocialenterprisehasfoundthevastmajorityofsocialenterprisesinAustraliaarenotforprofitsandmakerelativelyminimaluseofexternalfinance,particularlyequity.1Thatis,thebulkofsocialenterprisesarenotprofitdistributing(assetlocked)andareprecludedfromdistributionofprofits.Beyondtheirlegalform,manysocialenterprisesdonotseektogeneratefinancialreturnsbeyondfinancialsustainability,astheirbusinessmodelsinvolvesinkingadditionalresourcesdirectlyintotheexecutionoftheirsocialpurpose(e.g.carryingaproductivitycostinordertoprovidetransitionallabourmarketopportunitiesfordisadvantagedjobseekers).AmajorfindingoftheSEDIFevaluationwasthatsocialenterpriseandsocialimpactinvestingarenotnecessarilythesupplyanddemandendsofasinglemarket.Socialenterprisesrequirediverseformsofsocialfinanceand,whilethereisnoquestionthatsomemodelsofsocialenterprisecanbenefitfromsocialimpactinvestment,thisisaverysmallproportionoftheoverallsocialenterprisesector.

Thereareimplications-asnotedintheDiscussionPaper-withrespecttosocialenterprises’accesstosocialimpactinvestingandexistinglegalforms.Thereissomedebate,butasyetfairlyminimalevidence,regardingtheneedanddemandfornewformsthatfacilitateequityinvestments.InternationalmodelsincludeCommunityInterestCompanies2(CICs)intheUKandBenefitCorporations3intheUS(theL3Cmodel

1Whilethereissomescopetostructuresocialenterpriseasanotforprofitthatcanreceiveequityinvestmentsthisiscomplicatedandrelativelyrare(JusticeConnectmodel,https://www.justiceconnect.org.au/new-social-enterprise-guide).2CICsarelimitedcompanieswhichoperatetoprovideabenefittothecommunitytheyserve.Theyarenotstrictly'notforprofit',andCICscan,anddo,deliverreturnstoinvestors.However,thepurposeofCICisprimarilyoneofcommunitybenefitratherthanprivateprofit.Whilstreturnstoinvestorsarepermitted,thesemustbebalancedandreasonable,toencourageinvestmentinthesocialenterprisesectorwhilstensuringtruecommunitybenefitisalwaysattheheartofanyCIC’(DepartmentforBusinessInnovation&Skills2016:3).

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referencedisnotofutilityinAustralia).TheAustralianGovernmentshouldinvestigatetheneed,advantagesanddisadvantagesfortheselegalforms(orahybridmodel).ThisisconsistentwiththeadviceofthePrimeMinister’sCommunityBusinessPartnershipImpactInvestingandPartnershipsWorkinggroup.

Question 3: Are there any Australian Government legislative or regulatory barriers constraining the growth of the social impact investing market? Thetransactionscosts(includingmeasurement)andthesmallerscaleofsocialimpactinvestmentsmaymakeitdifficulttodeliversufficientsocialimpactinvestmentswithmarketreturns.

Superannuationfundshavebeenidentifiedasalargepooloffundsforsocialimpactinvesting.However,superannuationfundsare‘financialfirstinvestors’(asdefinedintheDiscussionPaper,p.xii),requiringriskadjustedfinancialreturnsequivalenttomainstreaminvestmentsduetotherequirementsofthesolepurposetestintheSuperannuationIndustry(Supervision)Act1993(AustralianGovernment1993).

Fiduciarydutiesalsopresentbarriersforothertypesofinvestorssuchastrusteesofcharitabletrusts(includingPAFs)andthereisalackofclarityoncurrentrulesgoverningtheuseofProgram-relatedInvestments(PRIs)andbarriersrelatingtothecurrenttreatmentofPRIsmadebyPAFsspecifically(seeQ24).

Morebroadly,investorsseekstabilityintheinvestmentenvironmentandamitigationofrisk,whichhasimplicationforgovernmentpolicy.Forexample,inaffordablehousingandrenewables,whereinstitutionalinvestorshaveexpressedaninterestininvesting,therehasbeenalackofpolicyandregulatorycertainty,orinconsistencyofpolicy.Forexample,theNationalRentalAffordabilityScheme(NRAS)commencedin2008andwasdiscontinuedin2014,atatimewhenadministrativeissueswereresolvedanditwasattractinggreaterinterest(Rowley,Jamesetal.2016).InvestmentinrenewableshasbeenhinderedbychangesinstateandterritoryandCommonwealthpolicies.

Theseissuesreinforcetheimportanceofgovernment:

1. Bringingdowntransactioncoststhroughsharedsystems(e.g.ahighqualityoutcomesmeasurementsystem)

2. Cross-subsidisinglayeredinvestmentsthatallowfordifferentratesofrisk-return,includingmarketandbelow-marketreturns

3. ClarifyingPRIsforcharitabletrusts4. Redressingpolicygapsthatpresentriskstothesuccessofasocialimpactinvestment(e.g.

reinstatementofanimprovedNRAS)

Question 4: What do you see as the role of the Australian Government in developing the social impact investing market? TheAustralianGovernmenthasclearrolestoplayincatalysingmarketdevelopment,policyandregulation,stewardshipandfunding.

Asnotedabove,theAustralianGovernmentcandrawfromsuccessfulmodelsimplementedoverseas.Forexample,intheareaofaffordablehousing,theNRASwasamodificationonthelongtermLowIncomeHousingTaxCredit(LIHTC)modelintheUS;andtheAffordableHousingWorkingGroupoftheCouncilonFederalFinancialRelations’(2016a;2016b)recommendedapproachofabondaggregatorismodelledonAffordableHousingFinanceintheUK.

TheAustralianGovernmentcanalsodrawexamplesfromothercountriesforthedevelopmentofenablingpolicyenvironments.

Publicpolicyforenablingsocialenterprisestoensureabsorptivecapacity

Asnotedabovepolicy-makersmustbecautiousnottotreatsocialenterprisesandsocialimpactinvestmentastwoendsofthesamemarket.However,strengtheningtheinvestmentreadinessofsocialenterpriseshas

3BLabcertifiesfor-profitcompaniesasBenefitCorporationswhentheymeetrigorousstandardsoftransparency,accountabilityandsocialandenvironmentalperformance(BCorp2016).

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implicationsfortheefficacyofsocialimpactinvestmentmarkets.Thatis,arobustsocialenterprisesectorwillbettercontributetotheabsorptivecapacityforsocialimpactinvestmentcapital.

Therearecommonalitiesamongpolicyframeworksforstrengtheningsocialenterprisesinternationally.AstudythatmappedpolicyframeworksintheEuropeanUnionobservedsixkeyelementsofanenablingpolicyenvironment.Theseinclude:

• SpecificlegalformsthatfacilitatesocialimpactinvestmentsuchasCICsintheUK,theexlegeinItalyisadefinedlegalstatusandtheBenefitCorporation

• PreferentialtaxtreatmentsuchasSocialInvestmentTaxRelief(discussedbelow)toincentivisesupplythroughtaxbenefits

• Specialisedsupport,oftenthroughintermediaries,suchasmentoringandbusinessdevelopment(primarilyastatejurisdictionissueinAustralia,althoughfederalsupportwouldbebeneficial)

• Socialprocurementinpublicservicecontractstopromotedemandandmarketaccessforsocialbenefitproviders

• Standardisedimpactmeasurementandreportingframeworks• Measurestogrowthesupply-sideofsocialimpactinvestmentmarkets

(Wilkinson,Medhurstetal.2014:50).

Manycountriesalsoadoptcoordinatedsocialenterprisestrategies,suchasthatrecentlylaunchedbytheVictorianGovernment.

The2016FASESstudyfoundthatsocialenterprisepolicyinAustraliaispiecemealandexposedtopoliticalchange.Alllevelsofgovernmentcouldprovidepolicyresponses,withlocalgovernmentassistingwithmarketdevelopment,andstateandfederalgovernmentsupportingdevelopmentoforganisations,stimulatingpolicydesigninnovationandenablingregulation(Barraket,Masonetal.2016:31).However,giventhenumberofindustriesinwhichsocialenterprisesoperate,industryregulationcouldoverrideanygenericdevelopmentsforsocialenterprises(Barraket,Masonetal.2016:53).Thestudy’ssurveyfoundover80percentagreeingthatnewopportunitieswouldbeencouragedbygovernmentpolicysupport,withthemajorityoftheremainderneutral(Barraket,Masonetal.2016:28).46percentofrespondentswereneutralonanewlegalformhelpingsocialenterprisestoachievetheirgoals,with32percentagreeingand22percentdisagreeing(Barraket,Masonetal.2016:27-28).

PublicpoliciesforenablingSIBs

PolicyinterventionsandinitiativesforSIBsnormallytaketheformof‘soft’instrumentsincluding:grantfundingforinfrastructureandtechnicalassistanceforSIBdevelopment(targetedatintermediariesandserviceproviders)andstrategiesandpolicyframeworksthatplacepaymentbyresultscontractsattheheartofpublicpolicy.‘Hard’regulatoryandlegislativereformsinclude:taxreliefandincentivesforinvestorsandpublicfinancereformstoprovidebudgetarycertainty.

Guffaston-Wright,Gardineretal.(2015:33-4,134-5,137)haveprovidedasummaryofUKandUSgovernmentsupportfortheSIB‘ecosystem’including:

• TheUK’sSocialInvestmentTaxRelief2014legislationthatprovidestaxbenefitsforindividualsinvestinginqualifyingsocialenterprisesincludingSIBs,asapercentageoftheamountinvestedanddeferralofcapitalgainstaxincertaincircumstances.

• TheUK’sCentreforSocialImpactBonds(withintheSocialInvestmentFinanceTeaminThePrimeMinister’sCabinetOffice)whichanalysesandfacilitatesthemarketthroughtheprovisionofinformationandtools,andbybuildinganevidence-baseandshowcasinginnovationinpublicservicedeliverythroughSIBs.

• TheUK’s2012SocialOutcomesFund(£20million)whichprovidesadditionalfundsforSIBs,usingcentralgovernmentfundingwherethesavingsapplytomultipledepartmentsthatwouldbedifficultforonedepartmenttofund.

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• TheUSisestablishingasimilarnationalfundtotheUK’sSocialOutcomesFund.TheUS’sfederalagency,theCorporationforNationalandCommunityService,hasalsoestablishedaSocialInnovationFundwhichhasawardedeightorganisationsgrantstodevelopSIBs.MassachusettsandUtahhavepassedlegislationauthorisingSIBsandeightotherstateshaveintroducedlegislation.

• VariousUSlegislationapplyingtoinvestmentinSIBs:theCommunityReinvestmentAct1977(leveragedforbanks);theTaxReformActforProgramRelatedInvestments;andtheRiegleCommunityDevelopmentRegulatoryImprovementActof1994forCommunityDevelopmentFinanceInstitution(CDFI)Funds.

Guffaston-Wright,Gardineretal.(2015:130-9)furthersummariselegislationandpolicyframeworksrelatingtoexploring,designingandimplementingSIBsinAustralia,Canada,theUKandUS(atfederalandstatelevels).Typesoflegislativesupportincludescoping,pilot,authorisation,financingandincentivesforfinancing.GovernmentactionsupportingSIBsincludestechnicalassistance,scoping,incubating,pilot,financing(grants,start-upcosts,paymentofintermediaries),issuingRequestsforInformation(RFIs)andRequestsforProposals(RFPs)andcommitment.

AsnotedintheDiscussionPaper,governmentsmayneedtochangelegalconditionstofacilitatepaymentforoutcomes,includingallowingpaymenttointermediariesandinyearsfollowingthefiscalyearinwhichthecontractsareexecuted(Burand2013:476-7;Guffaston-WrightandGardiner2015:6;Instiglio2014:14).

Thismayrequiretheestablishmentofsinkingfunds,trustsorspecialpurposevehicles.Changesmayalsoberequiredtoprocurementproceduresandtoallowtheintermediarytomakedecisions,forexample,selectingtheserviceprovider.GovernmentsmayalsoneedtoprovideclarityonthetaxtreatmentofSIBs(equityanddebtcomponents)andforinternationalinvestors(Burand2013:476-7;Guffaston-WrightandGardiner2015:6;Instiglio2014).

InareviewoftheearlyyearsofSIBs,Dear,Helbitzetal(2016:48-9)foundthreecommonfactorsgovernmentshouldconsider:

• DedicatedstaffingforSIBsandotherpaymentsbyresultsprogramaswellaschampionsforindividualSIBs(includingexternalintermediariesoradvisors)

• Structuresthattransitionchangesingovernmentandprioritiesandstaff• Combiningfundingsources,particularlywhereoutcomesarespreadacrossmultipledepartments,for

exampletheUKOutcomesFund.

TheimpactofSIBshasbeenseenasrelativelysmallgiventheamountofstructuringthatisrequired.SIBsarecomplexandexhibitbespokefeatures.Theyrequiresignificantintermediationduetheircomplexstructure,substantialresourcesindevelopment,andextensiveduediligenceforinvestors,whichlackfamiliaritywiththemodel.Thelackofaneasilyreplicablemodelalsocanpresentprohibitivelyhightransactionscosts.Thesechallengeshaveresultedinaperceptionthatthecomplexityofthedevelopmentprocesslimitstheirutilitytosocialpolicychallenges.Thereisalso,asyet,limitedevidenceabouttheireffectivenessandefficiencyindeliveringsocialoutcomes.

Publicpolicyforenablingsocialimpactinvestingfunds

Accesstocapital(grantsandloans)forsocialenterprisesisachallengeparticularlyfromtraditionalsources(BrackertzandMoran2010;SocialInvestmentTaskforce2000).Thishasresultedinmultiplepolicyinterventionsaimingtogrowsocialfinance.

Thisdevelopmentcommonlytakesmarketinfrastructureformssuchasspecialistfundstargetedatintermediaries(Wilkinson,Medhurstetal.2014).Intermediariesproviderepayableloansandotherformsoffinanceincludingequity(wherelegalformpermits)andquasi-equity(feasible).However,formsofequityarerareinAustraliaasmostsocialenterprisesarestructurallyprecludedfromdistributingprofits(Addis,McLeodetal.2013).

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ImprovinginvestmentreadinesshasbeenalesscommonfocusbutoneexampleisthenowclosedInvestmentandContractReadinessFundestablishedbytheUKGovernment.InAustralia,theSEDIFisaclearexamplewheregovernmenthasestablishedaninvestmentfundandmobilisedover124percentofthepublicfundinginprivatefinance.Itfinanced64socialenterpriseswithstrongdirecteffectsinscalingsocialimpactsandcapacitybuilding,andhadmodestindirectcapacitybuildingeffectsfor424socialenterpriseswhichwerefinancedorhadfinancingdeclined(Barraket,Muiretal.2016).

BigSocietyCapitalandAccess-TheFoundationforSocialInvestment

TheUKGovernmentalsoestablishedBigSocietyCapital(BSC)in2012with£400mofunclaimedassetsindormantbankaccountsand£200mfromthelargestfourretailbanks.Ithasinvestedin14intermediaries,manyfocussingexclusivelyorpartlyonsocialenterprise(BSC2017).

In2015theUKgovernmentestablished,Access-TheFoundationforSocialInvestmentinpartnershipwithTheBigLotteryFund(Access2015).Througha£45mGrowthFund(£22.5mgrantfromTheBigLotteryFund,£22.5mloanfromBSC)itsobjectiveistoassistearlystagesocialenterprisesaccesssocialinvestmenttomovebeyondpilottoscale,byproviding‘small,affordableandflexiblefinance’.TheCabinetOfficealsoprovided£60mtoAccessasanendowmenttosupportcapacitybuilding.Otherformsofgovernmentsupportcanincludetaxcredits(e.g.LIHTCintheUSorguaranteessuchasAffordableHousingFinanceintheUK)whichofferinvestmentatscaleandarefacilitatedthroughintermediaryinvestmentmanagers.

AsnotedintheDiscussionPaper(p.8)andbytheAffordableHousingWorkingGroupoftheCouncilonFederalFinancialRelations(2016b),socialimpactinvestmentiscomplementarytoandnotareplacementforgovernmentfunding.

Question 5 & 8: Do you see different roles for different levels of government in the Australian social impact investing market (for example, the Australian Government as co-funder with State and Territory Governments) continuing to take the lead in developing social impact investments? Are there opportunities for the Australian Government to collaborate with State and Territory Governments to develop or support joint social impact investments? Therolesfordifferentlevelsofgovernmentinthesocialimpactinvestingmarketrelatetotheirdifferentrolesasregulatorsand/orfunderswhichvaryfordifferentareasofservicedelivery.

Astheprimaryprovidersofservices,StateandTerritorygovernmentsaretakingtheleadinpayment-by-resultscontracts,includingSIBs.HoweverthereisscopeforCommonwealthinvolvementinthedevelopmentofbestpracticedocumentationandmeasurementacrosstheStatesandTerritories.Consistentdocumentationwouldresultinlowercosts(includinglegal)overtime.ConvergenceofoutcomesmeasurementacrosstheStatesandTerritorieswouldlowertransactioncostsovertimeandprovideinvestorswiththeopportunitytocomparedifferentsocialimpactinvestmentsforrisk,returnandimpact.Byagreeingstandardtimeframesforsavingsandconsideringdifferentdepartmentsforareasofsaving,theeffectivenessoftheinterventionscouldbecompared.

Moregenerally,andasdiscussedinQ.1andQ.3above,theestablishmentandmeasurementcostsofsomesocialimpactinvestmentsmeanitisdifficulttodeliveramarketreturn.Federal,StateandTerritoryGovernmentscanprovidegrantfundingforestablishment,duediligenceandmeasurementcosts.However,thereispotentialfortheCommonwealthtoprovidethisfundingforsocialimpactinvestmentsbeingdevelopedattheState/TerritoryGovernmentlevel.

Inareas,suchashousingandhomelessness,wherebothfederalandStateorTerritoryGovernmentshaveresponsibilities,coordinationisimportantforinvestors,serviceprovidersandmayhelptoimproveoutcomesforbeneficiaries.

Alllevels,includinglocalgovernments,canadoptprocurementpoliciestosupportserviceproviderswithsocialimpactinvestmentfinance(asrecentlyannouncedbytheVictorianGovernmentinitsSocialEnterpriseStrategy;2017).

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Question 6: Are there areas where funding through a social investment framework may generate more effective and efficient policy outcomes than direct grant funding? Socialimpactinvestingwillnotbesuitableforallsocialservices.Opportunitiesonlyexistwheretheinvestmentinthepolicyorinterventioncanresultinfinancialandsocialreturns.Therefore,itwillnotbeanappropriatemodelwhere:

- Costsoftheinterventionarehigherthanthefinancialreturnandsocialreturns- Thereisnotsufficientreadinessorcapabilityintheserviceprovisionmarket- Marketsarethinandthereturnsarelow- Outcomesarelikelytotakeverylongperiodsoftime(beyondtheappetiteforinvestors)andclear

incrementalpathwayscannoteasilybeestablishedregardingshortandmediumtermprogress

Thereisdifficulty,however,inoutliningspecificserviceareaswheresocialimpactinvestmentmaybeeffectiveorineffectivebecauseinternationalandlocalevidenceisnotyetstrong.Itisimportantthatsoundoutcomesmeasurementframeworksareestablishedandthattheevidencebaseisbuiltregardingareasofhighesteffectivenessandareasofpotentialrisk.

Further,itisimportanttodistinguishbetweensocialinnovation(newandimprovedresponsestocomplexsocialproblems)andinnovationsinfinancialmechanismsthatsupportsocialpolicyagendas.

Socialinvestmentmodelshavethepotentialtoleveragenewsourcesoffinanceandbringtogetherinvestors,providersandbeneficiaries.However,itisnotknownhowmuchcapitalthereis(orwouldbe)availableandhowmuchmoneywouldbedisplacedfromtraditionalgrantingsources,andwhetheroutcomeswouldimproveiffundingwasdisplaced.

Asignificantpromiseofsocialimpactinvestmentistheshifttotrack,understandandrewardbasedonoutcomes.Thisreflectsthetrendtooutcomesandpayment-for-results,ratherthanthehistoricfundingofactivities.Itwillbeimportanttounderstandwhereoutcomesoccur,forwhoandunderwhatcircumstancesandtotrackwhichgroupscouldbeleftbehind.Itwillbeimportantthatdifferentmechanismsforfundingsocialservicesremain,includingthecontinuationofgovernmentblockgrantswhereinvestmentapproachesarenotappropriate.

Question 7: What Australian Government policy or service delivery areas hold the most potential for social impact investing? Are there any specific opportunities you are aware of? Socialimpactinvestmentfunds

TheSEDIFresearchsuggeststhat‘bricksandmortar’investmentshavethemostpotential,suchassocialandaffordablehousing,andphysicalinfrastructurefornotforprofits,becauseofthesecurityprovidedbyrealassets.

Thishasbeenillustratedwiththesignificantsupportforthehousingbondaggregatorfromcommunityhousingproviders,intermediariesandinstitutionalinvestors(CouncilonFederalFinancialRelations2016b).

Somesocialinfrastructurefundsandpropertyfundsownsocialassets(e.g.schools,hospitals,watertreatmentplants)thatenabletheprovisionofservicesbyservicesproviders,oftenunderpublicprivatepartnership(PPP)models.However,thesefundsdonottypicallymeasuresocialoutcomesandwouldnotfallunderthedefinitionofsocialimpactinvesting.

Socialimpactbonds

TheavailabilityofbaselinedataforthecomparisonofoutcomesfromSIBswillvarybyStateandTerritoryandmayresultinparticularservicedeliveryareashavingmoreorlesspotential.

In2016intermediarySocialFinance,whichhasplayedaprominentroleinthegrowthofSIBsprovidingthefoundationalmodelatPeterboroughin2010,establishedanImpactBonddatabaseofSIBs.ItshowsasofJune2016therehavebeen60ImpactBondslaunchedwithUS$216millionofcapitalraised.Thesocialimpactareaswereasfollows:24workforcedevelopment(40%),12housing/homelessness(20%),8childandfamilywelfare

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(13.3%),5health(8.3%),5criminaljustice(8.3%),5educationandearlyyears(8.3%)and1adultswithcomplexneeds(1.7%;SocialFinance2016).

FurtherresearchisneededtodeterminewhetherandtowhatextenttheseSIBsdeliveredfinancialandsocialreturns.Themodelisrelativelyimmature,theevidence-basestillemergent,andthepotentialforreplicationwithinandacrossjurisdictionsischallenging.

Socialenterprises

Socialenterprisescanusediverseformsofsocialfinance.TheSEDIFevaluationidentifiedtheneedfordiverseformsofsocialfinance–includingpatientcapital,blendedfinance,guarantees–tosupporttheworkofSMEsocialenterprises(Barraket,Masonetal.2016).

Question 10: Are there opportunities for the Australian Government to form data sharing partnerships with State and Territory Governments, intermediaries and/or service providers? Thedevelopmentofcommonoutcomesmeasurementframeworksandtools,linkingdataandprovidingde-identifiedaggregatedreportingacrossgovernmentscould:

• facilitatecomparisonofoutcomesacrossprograms• assisttominimise(orinform)risktakenbyinvestorsandgovernment• reduceindividualtransactioncosts.• helptoinformevidencebasedpolicyinAustraliaand,inturnproducebeneficialoutcomesfor

individuals,communitiesandthebroadersociety.

Itwillbeimportanttoconsiderandapplyhighstandardsofprivacy,ethics,benchmarksfordifferentgroups,qualityindicatorsandrealtime,accessiblereporting.

Question 11: We are seeking your feedback on the four proposed Principles for social impact investing. ThefourproposedPrinciplesareimportant.Inadditiontovalueformoney;robustoutcomes-basedmeasurement;fairsharingofriskandreturn;andafocusondeliverableandrelevantsocialoutcomes,wesuggestaddingafifthprinciple:

- “Donoharm”.

Donoharmisaprinciplesuccessfullyembeddedandwidelyunderstoodinhealth,humanitarian,foreignaid,andenvironmentalprotectionareas.Itwouldbebeneficialtoaddthisprincipletosocialimpactinvestment.Morebroadly,thisshouldbeappliedifmarketfailureoccursandalternativefundingandsocialsupportsareneeded.

Someadditionalconsiderationsforthefourprinciplesoutlinedinclude:

- Valueformoneyo Itisimportanttounderstandthatdifferentinvestorshavedifferentexpectationsof‘value’

(e.g.philanthropicinvestorswilloftenhavelowerexpectationsoffinancialreturnthanfinancefirstinvestors)

- Robustoutcomesbasedmeasuremento Reasonablepathwaysformeasuringoutcomesareimportant.Theseshouldbebasedonclear

theoriesofchangeandprovidesteppingstonesformeasuringchangesintheshort,mediumandlongerterm

o Indeterminingwhobenefitsfromsocialimpactinvestment,itisimportanttonotethatevidencewillnotalwaysbeavailabletoconfirmlevelsofattributiontooutcomes.AstheDiscussionPaperoutlines,RCTsorquasi-experimentaldesigncanbeadopted,butthesecanbeprohibitivelyexpensiveandmayresultinabarriertoinvestment.Further,sincecomplexproblemsrequirecollaborative,holisticsolutions,itmaybemorecosteffectivetounderstandcontributionthanattribution

- Fairsharingofriskandreturn

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o Theexpectationofserviceproviderstohold‘risk’couldlimitthemarketpoolofserviceprovidersabletotakepartinsocialimpactinvestment

o Itmayleadtounexpectedconsequencesregarding‘cherrypicking’clientswhowillhavethehighestreturnsforthelowestcosts,whichwillbeproblematicifitisattheexpenseofbeneficiarieswithgreaterneeds

o Indifferentsocialareas,governmentwillneedtoacceptahigherlevelofriskand/ordecreasetherisksofotherscontributingcapital

o Stablepolicyandregulatorycontextswillbecriticaltohelpdecreasetherealandperceivedrisksfacedbyinvestorsandserviceproviders

- Deliverableandrelevantsocialoutcomeso Wesuggestalsoadding“evidencethattheserviceprovidercandeliveroutcomestothe

cohorttargeted”tothelistoffactorso Theremayberisksintransferringfundingtoasocialimpactinvestmentmarketbeforethere

isreadinesstodeliveroutcomes

Differenttypesofsocialimpactinvestmentmayrequireflexibilityintheapplicationoftheprinciples,buttheprinciplescanbeappliedacrossthesuiteofSIIinstruments.

AshighlightedintheDiscussionPaper(p.14),governmentisnotaparticipantinmanysocialimpactinvestments.Thus,whiletheaimoftheproposedPrinciplesistoguidetheAustralianGovernmentinthedevelopmentofthesocialimpactinvestingmarket,itshouldclearlybestatedthatcareshouldbetakenbyothermarketparticipantsinadoptingthePrinciples.

Question 23: What guidance in particular would provide a desired level of clarity on the fiduciary duty of superannuation trustees on impact investing?

Superannuationfundsrequiremarketrateriskadjustedfinancialreturnsduetotherequirementsofthesolepurposetest4.Mostsuperannuationfundsconsiderenvironmental,socialandgovernance(ESG)issuesaspartoftheirinvestmentanalysisbecauseoftheirimpactonthevalueandriskoftheinvestments.Thisincludesconsiderationofthecorporatesocialresponsibility(CSR)policiesandpracticesoftheportfoliocompanies,andengagementonparticularissues.

Withitsdualreturns(socialandfinancial),socialimpactinvestingismoretargeted(ResponsibleInvestmentAssociationAustralasia2016).Socialimpactinvestmentsarebeingconsideredbysomesuperannuationfunds,eitherforsociallyresponsiblememberchoiceoptionsorthefundasawhole.Whilethesolepurposetestrequiresriskadjustedmarketreturnsforthefundasawhole,claritycouldbeprovidedonthefiduciarydutyoftrusteesforsociallyresponsiblememberchoiceoptionswherethetrade-offbetweenreturnsandimpactmaybedifferentifitisclearlydisclosedtomembersintheproductdisclosurestatements.

Question 24: To what extent are the current arrangements for program related investments appropriate? Should changes be made to:

24.1 recognise the total loan, rather than only the discount rate between a commercial rate and the concessional loan rate, for the purposes of meeting the ancillary’s funds minimum annual distribution; and 24.2 allow ancillary funds to make program related investments to non-DGR organisations

ThecurrentarrangementswithregardstoPRIsdonoteffectivelypromotesocialimpactinvestment.

AsoutlinedintheDiscussionPaper,existingtreatmentconstrainstheabilityofPAFsandPuAFstomake‘impactfirst’PRIs,beyondthenarrowscopeallowedbyamendmentstotheancillaryfundguidelines.The

4UndertheSuperannuationIndustry(Supervision)Act1993,thesolepurposetestspecifiesthattrusteesmustensuresuperannuationfundsaresolelymaintainedtoprovideretirement(ordeath)benefitsformembers(AustralianGovernment1993).

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implicationsaretwo-fold:itlimitstheavailabilityofcapitaltoapoolofDGRCategory1sandreducestheappealofPRIstoancillaryfundsduetolimitsontheannualdistribution.TheexpandedtreatmentproposedintheDiscussionPaper(pp.30-31)shouldinprincipleaddresstheseissues.

Asnoted,therearesignificantimplicationsoftheextensionoftreatmenttoincludenon-DGRs.DGRcategoriesaretightlyregulatedinlinewithothergovernmentregulatoryandpolicyobjectives.Cautionmustbetakenwhenmakingthisamendmentandshouldbeaddressedwithinthewider,andongoing,discussionsaroundDGRstatus.

ThereportpreparedbyPhilanthropyAustraliaforthePrimeMinister’sCommunityBusinessPartnership(PhilanthropyAustralia2015:22)hasidentifiedthatthiswouldalsorequire‘relativelystraight-forward’amendmentstolegislationwithregulationwithrespecttoIncomeTaxAssessmentAct1997andancillaryfunds.

Question 29: Would making a model constitution for a social enterprise assist in reducing the costs for individuals intending to establish a new entity? What other standard products or other industry-led solutions would assist in reducing the costs for individuals intending to establish a social enterprise? OvereightyearsofconductingresearchwiththeAustraliansocialenterprisesector,thedirectcostsofincorporationhaveneverpresentedasabarriertoentryinCSIstaff’sexperience.Rather,thetransactioncostsoffindingsuitablelegaladviceandthecapitalcostsofestablishingparticularbusinesses–bothofwhicharearguablybarrierstoentryformainstreamSMEs–areidentifiablechallenges.

AsdetailedinrelationtothefindingsofFASES2016above,itisnotclearatthisstagethatalegalremedyisdesiredbythesocialenterprisesector,northatthiswouldremovebarrierstoentryorgreateraccesstoexternalfinance.MuchofthediscussionofnewlegalformspresentedduringFASES2016focusgroupswith75participantsrelatedmuchmoretoincreasingvisibilityandpubliclegitimacyofsocialenterprisesthanitdidtoaccessingfinanceorresolvinglegalconstraints.

AsidentifiedintheSEDIFevaluationandabove,accesstodiverseformsofsocialfinance–includingbutnotlimitedtosocialimpactinvestment–isimportanttomeetingtheneedsofdiversesocialenterprises.Further,financefirstmodelsofsocialenterprisedevelopmentareoftenunsuccessful,withcapacitybuildingfornewmarketentrantstypicallyrequiredinrelationto:understandingandapprenticingthesocialproblemtheyseektoresolve;establishingbusinessmodel,governanceandoperations;developingpeersupportandnetworks;andfosteringmarketopportunities.Attentiontotheseissues–withgovernmentinvestmentinspecialistintermediaries–islikelytoimprovesocialenterprisestart-upandperformance.Educatinglegalandfinancialadvisorsaboutdiversebusinessforms,includingsocialenterprises,isalsolikelytoimprovethequalityandaccessibilityofadvicetostart-upandestablishedsocialenterprises.

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